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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.
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.
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.
For more information on an accountancy firm that can set you up with online accounting and deal with all your business accounts and VAT – contact Alterledger or visit the website alterledger.com.
|Bar Council Guidance||practice-updates-and-guidance/remuneration-guidance/|
|Faculty of Advocates||http://www.advocates.org.uk/|
|HMRC crackdown on barristers||http://www.bbc.co.uk/news/business-19635051|
You can use the cash basis for Self Assessment Tax Returns (starting from 6th April 2013) if you:
- are a small self-employed businesses (sole traders and partnerships but not Limited Liability Partnerships)
- have an income of £79,000 or less a year (this is the threshold when you have to register for VAT)
You can choose to record your business income and expenses over the tax year in 1 of the following ways:
- using cash basis – record money when it actually comes in and goes out of your business (all money counts – cash, card payments, cheque, any other method)
- using traditional accounting (accruals basis) – record income and expenses when you invoice your customers or receive a bill
Cash basis might suit smaller businesses because, at the end of the tax year, you won’t have to pay Income Tax on money you haven’t received yet.
You must keep records of:
- business income received
- business expenses paid
Depending on what you use simplified expenses for, you need to record business miles for vehicles, hours you work at home and how many people live on your business premises over the year.
Sounds simpler so far, doesn’t it.
But what about …..
- Suppliers – if you have trade accounts with suppliers then you will have creditors, many small businesses get paid quickly for example a shop or a window cleaner, they don’t have debtors, so the cash basis may not be the best option
- Capital Allowances – many small businesses will claim capital allowances for their car (and claim most of the running costs too), with the cash basis you can only claim a set mileage allowance https://www.gov.uk/simpler-income-tax-simplified-expenses/vehicles-
- Equipment Finance – Under cash accounting money you owe isn’t counted until you pay it (unlike traditional capital allowances) and interest and charges are limited to £500 https://www.gov.uk/simpler-income-tax-cash-basis/income-and-expenses-under-cash-basis
Cash accounting may be simpler but will it reduce your tax bill?