Service Charges New Guidance Expected

RP Issues - Winter 2011/12

Andrew Bond discusses how RPs may wish to use the forthcoming consultation on service charge accounts to review their existing practice.

The Commonhold and Leasehold Reform Act 2002 was expected to have a major impact on a number of areas of leasehold management for housing associations and others. In the event, while many of the new regulations anticipated under the Act have come into law, those most directly affecting accounting were never enacted. Last year the new Government let it be known that it was unlikely that it would enact these regulations at all. As a result, legislation regarding the form and content of service charge accounts, independent accountants' reports and designated bank accounts are now no longer expected.

While the housing association sector has adopted good practice over a number of years and is exempt from some elements of the legislation, an imminent new publication produced by a joint working party of the ICAEW, Scottish and Certified accounting bodies, the Association of Residential Managing Agents and RICS is likely to be of interest. A working group was formed by these bodies largely as a result of the 'void' it was felt existed as a result of the failure of the anticipated regulations to come into force. An initial consultation document was issued in October 2010. Following that a range of issues were debated and, because of the difficulty in resolving some issues, Counsel's opinion was sought. The publication is now at final draft stage and may well have been issued by the time this newsletter is distributed. While not directed primarily at housing associations, RPs may wish to consider whether some of the content should influence their own working practices; key points are as follows.

There is a distinction to be made between service charge accounts and the statutory accounts of the company that makes the service charges. Service charge accounts should contain an income and expenditure account and ordinarily be drawn up on an accruals basis with a balance sheet.

The group was unable to resolve satisfactorily whether variable service charges should be accounted for within the accounts of the company owning the freehold to the relevant...