1
Q
Is VAT chargeable on gifts?
A
Gift of goods is VAT chargeable
Gifted supply of services is not
(so pro bono work is NOT vat chargeable)
2
Q
What supplies are exempt from VAT
A
- land (except new commercial sales and leases of comm prop which opted to be taxable)
- insurance
- some postal services
- finance
- health services
- burial and cremation
3
Q
examples of zero-rates supplies
A
water, food, books, international services and transport
4
Q
examples of reduced rate vat supplies and what rate are they reduced at?
A
5% chargeable VAT
- mobility aids
- domestic fuel
- installing energy-saving materials
- things that help stop smoking
- renovation
- some dwelling and residential conversions
- children’s car seats
- carrycots with restraint straps
5
Q
can you voluntarily register for VAT? if so why would you?
A
yes
recover input tax
6
Q
Is a person (inc company) a “taxable person” if make
a) only exempt supplies
b) taxable and exempt
A
A) no - can’t recover input
B) partly exempt - recover proportion input
7
Q
if no VAT included in quoted price, what is the customer liable to pay?
A
just the fee quoted and business will have to pay VAT from that
8
Q
What will time of supply (ie tax point) be?
A
Time at which:
- goods removed or available for purchaser
- or services completed
Exceptions:
- if supplier issues tax invoice 14 days after basic tax point, then date issued becomes tax point
- extension agreed with HMRC
(e.g. solicitors - 3 month to deliver bills / date bill = tax point)
- if issue tax invoice or receive payment BEFORE basic tax point, that date will become tax point
9
Q
What does ‘time of supply’ determine?
(clue: it’s about quarters)
A
- quarter at end of which liable to account for output tax (supplier)
- quarter during which can claim input tax on supply made to them (customer)
10
Q
why are tax invoices so imp?
A
can’t recover input tax without
11
Q
How long does a taxable person have to provide a tax invoice (basic rule)?
A
30 days after time of supply
12
Q
What must tax invoice contain?
A
- identifying number (VAT number)
- the date of the supply, ie the tax point;
- the supplier’s name, address and VAT registration number;
- name and address of recipient
- type of supply, eg sale, hire;
- description of the goods or services supplied
- quantity goods/extent of services and amount (exc VAT) payable for each description
- total amount payable (exc VAT)
- rate of cash discount; and
- rate and amount of tax charged
13
Q
When must taxable person submit return form to HMRC and what must it contain and have attached?
A
within one month after end of each quarter
contain
- output tax charged (eg to clients)
- less input tax suffered (eg by suppliers)
- amount due to HMRC
attach: payment for tax due
14
Q
Will VAT be charged on disbursements paid by law firms?
A
no,
as long as paid purely as AGENT of client
and conditions met:
- for client not solicitors use
main one!
- client authorised you to pay
- client knew goods or services paid for would be provided by a TP
- recover only exact amount owed to TP
- dibs clearly additional to your own supplies
(not if you have used TP to assist supply of own services eg assisting you in interpreting client maybe?)
15
Q
Examples of legal disbursements which will not be VAT chargeable?
A
Disbursements (not VAT chargeable):
- client responsible for payment
(e.g. IHT, capital gains tax, estate agents fees and stamp duty) - statutory charges
(eg stamp duty, court fees, land registry fees) - professional services of a TP
(e.g. Counsel’s fees, estate agents, surveyors)
16
Q
Examples of things in law firms which WILL NOT be a disbursement (even though may seem it) and so not VAT-chargeable?
A
- CHAPS/telegraphic transfer fees
- solicitor’s expenses (e.g. fuel) - treat as part of overall charge (!!!!!!)
(e.g. travel expenses, not dibs, but not meant to charge for as separate expense - same with overheads like photocopying, UNLESS loads of it like lots of photocopying) - necessary part of client offering
e.g. telephone charges, postage
(shouldn’t even charge client for this unless loads of it)
e.g. A firm’s professional charges for acting for a client are £1,000. The firm has paid £50 for train fares in connection with the client’s transaction.
