SQE 1: Solicitors Accounts

Question 1

What the the rules related to how a client account should be held?

Answer 1

• must be in branch of bank/building society in England or Wales
• must include the name of the firm and the word “client”

Question 2

What processes must firm do regularly for client account?

Answer 2

• Statement from bank every 5 weeks
• • Reconcile client account against bank statements every 5 weeks (signed of by COFA)
• Deliver accounting reports to SRA within 6 months of accounting period if total balance of all accounts exceeds: 1. 10k on average or £250k at any time (only if qualified)

Question 3

When does an accounting report have to produced and what is deadline? Who should produce this?

Answer 3

Produced and sent within 6 months of accounting period if:
- firm deals with client money at exceeds 1. 10k on average or £250k at any time
- it is qualified (report shows that money belonging to client/3rd party is/ has been, or is likely to be placed at risk)

Produced by:
- Report must be prepared and signed by an accountant who is part of chartered bodies, and
- Who is/works for a registered auditor

• must be kept for 6 years

Question 4

When must client money relieved be paid into client account?

Answer 4

Must be paid promptly into client account
- On day or day after receipt

Exceptions
- Firm holds money as trustee/holder of specified office and this would conflict with those obligations.
- The client money is received from the legal aid agency for firms costs
- An alternative arrangement has been agreed in writing with the client or 3rd party for whom the money is held

Question 5

How long should a firm hold client money in client account?

Answer 5

Should be available on demand
- Unless alternative arrangement agreed in writing

Should be returned promptly as soon as there is no longer any proper reason to hold the funds

Question 6

When does money not have to be held in client account?

Answer 6

Where client money held/received is in relation to unpaid fees or disbursements and:
- any money held for disbursements relates to costs or expenses incurred on behalf of client and for which firm is liable; and
- firm does not for any other reason maintain client account

However:
- client has to have been informed in advance of where and how money is held

Question 7

When can money be withdrawn from client account?

Answer 7

Money can be withdrawn only:
- for purpose for which it is being held;
- following receipt of instruction from client; or
- on SRA’s prior written authorisation

Also cannot exceed total amount held for that client

Question 8

Entries for client money received

Answer 8

• Credit in client ledger (client side)
• Debit in cash account (client side)

Question 9

Entries for client money spent by firm

Answer 9

• Debit client ledger
• Credit cash account

Question 10

Entries on issue of bill to client

Answer 10

• Debit Profit Costs on business side of client ledger
• Debit VAT on business side of client ledger
• Credit on Profit Cost Account (for profit cost)
• Credit on HMRC Account (for VAT)

Question 11

Entries when client pays bill

Answer 11

Option 1
- Credit total sum on business side of client ledger
- Debit business side of cash account

Option 2: where enough funds in client account to pay bill

Taking from Client Account
- Debit client account
- Credit cash account
Into Firm bank account
- Credit client ledger
- Debit cash account

Question 12

Entries if a client bill is lowered after issuing bill

Answer 12

• Debit Profit Cost Account (amount of bill reduced)
• Debit HMRC Account (VAT Reduced by)
• Credit Client Ledger (business side) amount bill reduced
• Credit client ledger (business side) VAT reduced

Question 13

How to rectify situation where money is improperly withheld/withdrawn from client account? What are possible disciplinary consequences?

Answer 13

• Must be returned even if partners must use personal funds

Consequences might include
- Disciplinary action by SRA
- Criminal sanctions in more serious cases

Question 14

Consequences of a firm drawing on cheques before it has cleared?

Answer 14

Trick question, this is allowed

However, if cheque then bounces client account may become overdrawn and must be rectified.

Question 15

Response if cheque a firm drew upon subsequently bounces?

Answer 15

• Firm must immediately reverse original entries
• Firm must immediately transfer the amount by which client account is overdrawn from business account to client account

Question 16

Response if cheque a firm drew upon subsequently bounces entires. FULL SEQUENCE

Answer 16

Client sends Cheque (£1000)
- Credit client ledger (client side) £1000
- Debit cash account (client side) £1000

Firm uses cheque to pay for something (£800)
- Debit client ledger (client side) £800
- Credit cash account (client side) £800

Cheque bounces (firm reverses original entries of £1000)
- Debit client ledger (client side) £1000
- Credit cash account £1000

Firm rectifies breach (if this example ledger is overdrawn by £800)
- Debit client ledger (business side) £800
- Credit cash account (business side) £800
- Credit client ledger (client side) £800
- Debit cash account (client side) £800

Question 17

In what situations may business money be placed in client account?

Answer 17

• To open the client bank account
• To maintain client account at an agreed level (with bank presumably)
• To replace any sum which has been incorrectly withdrawn
• To allow money in lieu of interest on client money
• Under Rule 4 (dealing with mixed cheques)

Question 18

How should a firm deal with mixed receipts?

