Resident management companies & service charges | AccountingWEB

Resident management companies & service charges

How do others with resident management company clients - ones where all the occupiers of leasehold flats are members of a company which collects service charges and pays out for communal expenses - prepare accounts?

Although the company is not the landlord, it appears that s.42 Landlord & Tenant Act 1987 (requiring that the company is only holding the service charge money in trust for the tenants) and s.21 LTA 1985 (requiring separate accounts for the service charges trust) apply.  This has prompted the ICAEW to issue TECH 01/10, Accounting for Service Charges, which indicates that as the service charges are held in trust, the company itself will often be dormant, and specifying the format of the service charge accounts.  This is despite the fact that all the tenants have set up the company for the sole purpose of handling the service charges.

I have asked in the Product Suggestion section of the IRIS Customer Forum if there are any plans to introduce a specialised chart of accounts and a specialised report to allow users to prepare the statutory (often dormant) accounts and the service charge accounts simultaneously, as suggested in TECH 01/10, but there has been no response.

So, do other IRIS users continue to produce "normal" company accounts containing all the service charge and communal expenses - on the grounds, perhaps, that the ICAEW release is still only a draft - or do others produce dormant statutory accounts and separate service charge accounts, perhaps using chart EPST?

Paul Scholes's picture

Have kept separate for a number of years now

Paul Scholes | | Permalink

Hi Euan - I have been preparing separate accounts for several years.  There was always much confusion but HMRC issued guidance about ten years ago about the need to keep service chs out of the company's accounts as well as the potential for trust tax returns each year.

Euan MacLennan's picture

So how do you do it in IRIS?

Euan MacLennan | | Permalink

Hello Paul

Do you prepare the service charge accounts in IRIS?  Using which chart of accounts?

And what about the statutory (dormant) accounts?  Do you do them as a separate client in IRIS?

Paul Scholes's picture

Not on iris yet

Paul Scholes | | Permalink

Hi Euan - No, as the accounts needed for the service charges are prescribed by the leases we merely produce an I&E account, balance sheet and some notes in Excel.  Having said that however I am thinking of using IRIS and will look at partnership and Ltd company charts to see what matches best, with any further changes in Word.

In the main one we now do, in order to control the accounts prep and keep track of other work we do, it is set up as an "other business" in Iris and so if we switch over I'll merely set it up again still separate to the main Ltd company.  The pain is not being able to set up a trust tax return job so we monitor that by a task.  The only entries are interest received and so we do that on paper.

Key to all this, if used, are the letting agents and their understanding.  I am sure some have no idea that money should be kept separate but the ones we deal with have two clients and keep separate bank accounts and so, to be honest, in many simple cases they are two jobs, happening to share a year end.  In the main one we now deal with however the Ltd Co has other income and transactions/balances with the Service Charges, and so we do have to do it as a joint job.


Euan MacLennan's picture

Thanks, Paul

Euan MacLennan | | Permalink

We have over 100 resident management company clients, so we need a mass production solution, rather than a one-off fix, and certainly not one which requires subsequent manual editing in Word.  That is why I am asking IRIS to introduce a specialised chart of accounts and reports in the same way that they already have special arrangements for Doctors, Farmers, Pension Schemes and Charities.  However, they are not interested as they seem to think the legislation might change and/or the draft ICAEW guidance might not be confirmed.

We have adapted the EPST chart to one for unincorporated Residents Associations, by including service charge income and more relevant analysis of expenditure.  If we switch to the recommended system, we would use that modified EPST chart to produce the service charge accounts, because you would not want all the share capital stuff that comes with the ELTD chart.

We are thinking of having a separate client for the dormant statutory accounts - client references (say) 1234 and 1234SC.  It would not be a problem for us to duplicate the clients as we have an unlimited license.

That said, I still think the legislation and hence, ICAEW guidance, is daft in the circumstance where the leaseholders have set up a residents management company for the sole and exclusive purpose of collecting service charges and paying for communal expenditure, when there is no landlord involved.

Paul Scholes's picture

See your point

Paul Scholes | | Permalink

Hi Euan - with that many, I too would ask Iris to assist.  Having said that however they may be referring to the fact that we are still waiting for the final clauses from the Commonhold & Leasehold Reform Act 2002 (relating to accounting for service charges) to come into being, which is why I think ICAEW & the property letting bodies got together to issue guidance.  I've given up waiting for this.

I actually agree with the separation of monies because the management company (or whoever) is holding money on trust for the leaseholders, ie the money never belongs to the 3rd party.  To my mind however a Ltd company is overkill made worse, in my main example, by the fact that its Memo & Arts require an audit. Trying to get 130 leaseholders to understand why it's daft to have an audit on the company when their service charges are not audited and that they should re-write their M&As is an uphill struggle.

I regularly contact Iris and so will join your club in suggesting a service charges chart might be a good idea.


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