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What fees does a barrister need to declare?

Special rules for barristers and advocates

Barristers are not permitted to provide their services through a limited company.  All barristers have to register as self-employed and submit business accounts as a sole trader to HMRC.  There are special provisions relating to cash accounting and the rules have changed in recent years meaning there are three different regimes that can apply.  There are time limits for the cash accounting schemes so if you are in your first few years of practising you will need to make sure that you are reporting the correct figures to HMRC.  Guidance is available from the Bar Council here.

English: A barrister on a mobile phone outside...

A barrister on a mobile phone outside Southwark Crown Court.
(Photo credit: Wikipedia)

Cash Accounting

The Finance Act 2013 introduced the possibility of cash accounting for most unincorporated business including sole traders from 6th April 2013.  Barristers already had a cash scheme available when they started their practice with permission to continue the same cash accounting principles for up to 7 years under the Finance Act 1998.  This old cash scheme is no longer available to new barristers, but anyone who started preparing accounts under the old cash basis by 5th April 2013 can continue to do so until their seven years is up or they transfer voluntarily to another scheme.  Once you have left the old cash scheme there is no turning back.

Barristers can join the new cash scheme where fee receipts do not exceed the VAT registration threshold (currently £79,000 per year).  If receipts are more than twice the VAT registration threshold (currently £158,000) the barrister must leave the scheme.

The advantages of the cash schemes are that they are easier to administer so there is less need to engage an accountant to prepare your accounts.  You only pay tax on fees received and you do not have make calculations at the year-end for work that is incomplete or invoiced and not yet paid by your clients.  This means that your tax payments are delayed compared to the earnings basis below and will improve your cash flow.  There are other aspects of the cash schemes which are explained in more detail here.

A barrister on the old cash scheme can elect to leave the scheme early, but the new cash scheme does not allow exit unless there is a “change in commercial circumstances”.

Earnings based accounting

UITF 40 requires that long term contracts are recognised in the year-end accounts to the extent that partly performed work is recognised as taxable income.  This requires barristers to calculate the value of any Work In Progress (WIP) at the end of their financial year and include this in their total income.

Materiality is a key concept in accounting, but the materiality of the total WIP must be considered not just the materiality of each individual contract.  It is not permitted to disregard a number of immaterial amounts if when considered together they are material to the accounts.  In practice this means that almost all WIP is chargeable to tax under the earnings method.  One of the few clear cut exceptions is a no fee no win case, where no WIP is to be recognised.

Transitional arrangements

When changing from either cash accounting scheme to the earnings based scheme a calculation of the WIP must be made which will increase the taxable income for the year.  The old cash method allows the closing WIP at the time of the change to the earnings method to be recognised over a period of up to 10 years.  The provisions under the new cash scheme have a reduced timeframe of 6 years.  It is normally the case that anyone transferring from the old cash scheme to the new cash scheme would not need any adjustment to the annual accounts.  There are corresponding adjustments for barristers transferring from the earnings scheme to the new cash scheme – explained in more detail here.

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Useful links

Bar Council Guidance practice-updates-and-guidance/remuneration-guidance/
Faculty of Advocates
HMRC crackdown on barristers

How Legal Aid Barristers cope with Revenue Recognition (UITF 40)

Business people

BIM74150 sets out HMRC’s guidance:

Unfortunately, there is no special treatment of cases where a client is legally aided. Work in progress, and anticipated profit costs in completed cases, have to be brought into account notwithstanding that there might be substantial delay in the receipt of fees. However, the solicitor is entitled to exercise a prudent approach where he or she knows that costs are going to be taxed, as to what the realisable value of work in progress, and anticipated profit costs, might be.

But the law society guidance provides more detail:

Legal aid in some cases is not agreed until after the matter has been settled. In lengthy cases payments on accounts are made. This is a long and protracted procedure that can take many years. Often the payments on account will be for a greater amount than the eventually agreed fee and the barrister has to return the excess. It has been agreed with HMRC that the relevant tax point is payment, normally a payment on account, or the agreement of the fee, whichever comes first. Again, professional judgement has to be applied here and the accounting treatment will depend on the degree of uncertainty. In principle, revenue should be recognised according to the work done to date, rather than according to progress payments received. If a reasonable estimate can be made of the revenue that has been earned as a result of the work done to date, then that should be recognised. Prudence should be built in to that estimate in response to uncertainty. It may be that the level of uncertainty is so high that no reliable estimate can be made until either later in the process or until the case is completed and the fee agreed. Finally, a barrister should not recognise all the progress payments received as revenue, even if they do bear a close relationship to the work done to date, if it is likely that some of the amounts received will have to be refunded.
So lets summarise:
  1. The Tax Point is normally payment
  2. Prudent judgement is required of the value of work done to date
  3. Payments should not be recognised if it is likely that they may have to be refunded

Other interesting points from the Law Society:

  • No Win No Fee – Revenue recognised when the case is won
  • Pay at End – either estimate the fees or if uncertain revenue should be recognised when a reliable estimate can be made
  • Fixed Fee – use appropriate judgement

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