- would be £200 not £210 VAT chargeable to client
17
Q
Will search fees be dibs (and therefore not VAT-chargeable)?
A
if info from search passed to client w/o comment, then yes
unusual - so usually part of services and subject to VAT
official copy entries defo NOT dibs
18
Q
What are non-disbursements?
A
Payments made to third parties by firm which do not fall within disbursements definition
(also known as recharges)
Part of firm’s chargeable supply
19
Q
How are non-disbursements treated in law firm’s accounts?
(TP payments which don’t fall in dibs definition)
A
- things like postage are just overheads, so just make sure bill covers
- search fees:
CR cash account (business)
DR client ledger (business)
(or could DR searches acc but not got record for each client then)
DR HMRC (if taxable - usually are)
20
Q
Difference between whether tax from non-disbursements will be treated as input or output tax by solicitors?
A
Output = if supplier did not charge VAT
(bcos client is paying VAT only on legal fees, which wouldn’t have otherwise)
Input = if supplier did charge VAT
(nb there will be no difference to client - there will be vat regardless if non-disb)
21
Q
What are client non-taxable disbursements and how will they be paid by law firm?
A
Payments for something not subject to VAT
e.g. exempt supplies and supplies NOT in course of business (e.g. court fees/stamp duty/LR fees)
{basically all except if disb is provided by taxable person eg surveyor}
Firm pay out of client account (or business acc if not enough)
No VAT charged to cl or paid
22
Q
Explain when law firm disbursements will inc a VAT element?
(even though satisfy HMRC definition of disbursements)
A
fees of taxable person
- usually surveyors/estate agents etc
law firm doesn’t charge any additional VAT (bcos satisfied disb definition)
but the taxable person does
23
Q
If a law firm disbursement includes a VAT element (from original supplier), what are the two ways the law firm will treat the disb?
What will decision be governed by?
A
- Agency basis
- principal basis
If addressed to client, agency basis
24
Q
Explain the ‘agency basis’ for paying VAT-chargeable dibs?
What is it and how is it recorded on firm accounts?
A
Invoice addressed to client - VAT simply passed on to client
Firm pays supplier on behalf of client
No entries on HMRC and do not separate tax amount
DR cl ledge cl side
CR cash acc cl side
(or business side for both if not enough in cl account)
Cl can reclaim input if taxable person - must pass invoice to them if taxable person
25
Explain principal method for law firm's payment of dibs?
(when will it be used, effect on who claims input, how must be paid and billed)
Dibs is for taxable supply and invoice addressed to firm
Means supply treated as made to the firm
Law firm can claim input, client cannot
Charge client output tax on dibs:
e.g. surveyor's invoice of £200 + £40 VAT. own legal fees are £400 + £80 VAT.
send invoice to client with surveyor's fee and prof charges separate, but output tax added together.
26
How must law firm pay dibs under principal method?
Inc what ledger entries?
MUST use business money to pay fees AND tax
CR: dibs and VAT: cash (business side)
(can show together or sep)
DR client ledger business side
DR HMRC
27
What ledger entries principal method once bill issued?
DR client ledger business side,
(VAT and costs as two separate amounts)
CR HMRC with total VAT
(for VAT on dibs and professional fees added together)
CR profit costs with firm's costs
28
Do you need to issue a single or separate invoices for payment of disbursements under principal method?
Single invoice
29
Are Counsel's fees treated on principal or agency basis?
Agency
(due to HMRC concession)
Firms can alter fee notes so addressed to client
30
What do Rules state on whether law firms need to account to clients and third parties for interest on money held for them?
Have to account FAIR SUM
Unless have an arrangement with them, based on informed consent
31
How does firm determine whether interest need to be paid to clients and third parties / how it's to be calculated?
Do Rules stipulate this?
Rules don't state so individual firms own policy
Consider in what circumstances fair to account to client and how to calculate
Usually will account for interest unless below some reasonable level
Terms of policy should be given to client at start of retainer, unless continued relationship
32
Two ways law firms can deal with interest?
