Solicitors Accounts

Question 1

Do disbursements come with VAT?

Answer 1

No - disbursements are VAT-free

Question 2

What are NOT disbursements?

Answer 2

Photocopying charges
Phone charges
Travel expenses incurred from the matter
Postage fees
Bank transfer fees
Property SEARCH fees

Question 3

What are disbursements?

Answer 3

Oath fees
Company search fees
Company registration fees
Court fees
Witness fees
Land Duty Stamp Tax
Land Registry fees

Question 4

Which account must petty cash be paid out of?

Answer 4

Cash account (BM)

Question 5

Where should deposits be held?

Answer 5

In a joint stakeholder account (buyer and seller)

Question 6

What’s the SRA’s position on how law firms should deal with interest accrued in CM accounts?

Answer 6

There must be a fair policy, that is shared with clients at the outset - subject to any other written and informed agreement by the client

Question 7

Is extra VAT ever charged when a law firm deals with an invoice on a client’s behalf?

Answer 7

Never - it is merely passed on to the client

Question 8

What are the different ways that a law firm can pay for a client’s invoice?

Answer 8

Agency method (if the invoice is addressed to the client) - law firm can pay using CM or BM

Principal method (if the invoice is addressed to the law firm) - law firm can only pay using BM. The VAT is only included in the client’s BILL.

Question 9

What is the exception to the principal method?

Answer 9

When an invoice is addressed to the firm, but is from legal counsel - then the firm can replace it with the client’s name

Question 10

When can money be withdrawn from the client account, aside from client instruction?

Answer 10

When the SRA gives written authorisation

Question 11

What happens if there is a breach of Account Rules, aside from reporting it to the COFA?

Answer 11

The law firm may be personally liable to pay back lost sums

Question 12

What are the ways to split a cheque payment so it can go into both the client and cash accounts?

Answer 12

Either split the cheque, or deposit into either account and then promptly transfer out

Question 13

Can a law firm automatically transfer CM from the client account (if there is any) to the cash account upon issuance of a bill to the client?

Answer 13

Yes, but only if they’ve explained to the client how and when payments are made, and they’ve notified the client that CM is being taken out of the account now

Question 14

How much is VAT in the UK, generally?

Answer 14

20%

Question 15

What transactions are exempt from VAT?

Answer 15

Property and financial transactions, disbursements

Question 16

Can a firm charge VAT after leaving out ‘VAT’ in the initial letter?

Answer 16

No

Question 17

What is the VAT threshold?

Answer 17

That a business or person has taxable supplied of £85,000 or more in the last 12 months

Question 18

What are the 2 parts to VAT?

Answer 18

Input tax (from the suppliers to the business), and output tax (from the business to its clients)

Question 19

What is the HMRC test for whether something is a disbursement?

Answer 19

The client was aware the services was not provided by the law firm

The client had benefitted from the services

The client had authorised the firm to pay on their behalf

The client’s money was actually used to pay the services

The firm had paid for the services on the client’s behalf

Question 20

What are the requirements when setting up a client account?

Answer 20

It must be within England and Wales, and contain both the firm and client name. It cannot serve any other purpose (e.g. provide banking facilities) other than for transferring sums in relation to the provision of legal services

Question 21

To whom do the SRA Account Rules apply to?

Answer 21

All SRA regulated bodies and their employees

Question 22

How long do firms need to keep accounting records?

Answer 22

At least 6 years

Question 23

Who should prepare accounting reports?

Answer 23

A chartered accountant who works for a registered audit firm

Question 24

When is an accounting report not required?

Answer 24

1. All CM is from the Legal Aid Agency
   OR
2. The total average client account balance does not exceed an average of £10,000, or a maximum of £250,000 when all combined

Question 25

When does an accounting report need to be delivered to the SRA?

Answer 25

If the report has any irregularities, then the report must be shared with the SRA within 6 months of the end of the accounting period

Question 26

What are the exceptions to the requirement that CM must be paid promptly into the client account?

Answer 26

1. Where the party provides written consent to the contrary
2. It is CM from the Legal Aid Agency
3. The law firm is holding CM as a trustee