SAC 2

Question 1

What are exempt supplies for VAT purposes?

Answer 1

Some land
Insurance
Some postal services
Finance
Health services
Burial and cremation

Question 2

What are some examples of taxable supplies chargeable at zero rate?

Answer 2

Water, food, books, international services and transport

Question 3

What are some examples of supplies which the reduced rate of 5% applies to?

Answer 3

Mobility aids, installation of energy saving materials, children’s car seats

Question 4

When is deemed basic tax point (i.e. time of supply) for goods?

Answer 4

When removed / made available to purchaser

Question 5

When is deemed basic tax point (i.e. time of supply) for services?

Answer 5

When completed

Question 6

When can the basic tax point be varied?

Answer 6

1. Supplier issues a tax invoice within 14 days after basic tax point – then becomes date of invoice unless longer period has been agreed with HMRC
2. Before a basic tax point arises, supplier issues a tax invoice or receives payment - supply will be treated as taking place at date of invoice or payment

Question 7

When must a taxable person making a taxable supply to another person provide them with a tax invoice?

Answer 7

Within 30 days after time of supply

Question 8

What is HMRC’s position on disbursements?

Answer 8

Not part of legal services therefore do not need to charge VAT on them

Question 9

If payment is for an item required by the solicitor to provide legal services then how is this regarded by HMRC?

Answer 9

Not a disbursement therefore taxable

Question 10

What are 3 examples of disbursements?

Answer 10

SDLT
Court fee
Company registration fee
Surveyor’s fees

Question 11

What are 3 examples of non-disbursements?

Answer 11

Postage
Land Registry search fee
Travel fare

Question 12

For disbursements including a VAT element, e.g. payments made by the firm to a taxable person in respect of taxable supplies, such as counsel, surveyor, accountant, estate agents etc, how is VAT dealt with?

Answer 12

1. Payment made by firm will include a VAT element which is passed on to the client
2. Firm does not charge client any additional VAT
3. Clients who are registered for VAT will want to recover it from HMRC and can only do this if they have a VAT invoice addressed to them

Question 13

What is the agency method?

Answer 13

Method used to deal with taxable supply following an invoice received addressed to the client

Question 14

How does the agency method work?

Answer 14

1. Payment can be made from the client bank account if there is sufficient money there held for the client but can also be made from the business bank account
2. Firm does not separate the supplier’s fees and VAT in the firm’s accounting records – just records total paid

Question 15

What is the principal method?

Answer 15

Method used to deal with taxable supply following an invoice received addressed to the firm

Question 16

What money must the firm use to pay an invoice received addressed to the firm?

Answer 16

Firm’s business money

Firm then resupplies item to client at same price, and will charge the client output tax on both the firm’s professional charges and the disbursement

Question 17

How is a disbursement which is to be treated on the principal method recorded?

Answer 17

1. CR the disbursement and the VAT on it to the cash account business section (common but not essential to show the two elements separately)
2. DR VAT to HMRC ledger

DR VAT exclusive amount to client ledger account business section

Make a memorandum note in the “Details” column of the client ledger of the amount of VAT which must be added to the VAT charged to the client when an invoice is issued

3. When a bill is issued, add the VAT on the principal method disbursement to the VAT on the professional charges and make the normal entries for delivery of a bill

DR client ledger account business section, with VAT and costs as two separate amounts

CR the profit costs account with costs

CR HMRC account with total VAT charged

Question 18

What is the obligation on solicitors regarding interest on client money?

Answer 18

Fair sum of interest must be accounted to clients

Question 19

Can a firm enter into a written agreement with the client on the payment of interest?

Answer 19

Yes

Could therefore technically agree to pay no interest

Question 20

If a firm is holding client money in a separate designated deposit bank account, how would an interest accrued be recorded?

Answer 20

DR cash account - client section

CR client ledger account - client (on deposit) section

Question 21

What are the two methods by which the firm can deal with interest?

Answer 21

1. Pay client money into separate deposit bank account for that client
2. Pay into general account and then set own policy on accrual of interest

Question 22

In a property transaction, when the firm receives a deposit to hold as stakeholder, what are the options for recording this?

