Accounting & Tax for Legal & Professional Services Firms

An Accountant’s Report is required for all SRA-regulated firms that hold client money above a de minimis threshold, that receive a cheque or payment in respect of client money, or that operate a client account. The Report must be delivered to the SRA within 6 months of the firm’s accounting period end. We provide SRA Accountant’s Reports for regulated firm clients and advise on whether the Report is qualified or unqualified.

LLP members (partners) are generally taxed as self-employed individuals on their share of the LLP’s profits. They complete a self-assessment tax return annually, paying income tax at 20%, 40% or 45% on their profit share, plus Class 4 NIC. They do not pay employee NIC — the LLP does not pay employer NIC on profit shares (unless the salaried member rules apply). Drawings (regular payments) are not the taxable event — the profit share is taxed at the accounting year end.

The salaried member rules (ITTOIA 2005 s863A-G) treat LLP members as employees for PAYE/NIC if all three conditions are met: (1) 80%+ of their income is a ‘disguised salary’ (fixed regardless of profit); (2) they have no significant influence over the LLP; (3) their capital contribution is less than 25% of their disguised salary. If all three conditions are met, the LLP must operate PAYE on the member’s income and pay employer NIC (15% from April 2025). We assess each member annually.

Court fees, Land Registry fees, official search fees paid by the solicitor as agent on behalf of the client are true disbursements — not part of the solicitor’s own supply. They are recharged to the client at cost with no VAT. Counsel’s fees, medical report fees and expert witness fees incurred by the solicitor (who is responsible for payment) are the solicitor’s own costs — they are included in the supply made by the solicitor to the client and carry VAT at 20%.

Yes — the SRA Accounts Rules (Rule 3.3) prohibit mixing client money and office money in the same bank account. Client money must be held in a designated client account. The firm’s own money (profit costs, VAT, disbursements paid from office) must be in an office account. Regular reconciliation of both accounts is required. Breaches of client account rules are among the most serious SRA compliance failures — leading to regulatory action and potential strike-off.

Treating counsel’s fees and medical reports as agent disbursements (and not charging VAT) creates a VAT under-declaration. HMRC’s legal sector compliance team specifically focuses on disbursement VAT treatment. The distinction between agent disbursements and own-cost disbursements must be made for every disbursement category — not just assumed.

The salaried member conditions can change — a junior equity partner receives a pay rise making their income more variable (condition 1 changes); or makes a required capital injection (condition 3 changes). Annual review ensures the correct PAYE/NIC treatment applies for each member each year.

Even temporary mixing — using the client account to cover an office shortfall, or failing to transfer profit costs to office account within the required period — is a breach of the SRA Accounts Rules. Repeated breaches, even if corrected, result in a qualified Accountant’s Report and potential SRA regulatory action.

Legal firm cash flow is driven by the WIP and debtor position — not the P&L. A firm with excellent billings but high lock-up days runs out of cash. Monthly lock-up tracking enables the managing partner to identify billing lags and chase slow-paying clients before cash flow becomes critical.