Morton Baxter Associates Limited Morton Baxter Associates Limited Morton Baxter Associates Limited

Please find a list of frequently asked questions here

Why do we have separate Service Charge and company accounts?

  • The Lessees Service Charge monies are subject to a statutory trust, therefore these trust monies do not belong to the RMC/RTMCo and should not be included as an asset in the statutory accounts. Tech 03/11 (Residential Service Charge Accounts) states that clarification is still sought regarding the ‘accounting for the transactions settled from such funds’ therefore separate Service Charge Accounts are provided for clarity & transparency.

My lease states that the accounts need to be audited, does this mean we need an audit?

  • The short answer is yes; however, it is a contentious issue. Tech 03/11 gets around the requirements of a full audit by requiring Service Charge audits to be carried out under ISA800 – Audits of financial statements prepared in accordance with special purpose framework. By preparing the audit under ISA800 it reduces some of the requirements of a full audit.

  • Tech 03/11 also gives two circumstances when it is possible to avoid a Service Charge audit even if it states in the lease that one is required:
    • If the lease predates 1980 then an audit is not required as this is before the ISA were introduced
    • If an audit is specified in the lease but is considered to be disproportionate to the circumstances of the property and is backed by all lessees then it may be possible to look at an alternative approach of certification instead
  • Morton Baxter will look at each case on a lease by lease basis and the team would be happy to provide advice if you as a Landlord, Managing Agent or Resident are unsure of the audit requirements of your block.

Why are Service Charge accounts prepared on the accruals basis?

  • The industry standard technical releases 03/11 (Residential Service Charge Accounts) & 09/14 (Commercial Property Service Charge Accounts) issued by ICAEW both state that Service Charge accounts should be prepared on the accruals basis which recognises costs in the accounts when the expense was incurred rather than when the invoice is paid. The benefit to lessees of the accruals basis is that they can be confident that the expenses in the accounts only relate to the Service Charge period in question. This is the opposite of cash accounting, which recognises transactions only when there is an exchange of cash.

What’s the difference between Service Charge income and reserve fund income?

  • Service Charge income is levied to cover the day to day running costs of the development as defined within the Leaseholders lease.
  • Reserve fund or Sinking fund income is levied towards the costs of expensive future repairs, such as decorating, lift renewals and roof repairs. By making a provision for this annually it spreads the costs of this major work over a number of years therefore mitigating against large one-off costs.

What should I expect from an independent accountant?

  • Service Charge accounts prepared to industry best practice guidelines
  • Accounts returned to directors/managing agent in a timely manner to enable them to be distributed to lessees
  • Accounting information to be checked thoroughly by an impartial body to ensure accuracy

When should I receive my accounts?

  • Section 20b of the Landlord and Tenant Act 1985 states that if any of the relevant costs taken into account in determining the amount of any Service Charge were incurred more than 18 months before a demand for payment of the Service Charge is served on the tenant, then the tenant shall not be liable to pay so much of the Service Charge as reflects the costs so incurred. In reality this means that Service Charge accounts need to be issued to lessees within six months following the end of the financial period to avoid the non-recoverability of Service Charges by the Landlord.
  • Here at Morton Baxter we will typically produce a draft within 2-3 weeks of receiving the year-end information ensuring there is plenty of time for the accounts to be distributed to lessees. Please see our current turnaround time at the top of this page for live turnaround information.

Why do the accounts need to be prepared by an independent accountant?

What is an accrual/prepayment?

  • An accrual is a charge for work that has been completed but has not yet been invoiced, for which provision is made at the end of a financial period (e.g. electricity supplied)
  • A prepayment refers to an expense paid in a given period that relates to the following period in whole or in part (e.g. buildings insurance)

Why do I pay a Service Charge?

  • Service Charges are fees that Leaseholders pay to the Landlord to cover their share of the cost of maintaining the building. These costs for which the Leaseholder is responsible will be defined within the terms of their lease. Items usually covered by the Service Charge include cleaning of communal areas, grounds maintenance and buildings insurance.

  • Other important information relating to Service Charges should be contained within the lease and will include:
    • How and when to pay your Service Charge
    • How your Service Charge is calculated
    • Whether a Sinking Fund or Reserve Fund collection is allowed
    • What happens if you pay excess or not enough Service Charge (e.g. expenses are higher than Service Charge collected) within the financial year
  • Please note that Service Charges are usually variable meaning the amount you pay each year can change

Experts in Service Charge Accounting

Morton Baxter work closely with Landlords, Managing Agents and Residents to provide clear, concise and compliant financial reporting of Service Charges. This is an area which needs particular expertise and our team is vastly experienced in dealing with the obligations of Residential, Commercial and Mixed-Use developments through the provision of compliant financial reports to meet the needs of stakeholders.

The ethos of Morton Baxter – born in 2010 – remains as strong now as it did then and the five elements that we continue to abide by can be viewed above (within the ‘Why Our Clients Choose Us’ section). Our team endeavours to stick to these principles, treating all clients equal no matter the size of the development. Our team currently report to 1,000 clients (and growing!) which range from small developments of four units to large mixed-use developments of 250+ units with multiple schedules.

If you believe Morton Baxter can help you then please contact us today.

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