Solicitors Accounts Notes

Solicitors Accounts Notes

Main Principles

Rule 1

Solicitor must:

• Keep client money separate

• In a bank or building society account

• Use each client’s money for their matter only; and

• Keep proper accounting record

Money must be kept physically separate

To do this solicitor needs two bank accounts:

• Office bank account

• Client bank account

Do not need separate bank account for each separate client

Rule 13(5):

• 2 types of client bank account:

  • A separate designated client bank account

  • A general client bank account

• Name of client bank account must include the word client

Keep proper records

Rule 1(c) – you must use each client’s money for their matter only

Rule 1(f) – must keep proper accounting records – each client must have separate records

What is Office and Client Money?

Rule 12:

• Client money – money held or received for a client or as trustee, and all other money which is not office money

• Office money – money which belongs to you or your firm.

Client money includes money held or received:

• As trustee

• As:

  • agent,

  • bailee,

  • stakeholder

  • donee of a power of attorney

• For payment of unpaid professional disbursements

• For payment of:

  • Stamp Duty Land Tax,

  • Land Registry fees,

  • telegraphic transfer fees,

  • court fees

• Payment on account of costs generally

• As a financial benefit paid in respect of a client

• To the sender’s order

• An advance to a client which is paid into a client account becomes client money

• A cheque in respect of damages and costs, made payable to the client but paid into a client account becomes client money.

• Endorsing a cheque or draft over to a client amounts to receiving client money

Office Money

• Money held or received in connection with running the firm, e.g.:

  • Firm’s fees

  • VAT on firm’s fees

• Interest on general client accounts

• Payments received in respect of:

  • Fees due to the firm against a bill or written notification of costs incurred

  • Disbursements already paid by the firm

  • Disbursements incurred but not yet paid by the firm, but excluding unpaid professional disbursements

  • Money paid for or towards an agreed fee

  • Money held on account and earmarked for costs – client money but can be used as office money

• Money held for a principal of the firm

Principals

• Principals are owner/partner of firm/sole practitioner

• Assistant solicitors and employees are not ‘principals’

• HOWEVER if money held for Principal +3^rd party = client money

  • Examples of 3^rd party: lender, spouse of principal.

How to Deal with Receipts of Client Money

Rule 14(1)

• Client money must be paid into a client bank account without delay (that day or next business day)

• …except where the Rules provide to the contrary

• Rules 15 & 16 provide for exceptions to Rule 14(1)

Rule 14(2)

Only client money may be paid into client bank account

Exceptions to Rule 14(2):

1. To open or maintain the account at an agreed level

2. To advance funds to a client to make a payment on the client’s behalf

3. To replace client money that has been wrongly withdrawn

4. To allow interest to be paid into client bank account so that everything owing to client can be paid in one cheque

5. Conditional Fee Agreement – mixed cheque for damages, fees and disbursements

6. Rules 17 & 18

• Rule 17 – money received in settlement of solicitor’s bill

• Rule 18 – mixed receipts

How to Make Payments on the Client’s Behalf

• Rule 20 – if client money is available use client money to pay for items on client’s behalf

Rule 20

• To make payments to or on behalf of a client

• To make payments to or on behalf of a trust

• To pay a disbursement on behalf of a client or trust

• To reimburse the firm for payments already made

• To transfer to another client bank account

Rule 20(6) limitation

• Money withdrawn from client account must not exceed money held in account

• If there is no money and fees need paying either get money off client or pay using office money and recover money from client at a later date

Withdrawing money for your own professional charges?

• Yes, but must send bill first

Making Payments

If insufficient funds in client bank account:

1. Ask client for more money

2. Make whole payment from office

3. Write two cheques – one for using all of client money and remainder from office account – confusing solution though

4. Advance the client money and make whole payment from client bank account

Property Transactions

Mortgage Advance

• Received between exchange and completion

• Lender’s money until completion

• Rule 29: Separate ledger for each client

• Rule 29(10) alternative: record mortgage advance on client section of borrower’s ledger if:

  • Funds belonging to each client are clearly identifiable

  • Lender is:

    • An institutional lender

    • Providing mortgages on standard terms

    • In the normal course of its activities

VAT

Business registered for VAT

• Charges VAT on its supplies of goods and services (output tax)

• Pays VAT on goods and services supplied to it (input tax)

• Business accounts to HMRC for:

  • Output tax less input tax (if input tax exceeds output tax

• To claim back VAT for input tax, business need VAT invoices

Who is the VAT invoice address to?

• The client – solicitor simply passes it on (agency method)

• The law firm

  • Only the person named on the invoice can recover the VAT

  • Law firm resupplies to client at same price (principal method)

    • Provides client with a VAT invoice

    • Law firm has input and output tax which cancel each other out

Recording the Principal Method

• First pay disbursement with office money

• Only record fee (not VAT) on client ledger

• Concession for Counsel’s fees – agency method

Interest

When is a Client Entitled to Interest?

• Do clients have a right to interest on money in client bank account?

  • Yes – if it’s fair and reasonable in all the circumstance

Rule 22

• Deals with payment of interest and need for written policy

• Policy must seek to provide a fair outcome

• Terms of policy must be drawn to client’s attention, unless inappropriate to do so

When is it fair and reasonable to pay interest?

• De minimis policy

• Interest is not paid where small...

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