In October 2010 Technical Release 01/10 was issued. It was issued for discussion with comments being requested. The period for comments finished early this year and since then SWATUK have been saying that they agree with the guidance in that technical release and recommend that it be followed.
It stressed the fundamental point that variable service charge contributions paid by lessees are held on statutory trust to meet the costs specified in the lease. It indicated that service charge monies do not belong to the residents’ management company and should not be shown as company assets on the company’s balance sheet. Depending on the terms of the lease and contractual arrangements entered into, service charge transactions may not belong in the company’s profit and loss account either.
The guidance pointed out that separate accounts should be prepared for the residents’ management company and for the service charges and that each should be capable of standing on their own.
Following this period of review a new technical release has now been issued, TECH 03/11 with the full title of Residential Service Charge Accounts – Guidance on accounting in relation to service charge accounts for residential properties on which variable service charges are paid in accordance with a lease or tenancy agreement.
Like TECH 01/10 it has been issued jointly by ICAEW, ACCA, ARMA and RICS.
The principal difference between this technical release and the previous one is that this one only deals with the service charge accounts and not with the residents’ management company as well. TECH 01/10 included an example set of accounts for an RMC which are not included in TECH 03/11.
The reason is explained in the introduction. It points out that service charge monies are subject to a statutory trust, and trust monies do not belong to the RMC and so should not be included as an asset in the statutory accounts of the RMC. This has now been confirmed by legal opinion. However the treatment of transactions relating to service charges in the RMC’s accounts is subject to debate, and in view of this the question of whether service charge transactions should be included in the company’s statutory accounts has been referred to the Urgent Issues Task Force.
Comparison of TECH 03/11 with the service charges sections of TECH 01/10 does not indicate any fundamental changes. Some sections have been revised or expanded and some have been added.
The sections that have been revised or expanded include:
Illustrative example service charge accounts.
Engagement letter to provide an accountant’s report on service charge accounts.
Accountant’s report of factual findings
There has been minimal change to the work programme for making a factual report on service charge accounts.
The sections that have been added include:
- A section on the tax treatment of service charges. This indicates that HMRC have confirmed that, if the statutory trusts apply without any modification and the trust terms are complied with, then the receipt of service charge payments will not give rise to any tax liability in the hands of the payee. The section also indicates that where landlords do have transactions in their own right, the tax treatment depends on the nature of the income and/or expenditure and whether the principle of mutuality applies to non-service charge transactions between a company and its members where the members of the company and the leaseholders are identical.
- Comments on audit. This points out that the lease is the contract for the administration of service charges and if it refers to an audit then in principle an audit should be carried out. However it points out that Auditing Standards and Guidelines were only introduced in 1980 and if the lease was drawn up before that date and refers to audit then the work that was anticipated is unlikely to be what is now required to comply with auditing standards. There may therefore be scope for revising the terms in the lease. There are comments on possible solutions where the lease is dated after 1980 and an audit is considered to be disproportionate to the circumstances.
- There is a comparison of an audit to work required for an accountant’s report on factual findings. There is also a new section on procedures for undertaking an audit of service charge accounts. This includes an introduction explaining the audit should be performed in compliance with ISA 800 Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks. It then includes an audit programme showing how ISA 800 can be applied to the audit of service charge accounts.
- Engagement letter to provide an audit in accordance with ISA 800.
The section on service charge accounts in Client Money Programmes published by CCH will be updated in the light of this technical release.
TECH 03/11 should now be used when considering what is required in respect of accounting and reporting on service charge accounts. The full text can viewed by clicking here >
As noted above our recommendation in respect of the statutory accounts of the RMC continues to be that they should not include the transactions and assets recorded in the trust accounts for the service charges. We believe that the original guidance and examples in TECH 01/10 should continue to be used.
If you would like further details, please email firstname.lastname@example.org.