Accurate record-keeping and regular reconciliation are fundamental to compliance with the SRA Accounts Rules. Good records enable you to demonstrate that client money has been handled correctly. Reconciliation ensures your records match the bank's records and that client money is properly accounted for. Together, they protect both clients and the firm.
If the SRA investigates how you handle client money, your records are your primary defence. Accurate, up-to-date records demonstrate compliance. Poor or missing records make it difficult to prove you handled money correctly and can lead to assumptions of non-compliance.
The SRA Accounts Rules require accurate and up-to-date records for all financial transactions. Every receipt and payment must be recorded promptly in the appropriate books of account. Records must be sufficient to show clearly each transaction and to enable the client account position to be checked at any time. This is a fundamental obligation that cannot be delegated.
You must maintain a cash book recording all bank transactions, client ledgers for each client showing all transactions affecting their money, and office ledgers recording costs incurred and recovered. Bank statements, paying-in slips, and cheque stubs must be retained. These records must be kept for at least six years from the date of the transaction.
Electronic records are permitted but must meet the same standards as manual records. They must be backed up regularly and remain accessible for the full retention period. If electronic systems fail, you must have contingency arrangements to ensure continuity. Electronic records must clearly show the audit trail for each transaction.
The SRA requires records to be retained for at least six years. This applies even after a client or matter is closed. Destroying records too early is a breach of the Accounts Rules. Ensure your archiving system allows records to be retrieved if needed for investigation or queries.
Every entry in your accounting records must include sufficient information to identify the transaction clearly. This means recording the date, amount, nature of the transaction, and relevant client or matter reference. Descriptions should be clear enough that someone else could understand the transaction without additional explanation.
Entries should be cross-referenced between ledgers. A payment recorded in the cash book should reference the relevant client ledger. A client ledger entry should reference the cash book entry or bank statement. This cross-referencing creates a clear audit trail and makes reconciliation much easier.
Avoid vague descriptions like "payment" or "transfer". Instead, use descriptive entries like "Search fee - Land Registry - Smith matter" or "Transfer to office - costs earned per bill dated 15/01/26". Clear descriptions save time when reconciling and help explain transactions if queried later.
The client ledger is the primary record of all money held for a particular client. It shows every transaction that affects the client's money, from receipt through to payment out or transfer to office account. The ledger balance at any time represents the current amount of that client's money being held in the client bank account.
Each client or matter must have a separate ledger account. Multiple matters for the same client may be kept on one ledger only if the client agrees and the transactions can be clearly distinguished. However, best practice is to maintain separate ledgers for each matter to avoid confusion and ensure accurate accounting.
A typical client ledger has columns for date, description, debit amount, credit amount, and running balance. The debit column records payments out, transfers to office, and bills delivered. The credit column records receipts of client money. The running balance shows the current amount held for that client.
In client ledgers, credits increase the balance (money received for the client) and debits decrease the balance (money paid out, transferred to office, or billed). This may seem counter-intuitive but follows accounting conventions where a credit to a liability account increases that liability. Your client ledger balance represents your liability to that client.
| Date | Description | Debit (£) | Credit (£) | Balance (£) |
|---|---|---|---|---|
| 01/01/26 | Opening balance | - | - | 0.00 |
| 05/01/26 | Received from client - on account | - | 5,000.00 | 5,000.00 CR |
| 12/01/26 | Search fee paid | 200.00 | - | 4,800.00 CR |
| 15/01/26 | Transfer to office - costs earned | 1,500.00 | - | 3,300.00 CR |
| 20/01/26 | Bill delivered | 800.00 | - | 2,500.00 CR |
The running balance column is essential for client ledgers. It shows at any point how much of that client's money remains in the client account. This helps prevent errors such as paying out more than is held. The running balance should always agree with the bank statements when combined with all other client ledgers.
The running balance is your quick reference for how much money you hold for each client. Always check it before making payments. If the balance is insufficient, you cannot make the payment from client funds. This prevents accidental breaches where you pay out more than is held.
Each client or matter must have its own ledger. Combining multiple clients on one ledger makes it impossible to identify how much belongs to each client. This is a serious breach of the Accounts Rules. If you discover combined ledgers, they must be separated immediately.
When you receive client money, you must record it promptly in both the cash book and the client ledger. In the cash book, enter the amount in the client bank receipts column. In the client ledger, credit the client's account with the amount received. Both entries should reference each other for cross-referencing.
