Service charges cover the costs of maintaining and running buildings under multiple occupation and communal areas (garden, pool, parking garage, gym, etc.), elevators, repairs, security guards, lighting and more.
However, due to the nature of service charges, it is a legal requirement for those operating in the property management industry to have a separate service charge account that is separate from their statutory accounts. Service charge accounts are used by landlords, property investment companies and property management companies to collect service charges from tenants, lessees or leaseholders. The charge can be variable, meaning it can change from term to term, or be a fixed amount. The conditions of the service charge are usually agreed upon in advance with tenants.
Legal requirements of service charge accounts
There is a specific area of legislation called the Landlord and Tenant Act (LTA) that covers service charge accounts and service charges by property management companies in the UK.
Service charges are not considered to be assets of property management companies, and are actually held in a trust for the tenants. The monies, therefore, cannot be included in the statutory accounts of the companies; this is an important consideration to note from an accounting point of view.
It is of upmost importance to manage these accounts properly and transparently to avoid legal problems and meet the financial requirements set by HMRC. To avoid incurring costly penalties, you are encouraged to seek professional advice.
Regulations regarding property tend to change at practically every budget announcement. It is important for landlords and management companies to maintain compliance to any changes. You can seek advice and guidance all year round from our specialist team.
For further information, contact us on 01923 224411 or email Laura.