Service charge accounts are different from company accounts. However, it can be difficult to differentiate between the costs associated with the Service Charge and the property’s management company, however, these must be kept separate and we are here to help you.
What is a Service Charge?
As a leaseholder, you are bound under the terms of your lease to pay for service charges which are accumulated costs associated with providing communal or shared services to a building. These costs must be reasonable and are only permitted as authorised by the lease. The service charge money is not owned by the management company as it is acting as trustee overseeing the management of the property.
Service Charge Expenditure includes:
- Communal cleaning
- Grounds maintenance
- General repairs
- Fire alarm maintenance
- Buildings insurance
- Utility costs
- Management fees
- Accountancy and professional fees
What is a Management Company?
Management companies are set up for the sole purpose of managing the service charge for the property. The directors of the company are required to fulfil the obligations of the lease and ensure that contractual duties are performed on behalf of the leaseholders. Directors can also be leaseholders. Service charge money should not be accounted for as an asset in the company accounts.
The management company’s funds can be derived from share capital and, where it holds the property’s freehold, ground rent or the proceeds of lease extensions.
Management Company Expenditure includes:
- Accounting fees for preparing the company accounts and filing tax returns if required
- Companies House filing fees
- Directors’ and Officers’ liability insurance
Preparing Annual Accounts
Service Charge
The lease will set out the requirements for an annual statement for the service charge. It may require the accounts to be certified or audited professionally by an independent accountant. This should then be issued to all leaseholders.
Best practice for service charge accounting is set out in guidance issued by ICAEW and ARMA.
Management Company
Companies are required by law to submit annual financial statements to Companies House. There may be a requirement for an audit based on the company’s Articles of Association; the directors of the company must approve these accounts before filing.
Top tips for tax issues:
Any interest earned from service charges monies is taxable as trust income and is subject to tax at the income tax rate and a Self-Assessment Trusts & Estates tax return must be filed for each year ended April 5th. Interest earned on monies held by the management company plus any ground rent income is taxable and a corporation tax return must be filed for the company’s accounting year-end within 9 months of the year-end. Net income is taxable at the applicable rate of corporation tax.
If you would like assistance with your accounts, or any other accounting aspect of your property management business, do take a look at our services page. Alternatively, we would be happy to have a no-obligation discussion, simply contact John Dwyer, Managing Partner, on 01803 321221 or email jdwyer@mjpaccountants.co.uk.