Before recording a receipt, you must identify which client the money belongs to. Money from unknown sources should be treated carefully and efforts made to identify the payer. If you cannot identify the client, the money may need to be dealt with as unclaimed client money following SRA guidance.
When clients send money "on account", it means they are providing funds in advance of costs being incurred. This is still client money and must be recorded in the client ledger. You can transfer it to office account only as costs are actually earned and billed, not simply because the money has been received.
Record client receipts on the same day they are banked. Delayed recording causes reconciliation problems and increases the risk of errors. Prompt recording also ensures the client ledger running balance is accurate at all times, which is essential for proper management of client funds.
When you pay money from the client account, record it in both the cash book and the client ledger. In the cash book, enter the amount in the client bank payments column. In the client ledger, debit the client's account. The debit reduces the client's credit balance, reflecting that less of their money is now being held.
Payments from client account include payments to clients themselves, payments to third parties on behalf of clients, transfers to office account for earned costs, and payments to other solicitors. Each type must be correctly identified and recorded. Different payment types may have different authority requirements.
Before making any payment from client account, ensure you have proper authority. Payments to clients or third parties require client instructions or entitlement. Transfers to office account require that costs have been earned and billed. Recording the authority (such as "per instructions dated..." or "per bill dated...") helps demonstrate compliance.
Always check the client ledger balance before making a payment. You must not pay out more than is held for that client. If the balance is insufficient, you cannot make the payment from client funds. Doing so would cause other clients' money to be used to cover the shortfall, which is a serious breach.
The office ledger tracks the costs and disbursements the firm incurs on behalf of clients and whether those costs have been recovered. It is a working tool that helps the firm monitor profitability and ensure that all proper costs are billed to and recovered from clients.
When a cost is incurred (such as a search fee or court fee), it is debited to the client's office ledger account. When the client is billed, the credit side records the costs recovered. When the client pays the bill, the amount is cleared. The balance shows unrecovered costs for that client - money the firm has spent but not yet recovered.
The office ledger is separate from the client ledger. The client ledger tracks client money held, while the office ledger tracks costs incurred. When money is transferred from client to office account, this is recorded in both ledgers - debiting the client ledger (reducing their balance) and crediting the office ledger for that client (showing cost recovery).
| Date | Description | Debit (£) | Credit (£) | Balance (£) |
|---|---|---|---|---|
| 01/01/26 | Opening balance | - | - | 0.00 |
| 05/01/26 | Land Registry search - Smith matter | 20.00 | - | 20.00 DR |
| 10/01/26 | Court fee issued - Smith matter | 115.00 | - | 135.00 DR |
| 15/01/26 | Transfer from client - costs earned | - | 500.00 | 365.00 CR |
| 20/01/26 | Bill to client - costs | 500.00 | - | 135.00 DR |
The office ledger helps you track whether you are recovering all costs incurred. A debit balance means you have spent more on costs than you have recovered. A credit balance means you have recovered more than you have spent. Regular review helps identify write-offs and ensure profitability.
When you pay a disbursement from the client account, record the payment in both the cash book (client bank payments column) and the client ledger (debit). Also record it in the office ledger (debit) to track the cost incurred. This double recording in the ledgers tracks both the client's money position and the firm's cost recovery position.
Sometimes costs are initially paid from the office account, perhaps for convenience or before client money is received. These should still be recorded in the office ledger (debit) as costs incurred. When client money is later received, a transfer from client to office account can be made to recover the costs, if properly earned and billed.
Some costs cannot be recovered from clients, either because the client has agreed not to pay them or because they are not legally recoverable. These should still be recorded in the office ledger when incurred. When it is confirmed they will not be recovered, they are written off by crediting the office ledger and debiting the firm's expenses.
Costs may be written off when they are genuinely irrecoverable, such as when a client cannot pay, the matter concludes without recovery of costs, or a disbursement was incurred in error. Write-offs should only be made with proper authority and should be recorded clearly in the office ledger to maintain an accurate audit trail.
To write off a cost, credit the office ledger (reducing the debit balance of unrecovered costs) and debit the firm's internal expense account. The entry should be clearly marked as a write-off with the reason. Write-offs should be approved by a partner or designated person to prevent unauthorised concessions.
If costs are written off, they should not be included in bills to clients. The bill should only include costs that the firm expects to recover. If a bill has already been issued and the costs later become irrecoverable, a credit note may need to be issued to correct the position.
