Service charge accounting

Mastering your building finances

If you’re a landlord or property manager and issue service charges to tenants or leaseholders, you may need to use service charge accounting.

Accounting for service charges can be complicated, and often requires an in-depth understanding of the sector to get right. Service charges are typically calculated in advance for the upcoming accounting period to prevent unexpected costs related to property maintenance. As service charge specialists, we can take on the burden of calculating, collecting and administering charges for you so you can stay on top of costs and keep your property business running smoothly.

What are service charges?

Service charges cover the cost of building services and communal areas used by more than one occupant — also known as the ‘common parts’. Essentially, anything at the property that meets this criteria will be maintained and paid for out of the service charge. This can include:

• building infrastructure (such as windows and roofing)
• common areas (such as hallways, stairs and landings)
• lifts and escalators
• fire alarms
• emergency lighting

Many property management companies and landlords also provide gardening, cleaning or security services, which are typically included in the service charge.

The proportion of these costs owed by each leaseholder or tenant is usually determined by their lease or tenancy agreement.

Service Charge Budgeting and Cost Allocation

Effective service charge budgeting and cost allocation are the cornerstones of successful service charge management. A service charge budget is essentially a forecast of the anticipated expenditure for the upcoming year, which helps determine the amount of service charge owed by each leaseholder.

The budgeting process involves identifying all potential costs for the coming year, from routine maintenance and cleaning to more significant cyclical expenses like repairs and replacements. These costs are then allocated to the relevant service charge fund, ensuring that there are sufficient resources to cover all necessary expenditures.

Cost allocation is the next critical step, where these identified costs are distributed among leaseholders based on their proportion of ownership or occupancy. This often involves using a predefined formula or schedule of costs to ensure fairness and transparency.

Ensuring that the service charge budget and cost allocation are accurate, fair, and compliant with relevant regulations is essential. A service charge accountant can provide invaluable assistance in this process, helping to create a budget that meets the needs of the property management company, resident management company, or landlord while ensuring compliance with all legal requirements.

Ensuring Transparency in Service Charge Management

Transparency in service charge management is vital for building trust between property management companies, resident management companies, and leaseholders. Providing clear and comprehensive information about service charge accounts, including income and expenditure, the balance of the service charge fund, and incurred costs, is key to achieving this transparency.

Several strategies can help ensure transparency in service charge management:

• Regular Financial Statements and Reports: Providing leaseholders with regular updates on the financial status of the service charge fund.
• Accessibility: Making service charge accounts readily available to leaseholders upon request.
• Clear Communication: Using straightforward language in service charge accounts and reports to avoid confusion.
• Detailed Explanations: Offering explanations and justifications for all costs and expenditures.
• Technology Utilisation: Leveraging technology to provide online access to service charge accounts and reports, making it easier for leaseholders to stay informed.

A service charge accountant plays a crucial role in maintaining this transparency by preparing clear and comprehensive financial statements and reports. They can also implement technology solutions to provide online access to these documents, ensuring that all stakeholders have the information they need at their fingertips.

By prioritising transparency in service charge management, property management companies, resident management companies, and landlords can build stronger, trust-based relationships with their leaseholders, demonstrating their commitment to fair and transparent service charge accounting practices.

Why should you hire a specialist in service charge accounting?

Collecting service charges in the UK is far from simple, especially if you have a large property portfolio. If you want to avoid non-compliance penalties or disputes with leaseholders, you’ll need to meet certain requirements.

At Almar BSL, we can help you manage your properties and obligations with ease. We’ll prepare and issue an annual service charge account statement, including a breakdown of expenses related to the property, your service charge plan, and the amounts required from each tenant or leaseholder. Our specialists can help prepare service charge accounts in accordance with the guidelines from the Association of Residential Managing Agents and the Royal Institution of Chartered Surveyors.

Our service charge accounts services include:

• keeping you compliant with legal requirements
• in-depth analysis of your service charge accounts
• accurate calculation of service charges and ground rent
• collecting service charges from leaseholders and tenants
• chasing tenants and leaseholders for any unpaid service charges
• preparation of estimated service charges for forthcoming years
• producing service charge accounts that are compliant and detailed

If you need help maintaining and managing your property, we can draw up a detailed budget, including current and projected expenses. We’ll base service charge calculations on accurate cost estimates to ensure there are sufficient funds available to cover expenses, providing complete transparency for you and your leaseholders. Our residential service charge accounts cover expenses such as insurance and maintenance for residential properties, ensuring professional management and transparency.

As your service charge accountant, it’s our job to make your life easier, so we’ll always be on hand to answer your questions or concerns. Our tailored service charge accounting services handle complex regulations and financial management, including budgeting, expense allocation, and financial reporting.

We understand the importance of collecting and managing service charge money. We emphasise the need for a dedicated bank account to promote transparency and accountability, ensuring that funds are used appropriately for specific costs such as maintenance and management fees.