Answer 18

Can choose one of the below

• split the cheque
• deposit in either client or business account and transfer
• If bill or other written notification of cost has been sent to client can immediately transfer client money to business account

Question 19

Entires for splitting cheque

Answer 19

Only if bank agrees to split cheque

• Credit client ledger (client side) – with client money part of cheque
• Credit client ledger (business side) – with business money part of cheque
• Debit Cash Ledger (client side) – with client money part of cheque
• Debit cash ledger (business side) – with business money part of cheque

Question 20

Entires/rules for mixed cheque deposit in either client or business account and transfer

Answer 20

Money in wrong account must then be transferred promptly to correct account (if client > business = 14 days // business > client = same/next working day)

If to client account first
- Credit client ledger (client side) – whole amount
- Debit cash ledger (client side) – whole amount

• Debit client ledger (client side) – business money part of cheque
• Credit cash ledger (client side) - business money part of cheque
• Credit client ledger (business side) - business money part of cheque
• Debit cash ledger (business side) - business money part of cheque

Question 21

When can firm use client money to pay for bills or disbursements?

Answer 21

If bill or other written notification of cost has been sent to client.

• If firm is already holding enough client money when it issues the bill then whole amount billed can be transferred to business bank account
• If firm has paid for disbursements themselves it can reimburse itself from client account (as would be for intended purpose)

Firm must explain to client how and when payments are being made and that reimbursement would be taken form client account

Question 22

Entries for inter client transfer

Answer 22

• Debit client ledger (client side) of Client X (one giving money)
• Credit client ledger (client side) of Client Y (receiving the money)

Question 23

What are 1. output VAT and 2. input VAT?

Answer 23

Output VAT
- charged by business to its customer

Input VAT
- charged to a business by its suppliers

Question 24

What are the rules for accounting to HMRC for VAT?

Answer 24

• Generally possible to deduct any input tax charged to the firm from amount that which it must account for to HMRC
• Will only account for difference between input and output tax to HMRC (output – input)
• HMRC will hold the firm liable for accountable amount regardless of whether clients have paid them

Question 25

How should a firm state its cost to clients?

Answer 25

• Must state cost for legal services as cost plus VAT
• If just put cost it is presumed that VAT is included

Question 26

What does a client have to charge/not charge VAT on?

Answer 26

Not charge VAT on
- disbursements (note this may depend on who invoice is addressed to)

Charge VAT
- costs that are not disbursements

Question 27

What counts as disbursements

Answer 27

• Company search fees
• Company registration fees
• Court fees
• Witness fees
• Oath fees paid to another solicitor
• Stamp duty land tax
• Certain Land Registry fees

Third party serivces
- Surveyor
- Accountant
- Legal counsel

Question 28

How does firm pass on invoices by third parties addressed to clients? Including entries.

Answer 28

Agency Method

Supply treated as having been made to client
- Firm to pay entire amount (including VAT) out of client account (if enough) or business
- Then send 3rd parties invoice to client, for them to reclaim their VAT (if requested)

Entries
- Debit client ledger (client side) (whole amount)
- Credit cash ledger (client side) (whole amount)

Question 29

How does firm pass on invoices by third parties addressed to firm? Including entries.

Answer 29

Principle Method
- Must use business money
- Then resupply the service to client at same price
- When firm sends client its own bill of Profit Cost it includes the VAT from this along with VAT that relates to Profit Cost

EXCEPTION: Legal Council Invoice addressed to firm
- Instead firm can cross out its own name on invoice and replace it with clients name

Question 30

How does firm hold deposits in conveyancing? Including entries.

Answer 30

• Held by sellers solicitor as stakeholder (in a separate stakeholder account in name of both the buyer and seller)
• Following completion funds must be transferred to selling client’s ledger

Entries
- Credit stakeholder ledger (client side)
- Debit cash ledger (client side)

On completion (money does not move so no cash account)
- Debit stakeholder ledger (client side)
- Credit client ledger (client side)

Question 30

How does firm hold mortgage funds for institutional lenders in conveyancing? Including entries.

Answer 30

• Can act for buyer and lender (but treated as separate clients)
• Should have separate ledgers for each one
• Mortgage funds should be credited to separate account for lender on receipt
• On completion an inter-client transfer made to borrower

Entries
- Credit lender client account (client side)
- Debit cash account (client side)

Completion
- Credit borrower client account (client side)
- Debit lender client account (client side)

Question 31

What are the rules for using petty cash for clients behalf? Including entries.

Answer 31

• Any payment made on behalf of client using petty cash must come from business account
• There will be separate petty cash ledger to record this

Entries
- Debit Client Ledger (Business side)
- Credit Petty Cash Ledger (Business Side)

Question 32

What interest must be given to client for money held in client account?

Answer 32

Must be fair sum of interest
- can have min threshold for any interest
- can pay out lower than they receive (more common in general client account)
- can come to any other arrangement in writing

Written Policy rules
- must have a written policy seeking a fair outcome
- should be presented to clients at outset of transaction
- must provide sufficient information to enable them to give informed consent

Question 33

How can interest be paid on client account money?

Answer 33

Can either:
- Offset interest owed from bill given to client
- Transfer sum of interest from business account to client account
- If transaction has ended, send interest payment directly to client

Question 34

Entries for offset interest payments from client bill.

Answer 34

• Debit interest payable ledger (business side)
• Credit client ledger (business side)

Question 35

Entries to pay interest of client money directly.

Answer 35

• Debit Interest payable ledger (business side)
• Credit client ledger (business side)

On completion
- Debit client account (business side)
- Credit cash account (business side)