Writing off costs is giving away the firm's money. It should only be done with proper authority from a partner or person authorised to make such decisions. Unauthorised write-offs may constitute a breach of trust and can hide deliberate misuse of client funds.
The cash book is the central record of all transactions through the firm's bank accounts. It records every receipt into and payment from both the client and office bank accounts. The cash book is the primary document that is reconciled to bank statements each month. It must be kept up to date at all times.
The cash book typically has separate columns for each bank account and for receipts and payments. A common format has five columns: date, description, client bank payments, client bank receipts, office bank payments, and office bank receipts. Each transaction is recorded in the appropriate column with the amount and a clear description.
In solicitors practice, the cash book primarily records bank transactions, not physical cash. Client money must be banked promptly and cannot be used as a cash float. The bank columns record all payments by cheque, electronic transfer, and other banking methods. Physical cash transactions are rare and, when they occur, are recorded separately.
If the firm holds physical cash (which should be minimal and only where necessary), separate petty cash records should be maintained. Cash columns in the main cash book are not typically used for client money. Client money received as cash should be paid into the bank account promptly, not held as cash.
The cash book should be updated daily whenever possible. Prompt recording makes reconciliation much easier and helps identify errors or missing entries quickly. If the cash book is allowed to fall behind, catching up becomes time-consuming and increases the risk of errors.
At any time, the cash book balances should agree with the bank statements, allowing for unpresented cheques and uncredited deposits. If they don't agree, there is an error that must be identified and corrected. Reconciliation exists to find these errors - ignoring discrepancies is not an option.
All money received into the client bank account is recorded in the client bank receipts column. This includes money from clients, from other solicitors, and from third parties. Each entry should show the date, amount, payer, and relevant client matter reference for cross-referencing to the client ledger.
All payments from the client bank account are recorded in the client bank payments column. This includes payments to clients, to third parties, to other solicitors, and transfers to the office account. Each entry should show the date, amount, payee, and relevant client matter reference.
The office bank receipts column records money received into the office account. This includes payments from clients on account of bills, transfers from client account for costs earned, and general firm receipts. Client money should never be paid directly into the office account except in the limited circumstances permitted by the Accounts Rules.
The office bank payments column records payments from the office account. This includes firm overheads, salaries, and other expenses. It also includes payments to third parties on behalf of clients where those payments are being made from office funds (for example, where costs have already been transferred to office).
| Date | Description | Client Bank Payments | Client Bank Receipts | Office Bank Payments | Office Bank Receipts |
|---|---|---|---|---|---|
| 01/01/26 | Opening balance brought forward | - | - | - | - |
| 05/01/26 | Cheque from client Smith - on account | - | 5,000.00 | - | - |
| 10/01/26 | Search fee - Land Registry - Smith matter | 200.00 | - | - | - |
| 15/01/26 | Transfer to office - Smith costs earned | 1,500.00 | - | - | 1,500.00 |
| 20/01/26 | Bill payment from Jones - office bill | - | - | - | 800.00 |
The SRA Accounts Rules require monthly reconciliation of client accounts. This means comparing the cash book records to the bank statements and client ledgers to ensure everything matches. Reconciliation must be carried out at least once in each calendar month, even if no transactions occurred that month.
Reconciliation verifies that your accounting records match the bank's records and that all client ledger balances are correct. It helps identify errors, unpresented cheques, bank errors, or missing entries. Regular reconciliation ensures that any discrepancies are identified and corrected promptly, protecting both clients and the firm.
Reconciliation must be done at least once every calendar month. It is good practice to reconcile as soon as possible after the month-end bank statement is received. Delaying reconciliation increases the risk that errors will go undetected and makes them harder to correct. The reconciliation should be completed promptly after month-end.
Failure to reconcile monthly is a breach of the SRA Accounts Rules. Even if you believe everything is correct, reconciliation must still be performed. The reconciliation process itself is important because it may uncover errors you weren't aware of. There are no exceptions to the monthly reconciliation requirement.
Reconciliation must be performed by someone who understands solicitors accounts and the reconciliation process. This could be a solicitor, a qualified accounts person, or a trained bookkeeper. The person performing reconciliation must be able to identify discrepancies and understand their significance.
If reconciliation is performed by non-solicitor staff, it must be properly supervised by a solicitor or someone with appropriate knowledge. The supervisor must review the reconciliation, ensure it is correct, and take action on any discrepancies. The firm must have appropriate arrangements in place for supervision.