Answer 22

1. Credit to Stakeholder joint ledger account in joint name of seller and buyer
2. Credit to seller’s ledger account BUT must be clearly labelled as stakeholder money for both buyer and seller

Make inter-client transfer following completion

Question 23

If a seller is buying a subsequent property but have not yet received sale money therefore require a bridging loan, how is this recorded?

Answer 23

Solicitor holds it to the order of the borrower and so it must be credited to borrower’s ledger account (not in name of bank)

Question 24

If a mortgage advance is received, what are the two methods by which a this can be dealt with, if the firm is acting for both lender and borrower?

Answer 24

Method 1 = mortgage advance CR borrower’s ledger account when received; details column must include name of the lender and fact that it is a mortgage advance

Method 2 = mortgage advance is credited to a separate ledger account in the name of the lender on receipt – on day of completion, funds become available to the borrower so an inter-client transfer should be made to borrower’s ledger account

Question 25

If a firm is acting on behalf of a buyer for a house, and receives a mortgage advance but does not act for the bank, how should this be recorded?

Answer 25

CR entry in a client ledger account in the name of the building society with the details stating ‘Cash’

DR entry in the cash account

Question 26

If a solicitor opens a joint account, what 2 Rules apply?

Answer 26

Rule 8.2 – obtaining statements from banks and building societies and other financial institutions at least every five weeks

Rule 8.4 – keeping a readily accessible central record of bills and other notifications of costs

Question 27

If a solicitor is operation a client’s own personal bank account as signatory, what Rules apply (as per Rule 10)?

Answer 27

Rule 8.2 – obtaining statements from banks and building societies and other financial institutions at least every five weeks

Rule 8.3 – completing reconciliations of the account at least every five weeks

Rule 8.4 – keeping a readily accessible central record of bills and other notifications of costs

Question 28

What are the limitations on a solicitor being found to have breached Rule 10?

Answer 28

Not a breach provided the solicitor has taken reasonable steps to satisfy themselves that the client’s money is not at risk and recorded the position appropriately

Question 29

If a firm enters into an agreement with a client to use a third party managed account (TPMA) to hold client money, does this still constitute client money?

Answer 29

No, therefore does not have to be held in accordance with the SRA Account Rules

Question 30

What are the requirements for a TPMA?

Answer 30

Must be:

o An authorised payment institution
o A small payment institution which has adopted voluntary safeguarding arrangements to the same level as an authorised payment institution, or
o An EEA authorised payment institution

Question 31

What steps is a solicitor expected to still take when using a TPMA?

Answer 31

Must maintain an overview of the transactions on the account and keep appropriate records to reflect this (in particular, must receive regular statements)

Question 32

When must an accountant’s report be obtained?

Answer 32

When firms have at any time during an accounting period held or received client money

Report must be obtained within 6 months of the end of the period

Question 33

When do accountant reports need to be submitted to the SRA?

Answer 33

When it is “qualified”, i.e. where there has been a significant breach of the Rules

Question 34

What is the time frame for the delivery of a qualified accountant’s report to the SRA?

Answer 34

Within 6 months of the end of the accounting period

Question 35

Who is responsible for submitting qualified reports to the SRA?

Answer 35

The law firm

Question 36

What are some “serious factors”, the presence of which is likely to lead to a qualification?

Answer 36

 Significant / unreplaced shortfall
 Systematic billing for fees and any disbursements
 Evidence of any disregard for safety of client money and assets
 Actual or suspected fraud or dishonesty
 Accounting records not available or significantly deficient
 A failure to provide documentation requested by the reporting accountant
 Client account bank reconciliations not carried out
 The client account is improperly used as a banking facility

Question 37

What are the 2 exceptions for obtaining an accountant’s report?

Answer 37

1. All client money held or received during the period is from Legal Aid
2. In the accounting period, total balance of all client accounts plus any joint accounts and client’s own accounts operated by firm does not exceed
   - Average of £10,000, and
   - Maximum of £250,000 (or equivalent in foreign currency)

Question 38

How long do accounting records need to be retained for?

Answer 38

At least 6 years

Question 39

What constitute accounting records?

Answer 39

Reconciliations, bank statements, electronic records, accountants’ reports, and documents relating to third party managed accounts