(clue: relates to bank accounts)
1. Pay client money into general client bank account
(use own policy to decide whether to transfer and how to calculate)
2. Pay into separate deposit bank account, designated to that client
(account to client for all interest earned on it)
33
Considerations for firms re opening separate designated bank account vs just paying into general client account?
(for interest purposes)
Sep designated accounts:
- administratively inconvenient if had for each client
- bank calculates and that exact interest goes to client
(good for best interests etc)
General cl account:
(more likely)
- bank doesn't calculate
- have to pay appropriate amount in lieu of interest from BUSINESS bank account
- but if paying via general account, statute permits keeping remaining interest
(after paid fair sum)
- more money kept in general account, more interest will accrue
34
Recording requirements if open a specific designated client account?
(clue: on two types of ledger, need amendments if there is designated account)
1. The client's ledger account must show all transactions using clients money via the designated account
- so could have an additional column on existing client ledger
(i.e. would have business, client and client-deposit)
OR
- or a new ledger account specifically for transactions with designated deposit bank account
2.Firm's cash account must show those transactions too
(either via separate cash account for the designated account or more likely, combined cash account showing transactions across all designated accounts)
(ahh so designated accounts have one cash account, and non-designated general cash account for others)
35
Entries for transferring from general client bank account to a separate designated deposit bank account?
(nb - two stages: one for recording payment out and one for recording payment in)
1. Payment out
CR Cash (client section)
DR Client Ledger (client section)
2. Payment in:
DR deposit cash account (client section)
CR client ledger account (client section or client-deposit section)
36
Weird entry rules where there is a specified designated client-deposit account?
- if use a separate ledger cos got specified deposit account, business column never really used
(since the existing client ledger account shows dealings with business money - remember there is a business and client acc column)
- once it is in the specified account, use deposit cash account (will use one for that specific deposit account or will have one for all deposit accounts) instead of normal cash account
- if got specified bank account, you will have either a new column on client-ledger OR
37
What entries made for bank payment of interest on specified designated accounts?
DR deposit cash account
CR client ledger
38
If bank does not allow payment directly from deposit account (ie specific designated account), how can payments be made?
And entries if this is the case.
need to transfer to general client bank account then pay client from there
(not sure if solicitor or bank transfers - assume it is solicitor)
CR: deposit cash account
DR: fancy client ledger
(^ paying out of separated designated)
DR: normal cash account
CR: normal client ledger (client section)
(^ receiving into general client)
CR: normal cash account (client section)
DR: normal client ledger (client section)
(^ pay to client)
39
Entries for bank transfer from general client bank account into separate designated account?
1. Leaving general client bank account
CR general cash account (cl section)
DR client ledger (client section)
2. Entering new account
DR deposit cash account
CR new client ledger (or new column in existing cl ledger)
(nb cash account impacted bcos it is going between diff accounts)
40
Entries where bank pay interest into specified deposit account?
Bank will pay the interest into deposit account:
DR: deposit cash account
CR: client ledger (whole new one or new column)
41
okay just blurting whilst I understand it
if you open a specified bank account, you can either use existing ledger for client and create a new column in it (alongside business and client)
or can make a new one
- if you do, you will always retain existing client ledger
- some banks don't allow you to pay client straight out of designated deposit so would need to transfer to general
- also this is why if create new ledger won't use business column
- you have separate deposit accounts between normal general client accounts and specified ones (either one for specific separate deposit or all separate deposits clumped together)
42
How would well organised firm keep deposit account (specified designated etc) money to ensure it still benefits from
** think this is right*
- keep proportion of client deposit money (kept in those accounts) in a general deposit bank account
- can then keep interest earned on that general deposit account
- should earn more on that than has to pay out to clients
nb can never put all client money on deposit though since needs to have enough to make day-to-day payments for clients in client account
43
Two options for payment of interest to clients where you are also paying them something else?