Ideally, the person performing reconciliation should not be the same person who processes most transactions. This separation of duties provides a check against errors or irregularities. In smaller firms where this is not practical, enhanced review procedures may be necessary.
Ensure that anyone performing reconciliation receives proper training in solicitors accounts. They need to understand not just the mechanical process but also why it matters and what types of problems to look for. Well-trained staff are more likely to identify issues that require attention.
Start by ensuring the cash book is up to date with all transactions recorded. All entries should be posted to the relevant ledgers. Gather the bank statements for the period being reconciled. Having complete and organised records makes the reconciliation process much smoother.
Calculate the total of the client bank receipts and payments columns for the period. These totals should match the total receipts and payments shown on the bank statement, allowing for timing differences. If the totals don't match, identify which transactions are different or missing.
Compare individual cash book entries to the bank statement line by line. Items in the cash book but not on the statement are outstanding items - typically unpresented cheques or uncredited deposits. List these outstanding items separately. They explain the difference between your cash book balance and the bank statement balance.
Look for items on the bank statement that are not in your cash book. These might be bank charges, interest, or items you forgot to record. Any such items must be recorded in the cash book immediately. Unidentified bank items must be investigated with the bank.
Ensure all client ledger balances are correct and up to date. The total of all client ledger credit balances should agree with your client bank position (cash book balance plus or minus outstanding items). If they don't agree, there is an error in the ledgers that must be identified and corrected.
Once everything agrees, document your reconciliation. Prepare a reconciliation statement showing the cash book balance, outstanding items, and bank statement balance. Record the date and have the reconciliation signed or electronically approved by the responsible person. Retain the reconciliation with your accounting records.
The five-column reconciliation is a standard format for reconciling solicitors client accounts. It provides a clear, structured way to verify that the cash book, bank statement, and client ledgers all agree. The format helps identify where discrepancies occur and makes the reconciliation process more methodical.
The five columns are: date, client payments, client receipts, office payments, and office receipts. Each transaction is recorded in the appropriate column. The reconciliation works by ensuring that the totals in each column agree with the bank statements and that the net position agrees with the client ledger totals.
The reconciliation balances when the opening balance plus receipts minus payments equals the closing balance. For the client account, this closing balance should also equal the total of all client ledger credit balances. Any difference indicates an error that must be investigated and corrected.
| Date | Client Payments (£) | Client Receipts (£) | Office Payments (£) | Office Receipts (£) |
|---|---|---|---|---|
| 01/01/26 | Opening balance b/f | - | - | - |
| 05/01/26 | - | 5,000.00 | - | - |
| 10/01/26 | 200.00 | - | - | - |
| 15/01/26 | 1,500.00 | - | - | 1,500.00 |
| Totals | 1,700.00 | 5,000.00 | 0.00 | 1,500.00 |
Outstanding items are transactions recorded in your cash book but not yet appearing on the bank statement. The most common are unpresented cheques (cheques you have written but not yet cleared through the banking system) and uncredited deposits (payments you have banked but not yet credited to your account by the bank).
Unpresented cheques are cheques that have been issued and recorded in your cash book but have not yet been presented for payment. They reduce your cash book balance but not yet your bank statement balance. When reconciling, you must account for unpresented cheques to understand the difference between your records and the bank statement.
Uncredited deposits are payments you have made to the bank but which have not yet been credited to your account. They increase your cash book balance but not yet your bank statement balance. Like unpresented cheques, they must be listed in the reconciliation to explain the difference between your records and the bank.
Outstanding items should not remain outstanding indefinitely. Unpresented cheques older than a few months should be investigated - the cheque may be lost or the payee may not have presented it. Uncredited deposits should clear within a few days. Items that remain outstanding for long periods may indicate problems that need attention.
Cheques that remain unpresented for more than six months may be considered stale. You should contact the payee to determine whether the cheque is still valid. If the cheque is lost, a stop payment may be needed and a replacement issued. Do not assume an unpresented cheque will never be presented.
When reconciliation doesn't balance, the first step is to identify where the error lies. Check whether the discrepancy is in the client bank reconciliation, the office bank reconciliation, or the client ledger totals. The size and nature of the discrepancy may provide clues about its source.
Errors can arise from: incorrect amounts in the cash book, posting to the wrong ledger, omitted entries, transposition errors (digits reversed), bank errors, or unrecorded bank transactions. Systematic checking of each possibility will usually identify the source. Sometimes errors compound - multiple small errors masking each other.
