Accounts payable for UK property management: a guide

Accounts payable for property management is the work of receiving, checking, coding, approving and paying supplier invoices on behalf of the buildings an agent manages. For a UK block or estate managing agent, every invoice has to land against the right property, fund, schedule and heading, because each building’s money belongs to that building and its leaseholders.

That last part is what makes property AP different from AP in most companies. A manufacturer codes an invoice to a cost centre in its own ledger. A managing agent codes it to one of hundreds of separate pots of client money, each with its own budget, its own approvers and its own year end. This guide walks through each part of that job, then compares the four ways agents run it.

What accounts payable means for a managing agent

A managing agent pays suppliers for the buildings it manages: cleaning, gardening, lift maintenance, fire safety, repairs, insurance, and the electricity, gas and water for communal areas. The client might be a residents’ management company, a right to manage company, a freeholder or a commercial landlord. The agent pays from the client’s money, under the authority the management agreement gives it.

So the AP team’s questions for every invoice are the same:

• Which building is this for, even if it is addressed to us, to the RMC or to the freeholder?

• Which fund pays: the service charge, a reserve fund, or something billed to one leaseholder?

• Which schedule and heading does it belong to, so the right leaseholders bear the cost?

• Who can approve it, and is it within the budget and the agent’s authority?

• Has it already been paid, and does it match the supplier’s statement?

Most of the time the answers are in records the agent already holds. The work is finding them quickly and consistently across a large portfolio.

Service charge funds and headings

Each building normally has its own service charge fund, and often a reserve or sinking fund for future major works. In residential property, service charge money paid by leaseholders of dwellings is held on trust for them under section 42 of the Landlord and Tenant Act 1987. In practice that means each building’s money is accounted for separately, and a cost charged to the wrong building takes money from the wrong people.

Inside each fund, the budget is split into headings: cleaning, electricity, lift maintenance, insurance, management fee and so on. Leaseholders see the budget at the start of the year and the actual spend against it at the end. An invoice coded to the wrong heading still balances, but it makes the year-end accounts harder to explain and the next budget harder to set.

Schedules: who pays for what

Many leases split costs into schedules. An estate might have an estate schedule that every unit pays towards, a block schedule for each building, and separate schedules for a car park, a lift or a commercial unit. Each schedule has its own apportionment, so each leaseholder pays a different share of each one.

This is where coding errors cost the most. A lift repair coded to the estate schedule is shared by flats with no lift. A car park cleaning invoice coded to the block schedule is paid by leaseholders who have no parking space. Fixing it later means journals, explanations and sometimes refunds.

Repeat suppliers make this easier: the same contractor tends to work on the same schedule at the same site, so supplier history is good evidence. New suppliers and one-off works are where a person needs to decide.

VAT on service charges

VAT is one of the details that guides written for other countries get wrong. HMRC treats service charges paid by residential leaseholders as further payment for the landlord’s exempt supply of the property, so they are exempt. Commercial service charges follow the VAT treatment of the rent, so they are exempt unless the landlord has opted to tax the building, and standard rated if it has. The managing agent’s own management fee is a standard rated supply.

For AP, the practical consequence is that a client whose supplies are exempt generally cannot recover the VAT on the invoices it pays for the building, under HMRC’s partial exemption rules. That VAT becomes part of the cost to the service charge, so the invoice is coded gross, and getting the VAT figure right matters as much as the net. A commercial building that has opted to tax is a different picture. Our guide to VAT on service charges covers the detail.

Utility bills

Communal electricity, gas and water are among the most frequent invoices an agent handles, and among the easiest to get wrong. One bill can show current charges, a balance brought forward, instalments and a payment slip, and the biggest number on the page is often the account balance, which includes last period’s charges.

The other details matter too: the supply address and meter that place the bill against a building, the billing period, whether the reading was estimated or actual, and whether the supply is billed with domestic or non-domestic VAT and Climate Change Levy. Bills often arrive late, so year end usually needs an accrual for supplies used but not yet billed.

There is more on this in our guide to how managing agents process utility bills.

Approvals across client boards

The management agreement sets what the agent can approve on its own. Above that, an invoice might need a property manager, a client accountant, the directors of the RMC or the landlord. Each client can have different limits, and the same agent can work to dozens of approval matrices at once.

Major works add a statutory layer in residential property. Under section 20 of the Landlord and Tenant Act 1985, landlords in England must consult leaseholders before qualifying works where any leaseholder’s contribution would be more than £250, and before long-term agreements costing any leaseholder more than £100 in an accounting period. When the invoices for those works arrive, AP needs to know which consultation they relate to and whether they are within what was consulted on.

Supplier statements and month end

Suppliers that work across many buildings send one statement covering all of them. Reconciling it against the purchase ledger shows invoices the agent never received, credit notes that are missing, amounts that differ and payments that crossed in the post. Done monthly, it catches problems while they are still easy to fix.

Read more in supplier statement reconciliation for block managers.

Year end

At the end of each building’s service charge year, the agent prepares accounts showing the actual spend against the budget, by heading. The lease sets out what the accounts must contain and who certifies them, and commercial service charges have their own professional standard from RICS. Whatever the format, the accounts are only as good as the coding behind them.

The AP work that makes year end straightforward is the work done all year:

• Every invoice coded to the right building, schedule and heading when it arrives.

• Utility bills posted for the right period, with accruals for bills not yet received.

• Supplier statements reconciled, so nothing is missing or paid twice.

• An invoice history that shows who coded and approved each cost, for when a leaseholder or auditor asks.

Four ways to run property accounts payable

Agents run AP in one of four broad ways, and many use a mix. None is right for everyone. The table sets out how each works and what to check.

Manual keying

A team reads each invoice, works out the property and coding, and keys it into the property accounting system. It needs no new software and it works for small portfolios. As the portfolio grows, so does the time per invoice, and the coding depends on the experience of whoever keyed it.

The property system’s own module

Several property accounting systems offer invoice capture or an AP module from the same supplier. One supplier and one contract is a real advantage. Check how it handles the cases that cause the most work: bills addressed to the agent or the RMC, utility bills with several totals, and your clients’ approval matrices.

Generic AP software

AP automation built for ordinary companies is mature and widely used. It suits groups that run corporate finance alongside property management. Check whether it can code to property, fund, schedule and heading without workarounds, and whether it understands that each building’s money is separate.

A property-specific tool

Some AP tools are built around property coding from the start. They suit agents managing many buildings for many clients. Check which property systems they work with and how: posting directly into the ledger, or exporting a file for your team to load.

Questions to ask before you choose

• How does it find the right building when an invoice is addressed to the agent, the RMC or the freeholder?

• Can it code to property, fund, schedule and heading, using our existing records?

• Which figure does it take from a utility bill with several totals, and how does it check VAT and Climate Change Levy?

• Can each client have its own approval matrix and limits?

• What happens to an invoice it cannot place? Who sees it, and what do they see?

• How does it get invoices into our property system, and what comes back?

• Can we see it work on a sample of our own invoices?

Where to start

Start with the invoices that cause the most work today: the utility bill with competing totals, the invoice nobody can place against a building, the approval that always stalls. They show quickly whether an approach fits your portfolio.

If you run MRI Qube or Blocks Online, see invoice and utility bill automation for property managers, which codes each invoice to property, fund and heading, posts to Qube or exports for Blocks Online, and holds anything uncertain for your team.