Client money in plain words
A law firm often holds money that belongs to other people. A deposit for a house purchase, an inheritance waiting to be paid out, money on account for future fees. Under the SRA Accounts Rules this client money must be kept in a separate client account, recorded accurately and never mixed with the firm's own money. It is not your income, even though it sits in an account in your firm's name.
The rules also expect regular reconciliations, at least every five weeks, comparing the bank statement, the client ledger and the cash book. Firms that hold client money usually need an annual accountant's report as well. We keep your office accounts and client account records clearly separate in the books, help you prepare for the report and flag anything that does not reconcile before it becomes a regulatory problem.
Work in progress and when fees count as income
Lawyers often do months of work before sending a bill. Under the accruals basis, which most firms use, the value of that unbilled work at the year end has to be included in your accounts as work in progress. That means you can be taxed on fees you have not yet invoiced, which surprises many new practices.
We help you value work in progress on a fair and consistent basis, using time records and the stage each matter has reached. Conditional fee and contingency work needs extra thought, because the fee may never be earned. Doing this well each year avoids large jumps in taxable profit and awkward questions from HMRC.
What is included
- Annual accounts with work in progress valuation
- Partnership or LLP tax returns
- Self assessment returns for partners, members and barristers
- Corporation tax for incorporated law firms
- VAT returns with disbursement and recharge checks
- Support preparing for the annual accountant's report
- Client account bookkeeping and reconciliations
- Payroll for fee earners and support staff
Partnership and LLP tax
In a traditional partnership or a limited liability partnership, the firm itself does not pay income tax. Each partner or member pays tax on their share of the profit through their own self assessment return. The firm files a partnership return showing how the profit was split.
Since the 2024/25 tax year, partners are taxed on the profit for the tax year itself, rather than the profit for the accounting year that ended in it. Firms with a year end other than 31/3 or 5/4 now have to apportion profits across two accounting periods, and many partners are still paying tax on extra transition profit spread over several years. Some firms have changed their year end to make this simpler.
LLP members are normally taxed as self employed, but HMRC has salaried member rules that can treat some members as employees. If your firm has fixed share members, we review whether the rules apply.
- Partnership tax return and profit allocation
- Partner and member self assessment returns
- Basis period changes and transition profit
- Salaried member reviews for LLPs
Barristers and self employed counsel
Most barristers in private practice are self employed sole traders, even though they work within chambers. Fees often arrive long after the work is done, so cash flow can be very uneven. Chambers rent, clerks' fees, practising certificate costs, professional insurance, books, wigs and gowns, and travel to court are all part of the picture.
Since 6/4/2024 the cash basis is the default for sole traders, so many barristers are now taxed on fees when received rather than when earned. That can suit a junior barrister with slow paying solicitors, but the choice should be made with care. We also handle VAT registration once fee income passes £90,000 in a rolling 12 month period, and plan tax payments around the long gaps between work and payment.
VAT on legal fees and disbursements
Legal services are standard rated for VAT. The question that causes most errors is what to do with costs you pass on to clients. A true disbursement, such as a court fee or a search fee paid on the client's behalf, can be passed on without VAT if it meets HMRC's conditions. A cost you incur as part of your own service, such as travel or copying, is a recharge and VAT is added to it.
We check how your billing system treats each type of cost and prepare your VAT returns under Making Tax Digital. Firms acting for overseas clients also need to know when the place of supply rules mean no UK VAT is charged.
Working with law firms in Fulham
Many lawyers live in Fulham, Parsons Green and Chelsea and practise across London, while others run smaller firms from offices in SW6 and the surrounding streets. We work online with your practice management system, and we can meet when it helps.
We start with a free review and agree a fixed fee before any work begins. Whether you are setting up on your own after years in a large firm or running a small partnership, we explain the numbers plainly.
Who this suits
- Sole practitioner solicitors starting their own practice
- Small high street and specialist law firms
- Partnerships and LLPs with a handful of partners
- Self employed barristers in chambers
- Consultant solicitors working through platform firms
Common questions
Does a sole practitioner solicitor need an accountant's report?
Most firms that hold or receive client money must obtain an annual accountant's report under the SRA Accounts Rules, though there are some exemptions. It is separate from your tax accounts. We can help you get your records ready and check your reconciliations.
Is money in the client account taxable income?
No. Client money belongs to your clients, not the firm, so it is not your income. It becomes your income only when you properly transfer money to settle a bill you have issued.
How is work in progress taxed for a law firm?
Under the accruals basis, the value of unbilled work at the year end is included in your profit. That means you can pay tax on work before you invoice it. Sole practitioners and barristers using the cash basis are generally taxed when fees are received instead.
How are LLP members taxed?
LLP members are usually taxed as self employed on their share of the profit through self assessment. The LLP itself does not pay income tax. Some members may be treated as employees under HMRC's salaried member rules.
Do barristers pay VAT?
Barristers must register for VAT once their taxable fee income passes £90,000 in a rolling 12 month period. They then charge VAT on fees and can usually reclaim VAT on chambers costs and other business expenses.
What is the difference between a disbursement and a recharge?
A disbursement is a cost you pay purely as the client's agent, such as a court fee, and it can be passed on without adding VAT. A recharge is a cost that forms part of your own service, such as travel, and VAT is added to it.
Should my law firm become a limited company?
Some firms move to a company or LLP structure for tax or liability reasons. It affects how profits are taxed, how you take money out and your SRA authorisation. We compare the options with your figures before you decide.