Once an error is identified, it must be corrected promptly. Make the appropriate correcting entry in the cash book or ledgers. If the error affects client money, ensure the correction maintains the correct client positions. Document the correction so the audit trail remains clear. Large or systematic errors may require notification to the SRA.
If a discrepancy is divisible by 9, it may be a transposition error where digits were reversed (e.g., 63 recorded as 36). This is a useful diagnostic technique. The difference between the transposed numbers will always be divisible by 9. This can help narrow down where to look for the error.
Never artificially make a reconciliation balance by adding a "balancing figure" without understanding what it represents. This hides errors rather than correcting them. If reconciliation doesn't balance, you must find and correct the actual errors. Unexplained balancing figures are a serious breach of proper accounting practice.
Unpresented cheques are cheques issued but not yet cleared. They are the most common cause of differences between cash book and bank statement. Always list unpresented cheques in your reconciliation. Monitor their age and investigate any that remain outstanding for extended periods.
Uncredited deposits are payments made but not yet showing on the bank statement. Like unpresented cheques, they should be listed in the reconciliation. If deposits remain uncredited for unusually long, follow up with the bank to ensure there is no problem.
Banks sometimes make errors - wrong amounts, items posted to the wrong account, or duplicate transactions. If you identify a bank error, contact the bank immediately to have it corrected. Do not adjust your records to match an incorrect bank statement - the bank must correct their records.
Posting errors occur when transactions are recorded to the wrong ledger or wrong client. For example, a payment posted to the wrong client ledger will cause both ledgers to be incorrect. Careful checking of ledger postings and regular review of client balances helps identify and prevent posting errors.
Transposition errors happen when digits are reversed, such as recording £528 as £582. The difference will always be divisible by 9. Being aware of this pattern helps identify these errors quickly. Double-checking amounts when recording and using electronic systems with validation can reduce transposition errors.
Omission errors occur when transactions are completely missed from the records. A payment or receipt that is never recorded causes the cash book not to agree with the bank statement. Regular, prompt recording of transactions minimises omissions. The reconciliation process will identify omitted items when the bank statement shows transactions not in your cash book.
A bill is a formal demand for payment from a solicitor to a client. It sets out the costs the client is being asked to pay, including profit costs, disbursements, and VAT. Once a bill is delivered, it becomes a debt owed by the client to the firm. Proper billing is essential for recovering costs and maintaining cash flow.
A bill must clearly identify the solicitor and client, describe the work done or services provided, show the amount charged for profit costs and disbursements separately, show VAT separately if applicable, and state the total amount due. It should also state when payment is due and provide payment instructions. Clear, detailed bills reduce queries and disputes.
A bill is "delivered" when it is sent to the client by post, email, or hand delivery. The date of delivery is important because it determines when costs become due and payable. Email delivery is now common, but you should ensure the client receives and can open the bill. Keep records of when bills were sent.
Once a bill is delivered, the costs billed become a debt owed by the client. If you hold client money, you may be entitled to use it to pay the bill. However, you must not transfer money from client to office account until the bill is delivered and the costs are properly earned. Billing before costs are earned can create problems.
Vague bills generate queries and delay payment. Describe the work done clearly, show disbursements separately, and explain any unusual items. A clear bill helps the client understand what they are paying for and reduces the likelihood of complaints or challenges to your costs.
Bills should be submitted promptly once work is complete or at appropriate stages during a matter. Delaying billing can cause cash flow problems and may reduce recovery. For ongoing matters, interim bills may be appropriate. The timing of bills should be agreed with the client where possible.
Clients may challenge bills and request reductions. Any reduction or write-off of costs requires proper authority from a partner or designated person. Reduced costs should be clearly documented. If a bill is reduced after delivery, a credit note may be issued to correct the records. Do not agree to reductions without proper authority.
Bills should be paid within the credit period stated, typically 30 days. Payment may come from the office account (if no client money is held) or from client funds (if money is held and the costs are properly earned). Once paid, the bill should be marked as satisfied and the office ledger cleared for those costs.
If bills remain unpaid, follow up with the client promptly. Long overdue debts may require debt recovery action. If you hold client money, you may be entitled to use it to pay unpaid bills, but check your entitlement carefully. Do not write off unpaid bills without proper assessment and authority.
