Service Charge Accounts
Transparent, independently certified service charge accounts that give leaseholders complete confidence in how their money is managed. From preparation and service charge audit through to timely distribution, every pound is accounted for in accordance with the new rules for service charge accounting.
What Are Service Charge Accounts?
Service charge accounts are the annual financial statements that detail how leaseholders' service charge contributions have been collected and spent during an accounting period. They provide a complete record of all income received through service charge demands and all expenditure incurred on maintaining and running the building, including insurance, communal maintenance, cleaning, compliance work, management fees, and contributions to the sinking fund or reserve fund.
For residential service charge accounts, the accounts typically compare actual expenditure against the budget that was set at the start of the year, showing variances on every line item. This allows leaseholders to see exactly where their money went, whether costs came in over or under budget, and what the resulting surplus or deficit is for the period. Well-prepared service charge accounts are the foundation of trust between a managing agent and the residents they serve.
At Block, we prepare fully itemised service charge accounts for every building we manage. Our accounts go beyond a simple summary of costs, providing a detailed breakdown that makes it straightforward for leaseholders to understand exactly how their contributions have been applied. This level of transparency is central to our approach to service charge management.
Legal Requirements and the Landlord and Tenant Act 1985
The preparation and distribution of service charge accounts is governed primarily by the Landlord and Tenant Act 1985. Section 21 of the Act requires that a summary of relevant costs must be supplied to each leaseholder within six months of the end of the accounting period. This is known as the 6 month rule for service charge accounts, and failure to comply means the landlord cannot demand payment of those costs until the summary is provided.
The Act also requires that the summary must be certified by a qualified accountant as being a fair summary of the costs incurred and that it is sufficiently supported by accounts, receipts, and other documents. Where the building contains more than four dwellings, the summary must be audited by a qualified accountant. These provisions ensure leaseholders receive reliable financial information and can hold their managing agent accountable.
Beyond the statutory minimums, the terms of each individual lease may impose additional requirements on how service charge accounts are prepared and presented. Some leases require a full audit rather than a certification, specify a particular accounting format, or require accounts to be presented at an annual general meeting. Our block management team reviews every lease to ensure the accounts we produce meet both the statutory and contractual requirements for each building.
- Summary of relevant costs must be issued within six months of the year-end
- Accounts must be certified by a qualified accountant as a fair summary
- Buildings with more than four dwellings require an audited summary
- Leaseholders have the right to inspect receipts and supporting documents
- Service charges must be held in a designated trust account
- Failure to comply with the 6 month rule suspends the right to demand payment
The 6 Month Rule and Service Charge Audit Requirements
The 6 month rule for service charge accounts is one of the most important protections available to leaseholders. It creates a hard deadline by which accounts must be supplied, and the consequence of missing that deadline is significant: the landlord loses the right to demand payment until the accounts are provided. This incentivises prompt and diligent accounting by the managing agent.
The question of whether service charge accounts need to be audited depends on the size of the development and the terms of the lease. Under the Landlord and Tenant Act 1985, buildings with more than four dwellings require the summary of costs to be audited. Many leases go further and require a full service charge audit by an independent qualified accountant, regardless of the number of units.
The ICAEW Technical Release Tech 03/11 provides the industry-standard guidance on how service charge accounts should be reported on by accountants. It sets out three levels of assurance: a full audit, a review engagement, and an agreed-upon procedures report. The appropriate level depends on what the lease requires and the expectations of the leaseholders. Block works with qualified accountants who follow ICAEW service charge accounts guidance to ensure every set of accounts meets the required standard.
- The 6 month deadline runs from the end of the accounting period, not the calendar year
- Accounts for buildings with more than four dwellings must be independently audited
- ICAEW Tech 03/11 defines three levels of assurance for service charge reporting
- Lease terms may impose additional or stricter audit requirements
- Certified service charge accounts provide leaseholders with independent verification
- Late or missing accounts give leaseholders grounds to withhold payment
What Service Charge Accounts Must Include
A properly prepared set of service charge accounts should provide leaseholders with a clear and complete picture of the building's financial position. While the precise format may vary depending on the lease and the accountant's approach, a service charge accounts template typically includes several core components that ensure transparency and accountability.
The accounts should cover all income and expenditure for the accounting period, presented in a way that allows leaseholders to compare actual costs against the budget. This line-by-line comparison is essential for understanding where money has been spent and whether the managing agent has exercised proper financial control. Our approach to service charge management ensures every account we produce meets and exceeds these standards.
Income Statement
A detailed record of all service charge demands issued, payments received, and any arrears carried forward or written off during the accounting period.
Expenditure Breakdown
Line-by-line actual expenditure compared against budget for every cost category including insurance, maintenance, cleaning, compliance, and management fees.
Reserve Fund Statement
A separate statement showing contributions received, expenditure funded from the reserve, interest earned, and the closing balance of the sinking fund or reserve fund.
Balance Sheet
A snapshot of the financial position at the year-end, including bank balances, debtors (arrears), creditors (accrued costs), and prepayments.
Accountant's Report
An independent certification or audit report from a qualified accountant confirming the accounts present a fair summary of costs in accordance with ICAEW Tech 03/11.
Notes to the Accounts
Explanatory notes covering accounting policies, significant variances from budget, any exceptional items, and details of how costs have been apportioned between leaseholders.
New Rules for Service Charge Accounting
The regulatory landscape for service charge accounts is evolving. The new rules for service charge accounting introduced through the Leasehold and Freehold Reform Act 2024 aim to strengthen leaseholder protections and bring greater standardisation to how residential service charge accounts are prepared and presented. These reforms respond to long-standing concerns about transparency and accountability in the leasehold sector.
