Service Charge Accounting UK: Complete Guide for RTM Companies

Introduction

Service charge accounting is one of the most misunderstood aspects of managing a leasehold block. Get it wrong and you risk being unable to collect charges from leaseholders — or worse, facing a tribunal claim.

This guide covers everything an RTM company or self-managed block needs to know about service charge accounting in the UK.

The Legal Framework

Service charge accounting in England and Wales is governed by:

• Landlord and Tenant Act 1985 (Sections 18–30) — defines what a service charge is and how it must be demanded
• RICS Service Charge Residential Management Code — best practice guidance
• Commonhold and Leasehold Reform Act 2002 — additional protections for leaseholders

The most important principle: service charges must be reasonable and properly demanded to be collectible.

Section 21 Demands — Getting It Right

Before you can legally collect a service charge, you must issue a Section 21 demand. This is a formal written demand that must include:

1. The landlord's (or RTM company's) name and address
2. The period covered
3. A summary of rights and obligations (prescribed form under LTA 1985)

Failure to include the summary of rights means the charge is not yet due — the leaseholder can withhold payment without breaching their lease.

Budget vs. Actual Accounting

Service charge accounting operates on a budget cycle:

At the start of the year:

• Prepare a service charge budget estimating all expenditure
• Issue demands based on the budget (on account payments)

During the year:

• Track actual income and expenditure against budget
• Keep service charge funds in a separate designated account (legally required)

At year end:

• Prepare year-end accounts showing actual income and expenditure
• Any surplus is either carried forward or refunded to leaseholders
• Any deficit can be collected from leaseholders in the following year

The Reserve Fund (Sinking Fund)

A reserve fund is money collected from leaseholders in advance to cover major works — roof replacement, lift refurbishment, external decoration, and so on.

Key points:

• Reserve fund contributions are still service charges and must be properly demanded
• The money must be held in a designated account, separate from day-to-day service charges
• Interest earned on the reserve fund belongs to the leaseholders
• The fund should be built up based on a planned maintenance programme

Section 20 Consultation

Before carrying out major works costing more than £250 per leaseholder, you must carry out Section 20 consultation:

1. Notice of Intention — inform leaseholders of the proposed works and invite nominations of contractors
2. Notice of Estimates — share at least two estimates with leaseholders
3. Award of Contract — notify leaseholders of the decision (with reasons if not choosing the lowest estimate)

Failure to consult limits recovery to £250 per leaseholder regardless of actual cost.

Year-End Accounts

RTM companies must produce year-end service charge accounts that are:

• Certified by a qualified accountant — either an accountant's report (smaller blocks) or a full audit (larger or where the lease requires it)
• Issued to leaseholders within 6 months of the accounting year end
• Clear and transparent — showing all income and expenditure in detail

The RICS code recommends using accruals accounting (not cash accounting) for service charges to give a true picture of the financial position.

Common Accounting Mistakes to Avoid

Mixing funds — service charge money must be held separately from any other funds. Mixing with personal or company accounts is a serious breach.

Not issuing proper demands — if the demand doesn't comply with Section 21, the charge isn't legally due.

Charging items not covered by the lease — you can only charge for items that are explicitly permitted under each leaseholder's lease.

Ignoring the reserve fund — underfunding reserves leads to large one-off demands that are difficult for leaseholders to budget for and more likely to lead to disputes.

Software for Service Charge Accounting

Managing service charge accounting manually in spreadsheets is error-prone and time-consuming. Purpose-built property management software like PropLinker handles:

• Automated service charge demands
• Income and expenditure tracking
• Reserve fund management
• Year-end account preparation
• Integration with GoCardless for Direct Debit collection

Conclusion

Service charge accounting is complex but manageable with the right processes and tools. The most important principles are: always demand correctly under Section 21, keep funds separate, and prepare transparent year-end accounts on time.

If you're running an RTM company or self-managed block, PropLinker can handle the accounting and collection side — so your directors can focus on managing the building.