1. Send 2 cheques
- one for interest and one for other amount due
2. Transfer interest from business bank account to client bank account, then send all of the money together
44
What entries if sending client 2 amounts owed separately - one for interest and one for a different sum received into client account?
(assuming already done entries to record interest being owed and transferred into client account)
Record interest being sent:
CR cash account (business section)
DR client ledger (business section)
Record other client cash being sent
(which has been sitting in client account):
DR client ledger (client section)
CR cash account (client section)
45
What entries for sending client one cheque for interest and other sum?
(assuming other sum in client bank account)
Record interest owed
DR interest payable (business)
CR client ledger (business)
Record interest paid out of business bank account:
DR client ledger (business)
CR cash (business)
Record interest received into client bank account:
DR cash (client)
CR client ledger (client)
Payment to client:
DR client ledger (client section)
CR cash (client)
46
Entry to record interest being OWED to client and then TRANSFERRED to client account?
Interest being owed:
DR INTEREST PAYABLE ledger account (business section)
CR original client ledger (business section)
To record interest being sent to client account:
DR client ledger (business section)
CR cash (business section)
47
2 options for holding stakeholder money and the correct entries for each?
(i.e. seller's solicitor holds before completion)
1. either show on client (i.e. seller's) ledger account if label that hold as stakeholder
- DR cash (cl section)
- CR seller's ledger (cl section)
2. can have separate stakeholder ledger account in joint names of buyer and seller
- DR cash (cl section)
- CR joins stakeholder ledger (cl section)
(nb ledger account not same as ledger I don't think)
48
Entries on completion if money held as stakeholder
DR joint stakeholders (cl section)
CR seller's ledger acc (cl section)
49
What entries for DEPOSIT received as AGENT for seller alone be recorded?
(belongs to seller alone if receive as agent)
DR Cash (cl section)
CR seller's ledger account (cl section)
50
Why may a seller who is purchasing new property face issues if deposit held as stakeholder?
How can they get around this?
- deposit not available until completion
- may need to pay for deposit on purchase
- so can take a bridging loan from bank to cover this
- treat as if owned by borrower, so credit to borrower's ledger (not the bank's ledger)
51
If acting for buyer and lender and received mortgage advance (from lender), whose ledger should it be credited to?
2 options.
(usually states preference of firm in Q)
1.
- credit to borrower's ledger soon as received
- must state name of ledger and that is a mortgage advance
2.
- credit to lender's ledger
- on completion, inter-client transfer to borrower's ledger
(nb - unless paid direct to seller's solicitor)
52
If buyer paying lender's mortgage costs (and both clients), what entries need to be made?
Buyer - for fees and VAT:
CR profit costs and HMRC
DR buyer's ledger (business)
Lender - for fees and VAT:
DR lender's ledger (business)
CR profit costs and HMRC
Transfer from buyer to to lender:
CR lender's ledger (business) - fees and VAT as one figure
DR buyer's ledger (business) - fees and VAT as one figure
*page 6 chapter 8 got so lost*
53
When mortgage advance or mortgage redemption is received, money must be paid into ___ bank account?
Client
54
If acting for lender and seller and some sale proceeds held for each, who would firm credit?
(fyi some of sale proceeds would be needed to redeem mortgage from lender)
1. credit whole amount to seller's ledger
- then immediate inter-client transfer of amount required to redeem mortgage
2. split at time of receipt
- credit part of proceeds to seller's ledger and part to lender's
(nb if paid straight to lender's solicitor, no entries for seller's solicitors)
55
If seller agrees to pay legal fees of lender, what entries need to be made?
(assuming both clients)
re fees charged to lender and VAT:
DR lender's ledger (business section)
CR profit costs and HMRC
transfer from seller:
CR lender's account - fees and VAT one amount
CR seller's account - fees and VAT one amount
56
Whats a joint account / who may it be opened between?
Account opened in joint names of solicitor/firm and a client or third party
e.g. solicitor is joint executor named in will
Means both can pay into / withdraw from / manage the account
57
Will joint account be classed as a client account?