Never reduce or write off a bill without proper authority. Giving away the firm's money without authorisation is a serious matter. Bill reductions should be approved by a partner or someone with appropriate authority. Documentation should show why the reduction was given and by whom it was authorised.
The agency method applies to disbursements where you act as your client's agent. In this relationship, you are incurring the disbursement on behalf of your client, but the supplier is actually providing services to you as the solicitor. You are then charging your client for the cost. Under VAT rules, these disbursements are standard-rated for VAT.
Under the agency method, you must charge VAT on the disbursement when billing the client. This is because the supply is from you to the client, not from the third party to the client. You charge VAT at the standard rate on the disbursement amount. You can usually recover any VAT you were charged on the disbursement through your own VAT return.
When incurring the disbursement: debit office ledger (cost incurred), credit client bank if paid from client account or credit office bank if paid from office account. When billing: debit office ledger (cost recovered) and credit office bank (via bill), including VAT in the bill amount. The VAT is recorded separately for VAT return purposes.
When using the agency method, bills should show the disbursement amount separately from profit costs, with VAT clearly shown. The client should see the amount of the disbursement, the VAT charged, and the total. This transparency helps the client understand what they are being charged and why VAT applies.
| Item | Amount (£) | VAT (£) | Total (£) |
|---|---|---|---|
| Professional fees (search) | 100.00 | 20.00 | 120.00 |
| Profit costs | 500.00 | 100.00 | 600.00 |
| Totals | 600.00 | 120.00 | 720.00 |
The agency method is the default for most disbursements in legal practice. Items such as search fees, court fees (where you are the customer), expert's fees instructed by you, and similar charges are typically agency disbursements. You charge VAT because you are making the supply to the client, not passing through a third-party supply.
The principal method applies to disbursements where you act merely as a conduit for payment, and the third party is providing services directly to your client. In this case, you are not the customer - your client is. You are simply passing through the cost. Under VAT rules, these are not disbursements for VAT purposes and no VAT is added.
Under the principal method, you do not charge VAT on the disbursement when billing the client. This is because there is no supply from you to the client - you are simply recovering a cost the client is directly liable for. The client pays the third party's VAT (if any) directly to that third party. Your bill shows only the cost amount without additional VAT.
When paying the third party: debit client ledger (if from client account) or debit office ledger (if from office account), credit the relevant bank account. No VAT entry is needed. When billing: simply show the cost amount as passed through. No VAT is added or recoverable. The entry is straightforward pass-through.
Bills using the principal method should show the disbursement separately, clearly marked as having no VAT added. The client should understand that this is a pass-through cost and that they may have paid VAT directly to the third party. Clear disclosure prevents confusion about why VAT is not being charged on that item.
| Item | Amount (£) | VAT (£) | Total (£) |
|---|---|---|---|
| Barrister's fees (pass-through) | 100.00 | 0.00 | 100.00 |
| Profit costs | 500.00 | 100.00 | 600.00 |
| Totals | 600.00 | 100.00 | 700.00 |
The principal method applies in limited circumstances, typically involving barristers' fees, certain court fees paid directly by the client, and similar situations where the client is the direct customer of the third party. Most disbursements use the agency method. If in doubt, check VAT guidance or seek advice.
The fundamental difference between agency and principal methods is VAT treatment. Agency method disbursements have VAT added when billed to the client. Principal method disbursements have no VAT added. This difference affects both how you record the transaction and how much the client ultimately pays.
The key question is: who is the customer of the third party? If you are the customer (you engaged them, they look to you for payment, and they provide to you), it's agency. If your client is the customer (the third party looks to the client, or the client is directly liable), it's principal. This determines the VAT treatment.
Under the agency method, you can usually recover any VAT you were charged on the disbursement through your VAT return. Under the principal method, there is no VAT for you to recover because you are not the customer. The client deals with the VAT aspect directly with the third party.
| Aspect | Agency Method | Principal Method | ||
|---|---|---|---|---|
| VAT on bill to client | VAT added at standard rate | No VAT added | ||
| Who is customer of third party | Solicitor is customer | Client is customer | ||
| VAT recovery | Solicitor recovers input VAT | No VAT for solicitor to recover | ||
| Common examples | Search fees, court fees (solicitor customer) | Barrister fees (counsel to client) | Expert instructed by solicitor | Certain land registry payments |
Incorrect VAT treatment on disbursements can lead to VAT penalties and client disputes. If you're unsure whether agency or principal method applies, check HMRC VAT guidance or seek advice. The rules are detailed and specific circumstances matter. Don't assume - check.
