Service Charge Accounts Made Simple

Residential Service Charge Accounts: What are they?

If you own or manage a residential block, you’ll know how important it is to keep service charge accounts accurate and transparent.

These accounts record the income and expenditure related to the maintenance, management, and repair of shared areas — and they’re a key part of building trust between landlords, managing agents, and leaseholders.

Service charge accounts provide financial transparency for landlords and residents

Service Charge Accounts: How do they work?

A service charge is the money leaseholders pay to cover communal costs such as cleaning, gardening, insurance, and repairs.

The service charge account is separate from the landlord’s own finances — it must be treated as a trust fund for the leaseholders.

Each year, a set of accounts should be prepared showing:

• Income received (usually service charge contributions)

• Expenditure incurred (cleaning, maintenance, insurance, etc.)

• Reserves or sinking funds for future major works

Legal and Best Practice Requirements

Under the Landlord and Tenant Act 1985, leaseholders have a right to see how their money is spent. Managing agents and freeholders must ensure the accounts are clear, independently reviewed, and reconciled to bank statements.

The ARMA (Association of Residential Managing Agents) and RICS (Royal Institution of Chartered Surveyors) also provide best practice guidance — recommending that year-end accounts are certified by an independent accountant experienced in service charge reporting.

Technical Accounting Considerations

While service charge accounts may seem straightforward, they follow specific accounting and legal conventions that differ from ordinary company accounts.

The following principles, based on ICAEW Technical Release TECH 03/11, set out the key points for preparing and reviewing residential service charge statements:

1. Separate Trust Accounts

Service charge funds are held on trust for leaseholders and must not be mixed with a landlord’s or managing agent’s own money. Each development should have its own designated client bank account to ensure transparency and compliance.

2. Non-Statutory, Leaseholder-Focused Accounts

Service charge statements are non-statutory and produced for leaseholders rather than Companies House. They show how residents’ money has been spent and should include:

• A statement of income and expenditure

• A fund statement (balance sheet) reconciling opening and closing funds

• Supporting notes explaining key items, accruals, and reserves

3. Accruals Basis of Accounting

Best practice is to prepare accounts on an accruals basis, not a cash basis. This means:

• Income is recognised when it becomes due under the lease

• Expenditure is recognised when incurred, not when paidThis approach gives a more accurate reflection of the true cost of running the building for the period.

4. Treatment of Reserves and Sinking Funds

Reserve or sinking funds must be shown separately from day-to-day service charge monies. They represent funds ring-fenced for future major works and are only to be used in accordance with lease terms. Any interest earned belongs to the leaseholders.

Funds can be held in reserve to cover specific costs such as roof repairs or lift maintenance

5. Independent Review and Certification

Although not usually subject to statutory audit, the accounts should be certified by an independent accountant familiar with property and service charge accounting.

The accountant will verify that the statements are consistent with underlying records and bank reconciliations, providing assurance to leaseholders.

6. VAT and Taxation

Service charge income is generally outside the scope of VAT, except for management fees or where the landlord is VAT-registered and recharges taxable supplies.

Any interest earned on reserve accounts may be subject to tax, depending on how the bank accounts are structured.

7. Reconciliation and Transparency

A fundamental part of good service charge accounting is the client money reconciliation, matching bank balances to the reported service charge funds. This ensures that all receipts and payments are properly accounted for, maintaining confidence among leaseholders.

Conclusion: Why Professional Accounting Matters

Proper service charge accounting helps prevent disputes and ensures compliance with lease terms and statutory requirements.

It also reassures leaseholders that funds are being handled responsibly — and makes it easier to plan for long-term maintenance.

Whether you’re a freeholder, managing agent, or leaseholder representative, working with an accountant who understands the complexities of residential service charges can save time, money, and stress.

Do you need your service charge accounts prepared or reviewed? Speak to our team at Verifiable Accounts for help and advice today.