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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.
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.
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.
Useful links
| 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 |
Should my Work in Progress be classified as a Debtor (UITF40)
It’s a common issue and area of confusion and it has tax implications. WIP is valued at the lower of cost or net realisable value but Debtors whether invoiced or not are valued at Sales Value, uninvoiced Sales are shown as Amounts Recoverable on Contracts within Debtors.
Here is an example from HMRC
A joiner contracts to create fitted bookcases in an office for a total price of £15,000. He purchases the timber (materials cost £6,000) and builds the doors in his workshop. He also prepares the timber for the rest of the structure in his workshop. He then builds the skeleton of the bookcases on the customer’s premises and attaches thereto the timber that he has already prepared in his workshop. What is the accounts treatment if his year end occurs after he has prepared the timber and the doors but before he has gone to the customer’s premises to build the skeleton and fit them?
The contract is a single contract and the joiner should recognise revenue according to the stage of completion of the work. It is not relevant whether the work is done at his workshop or at the client’s premises. Neither is it relevant that part of the contract can be regarded as ‘goods’ and part as ‘services’: both are treated in the same way for accounting purposes.
Let us assume the joiner assesses that he has done 1/3 of the work by the year end and he has used half of the timber and other materials. The calculation would be: total price £15,000 less materials at cost (£6,000) leaves £9,000. Assuming the profit attaches only to the labour, accrued income is £3,000 (1/3 complete) plus materials at cost of £3,000 ( a half used), a total of £6,000. The remaining half of the total cost of the materials (£3,000) is work in progress. These figures should then be adjusted to reflect any likely losses, discounts, delay in payment or cost of difficulties expected to arise in completing the contract. Any progress payments received should be treated as creditors in accordance with SSAP 9.
http://www.hmrc.gov.uk/manuals/bimmanual/bim74270.htm
Also further guidance at
http://www.hmrc.gov.uk/helpsheets/hs238.pdf
So do you have Work in Progress or Amounts Recoverable on Contracts?
steve@bicknells.net
Business Accountant 