What is service charge accounting?

Mar 1, 2022 | Uncategorized

If you let out property as an individual or a company you need to understand service charges and service charge accounts.

However, because of how complex service charge accounting is, many online resources can fail to explain the basics.

Here is our guide to this specialist area of accounting.

Service charges for the property sector

A service charge is the cost incurred by a landlord for the delivery or supply of common services to a tenanted or multi-tenanted building, which is recovered from the tenants through accounting transactions.

Services include repairs, maintenance, insurance, improvements, plant installation, clearing, costs of management and more. 

How exactly the financial recovery takes place depends on the provisions within the lease agreement set up between an occupant and their landlord.

As set out by the Royal Institute of Chartered Surveyors (RICS), landlords must seek to recover no more than 100% of the proper and actual costs of the services.

They must also ensure a budget, including appropriate explanatory commentaries, are issued annually to tenants, along with an approved set of service charge accounts.

The RICS also set out mandatory requirements for practitioners who are advising their clients about service charges. 

However, in the words of Learned Counsel, the property owner may not “enjoy” funds raised by service charges but only “deploy” them, hence why accounting for service charges is so important to get right.

Commercial property

Unlike their residential counterpart, there is currently no legislation that applies to commercial property service charges.

For landlords’ deadlines with commercial tenants, the lease agreement should therefore be followed as it forms the legal basis upon which the landlord will recover the cost of providing and delivering services from the tenant.

The lease will typically define the exact nature of the services to be supplied, but usually include everything essential to the running of the business occupying the space.

Service charge costs are rarely constant from year to year as they are influenced by inflationary factors, variances in service levels and irregular capital expenditures.

With any tenant, residential or commercial, there is often a misalignment between their requirements and those of the landlord. 

Compliance with the tenant’s lease and ensuring service contracts are interpreted correctly is therefore paramount, so landlords don’t risk irrecoverable costs in the future. 

Assistance with your service charge accounts

Service charge accounting is a highly technical and complex area that requires specialist knowledge. 

Our accounting team delivers value-added service charge certificates to a range of residential, commercial and mixed property developments.

Working with managing agents and leaseholders alike, we deliver an efficient, timely and cost-effective service.

With a seat in the ICAEW service charge accounts steering committee, we’re at the forefront of changes in recommended practice – so you can be sure your service charge accounts are prepared correctly.

Get in touch with us to discuss your service charge accounts.

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