Choosing between agency and principal method depends on the specific circumstances of each disbursement. The key question is who is the customer of the third party supplier. The decision process considers your relationship with the supplier, the nature of the supply, and whether you are acting as agent or conduit.
For significant or unusual disbursements, document which method you are using and why. This provides an audit trail and helps explain the VAT treatment if questioned. File a note with the client or matter records explaining your analysis for borderline cases.
Most legal services provided by solicitors are standard-rated for VAT. This means you must charge VAT at the standard rate (currently 20%) on your profit costs. VAT is also charged on agency method disbursements. The VAT charged is output VAT which must be accounted for on your VAT return.
When preparing a bill, calculate VAT on the VAT-able items (profit costs and agency disbursements). The bill should show the net amount, VAT amount, and total. VAT on principal method disbursements is not added. Record the VAT separately in your accounts so it can be correctly reported on your VAT return.
For VAT-registered businesses, bills are also VAT invoices. They must include your VAT number, the client's VAT number (if applicable), a breakdown showing VAT separately, the VAT rate applied, and the total VAT amount. Ensure your billing system produces compliant VAT invoices to avoid problems with HMRC.
Input VAT is VAT you have been charged on purchases and expenses. You can usually recover this through your VAT return, provided the expenses relate to your VAT-able business activities. Keep VAT invoices for all purchases to support your recovery claims. Input VAT on disbursements may be recoverable depending on the method used.
Maintain clear records of VAT charged on bills (output VAT) and VAT paid on expenses (input VAT). This information is needed for your VAT return. Your accounting system should automatically track VAT, but you still need to understand what is being recorded and why.
VAT errors can lead to penalties and interest charges. Common errors include failing to charge VAT on agency disbursements, incorrectly applying the principal method, or calculation mistakes. Ensure anyone responsible for billing understands VAT rules or has access to guidance. Consider VAT training for billing staff.
Transfers between accounts move money from the client account to the office account when costs have been earned and are properly billed to the client. The transfer represents the firm withdrawing money it is entitled to keep. This is not client money anymore - it is the firm's money for work done and costs incurred.
You can transfer money from client to office account only when you have delivered a bill for the costs and the costs have been properly earned. You cannot transfer simply because you have a credit balance on the client ledger. The transfer must be supported by a bill or other legitimate entitlement. The amount transferred cannot exceed what is properly due.
When transferring from client to office account: credit client bank (payment out), debit client ledger (reducing their balance), debit office bank (money received), and credit office ledger (clearing costs recovered). This four-way entry ensures all records accurately reflect the transfer and its purpose.
Each transfer should be documented clearly. The description should reference the bill or costs being recovered, such as "Transfer to office per bill dated 15/01/26". This creates a clear audit trail and enables you to demonstrate that the transfer was properly supported by earned costs.
Don't transfer more than you've actually earned and billed. Holding some money in client account until matter completion can protect against over-recovery. If you transfer too much and later need to refund, you'll have to transfer money back from office to client account, which creates additional work and accounting complexity.
Transferring money from client to office account without proper entitlement is a breach of the SRA Accounts Rules. You must have delivered a bill or have other clear entitlement to the money. Transfers simply to improve cash flow or because the client has plenty of funds are not permitted.
Reverse transfers (office to client) may be needed when costs have been written off, a bill has been reduced, or money was transferred in error. The firm must return money to the client account because it was not properly entitled to keep it. Reverse transfers should be processed promptly once the need is identified.
When transferring from office to client account: debit client bank (money received), credit client ledger (increasing their balance), credit office bank (payment out), and debit office ledger (reversing cost recovery). The entry reverses the original transfer entries, putting the client back in the position they would have been in had the transfer not occurred.
The best approach is to avoid situations requiring reverse transfers. Don't transfer money until costs are actually earned and bills are final. Be cautious about transferring on account of anticipated costs. Good practice reduces the need for corrections and makes accounting cleaner.
If you identify that a reverse transfer is needed, process it promptly. Keeping money in the office account that should be in client account is a breach. Delaying the correction compounds the breach. Document clearly why the reverse transfer was made for audit purposes.
Accurate records, regular reconciliation, and proper billing practices protect both your clients and your firm. They demonstrate compliance with the SRA Accounts Rules and help prevent problems before they occur. Investing time in getting these basics right pays dividends in avoiding breaches and maintaining client trust.