Key changes include requirements for service charge accounts to be presented in a standardised format, making it easier for leaseholders to understand and compare costs across different buildings and managing agents. The reforms also introduce clearer rules around the treatment of reserve funds, enhanced rights for leaseholders to access information, and stronger enforcement mechanisms for non-compliance.
Block already operates to standards that exceed the current legal minimums. Our certified service charge accounts are fully itemised, independently verified, and presented in a clear format that leaseholders can easily understand. When the new rules for service charge accounting come fully into force, our clients will experience a seamless transition because we have been operating to these higher standards from the outset.
We continue to monitor developments closely and keep our clients informed of any changes that affect their rights or obligations. If you are concerned about whether your current managing agent is meeting the required standards, our team can review your existing accounts and advise on compliance. Learn more about the Section 20 consultation requirements that work alongside service charge accounting obligations.
Leaseholder Right to Inspect and Our Transparent Approach
Leaseholders have the statutory right to request a summary of relevant costs and to inspect the underlying documents that support the service charge accounts, including invoices, receipts, and contracts. Under the Landlord and Tenant Act 1985, the landlord or managing agent must make these documents available for inspection within one month of a written request, and must provide facilities for the leaseholder to take copies.
This right of inspection is a powerful tool for leaseholders who want to verify that their service charges have been spent appropriately. It allows them to check that invoices match the figures in the accounts, that contractors have been competitively appointed, and that no undisclosed commissions or mark-ups have been applied. A competent managing agent should welcome scrutiny, not resist it.
At Block, transparency is not an afterthought. We facilitate all inspection requests promptly because we have nothing to hide. Our service charge accounts are supported by comprehensive documentation, and our online portal gives leaseholders direct access to financial information at any time. This commitment to openness underpins our block management philosophy and is a key reason why buildings choose to move to our service.
- Leaseholders can request a summary of costs within six months of the year-end
- Supporting documents must be made available for inspection within one month of a request
- Leaseholders have the right to take copies of invoices and receipts
- Managing agents must not charge unreasonable fees for providing access to documents
- All service charge funds are held in designated trust accounts with full audit trails
- Our online portal provides leaseholders with 24/7 access to their building accounts
Frequently Asked Questions About Service Charge Accounts
What is the 6 month rule for service charge accounts?
The 6 month rule for service charge accounts comes from Section 21 of the Landlord and Tenant Act 1985. It requires that a summary of relevant costs must be provided to leaseholders within six months of the end of each accounting period. If the landlord or managing agent fails to supply the summary within this timeframe, leaseholders are not liable to pay service charge costs relating to that period until the summary is provided. This rule exists to ensure leaseholders receive timely financial information about how their service charges have been spent.
How do you record service charges in accounting?
Service charges in accounting are recorded on an accruals basis, matching income and expenditure to the accounting period in which they arise rather than when cash is received or paid. Each leaseholder demand is recorded as a debtor when issued, and payments are allocated against those demands. Expenditure is categorised by type, such as insurance, maintenance, cleaning, compliance, and management fees. At the year-end, accruals and prepayments are calculated to ensure the accounts reflect the true cost of services provided during the period. The resulting service charge accounts show actual expenditure against budget for every line item.
Do you have to prepare service charge accounts?
Yes, service charge accounts must be prepared for every accounting period. The Landlord and Tenant Act 1985 requires that a summary of relevant costs is supplied to leaseholders, and best practice is to prepare full certified service charge accounts rather than a simple summary. Most leases also contain specific provisions requiring the preparation and distribution of annual accounts. Failure to prepare and issue service charge accounts within the statutory six-month deadline means the landlord cannot demand payment of service charges relating to that period until the accounts are provided.
What are some red flags in service charge accounting?
Red flags in service charge accounting include accounts that are consistently late or not provided at all, unexplained variances between budget and actual expenditure, vague or insufficiently itemised cost categories, management fees that include undisclosed commissions on insurance or contractor invoices, reserve fund balances that do not reconcile with bank statements, missing or incomplete supporting documentation, and a refusal or reluctance by the managing agent to allow leaseholders to inspect receipts and invoices. If you encounter any of these issues, you have the right to challenge the accounts and apply to the First-tier Tribunal.
How to reconcile service charges?
Reconciling service charges involves comparing the estimated service charge demands issued at the start of the accounting period with the actual expenditure incurred during that period. Each cost category in the budget is matched against the corresponding actual spend, and the difference is calculated as either an overspend or an underspend. The total variance determines whether leaseholders are due a credit or an additional charge. At Block, we reconcile every line item and present the results in our certified service charge accounts, ensuring leaseholders can see exactly where their money was spent.
Do service charge accounts need to be audited?
Whether service charge accounts need to be audited depends on the terms of the lease and the size of the development. Many leases require an independent audit or certification by a qualified accountant. The ICAEW Technical Release Tech 03/11 provides guidance on the level of assurance required, ranging from a full audit to an agreed-upon procedures engagement. Even where a lease does not mandate a formal audit, best practice is to have the accounts independently certified to provide leaseholders with confidence that the figures are accurate and funds have been properly managed. Block arranges independent certification for all service charge accounts as standard.
Ready for Transparent Service Charge Accounts?
Whether you need help preparing service charge accounts, want your existing accounts independently audited, or are looking for a managing agent that puts financial transparency first, we are here to help. Our service charge management and block management services work hand in hand to deliver complete financial clarity for every building.