No (even though it is client money)
58
What SRA Accounts Rules are joint account subject to in terms of client money?
None except:
- must obtain statements from banks/other financial institutions at least every 5 weeks; and
- keep readily accessible central record of bills and other notifications of costs
But SRA Code of Conduct etc may require to take additional steps to minimise risk
eg account operates on joint signatures only
59
When may a firm / solicitor operate a client's personal bank account?
power of attorney / court of protection deputy
60
If firm operating client's own bank account, what SRA Accounts Rules apply?
What if can't meet?
None except:
- obtain statements banks/other institutions at least every 5 weeks
- complete reconciliations of account at least every 5 weeks
- readily accessible record of bills
If unable to meet those requirements (eg not got access to statements), no breach if taken reasonable steps to satisfy self client's money not at risk.
61
What is third party managed account and does money within constitute client money?
Firm enters arrangement with client to use third party managed account to hold their money, instead of using the firm's own account.
Not received by solicitor so not client money.
62
If firm is using a Third Party Managed Account, how will it ensure compliance with its SRA obligations?
Ensure decision to use TPMA and the particular one selected appropriate
Must be account at bank or building society
FCA regulated
- Authorised payment institution,
- Small payment institution which adopted safeguarding arrangements; or
- EEA authorised
- Maintain overview/check statements regularly
- Internal monitoring procedures
(also see card on what must make client aware of)
63
Benefits to using Third Party Managed Account?
Reduces costs e.g. for professional indemnity insurance
less admin e.g. accountants reports
maybe more secure and less money laundering risk
64
Does SRA require permission for use of TPMA?
No
But expects firms to notify using TPMA form
If use same TPMA for multiple clients, only inform first time used
65
what must you tell client if using a TPMA?
Inform and ensure understand:
- terms
- any fees and who bears them
- right to terminate / dispute using
And inform:
- that regulated by FCA and differences in regulatory protection to SRA
e.g. complaints made to provider
66
What law firms are exempt by SRA from obtaining accountant's report?
Present little or no risk
e.g. little client money held
Specifically bcos:
- all client money held is legal aid; or
- in accounting period, total balance of client money (inc joint/cl personal) does not exceed:
- average £19k; and
- max of £250k
67
Which law firms must obtain accountant's report and what must they do within what time period?
If held or received client money or operated joint account or client's personal account
Within 6 months of end of that accounting period, get inspected by accountant
68
What is the purpose of an accountants report / what must it show?
Confirm compliance SRA rules
Qualified if think failure to comply with rules such that money belonging to clients or TPs likely placed at risk
69
If accountant's report is qualified, who must do what?
Delivered to SRA within 6 months of end of accounting period
Obligation to submit lies with firm and managers
70
SRA - examples of 'serious factors' which are likely to lead to qualification of accountants report?
- shortfall on client account or client personal accounts
(unless error and promptly rectified)
- billing for things not incurred
- disregard safety of client assets
- suspected fraud or dishonesty
- accounting records not available or v deficient
- ledgers/accounts failing to reference client
- client account bank reconciliations not carried out (comparing bank's records to own)
- failure to provide requested docs to accountant
- use client account as banking facility
71
When may SRA require a firm to obtain an accountant's report (and deliver to SRA)?
firm shuts down and closes its client account - and considers necessary
(or public interest)
Will give reasonable notice
72
When may SRA disqualify accountant from preparing a report on a law firm's accounts?
1. been found guilty by professional body for misconduct; or
2. failed exercise due care and skill in preparing a law firm's report
73
what must law firms provide accountant preparing their report with?
- details of all accounts held at any bank/financial institution during accounting period; and
- all other info and docs accountant requires
74
How long should law firms securely retain accounting records for?
What counts as accounting records?
6 years
Widely defined - eg bank statements, reconciliations (ie double check bookkeeping)
75
what is re-supplying to client?
charge cl output tax on VAT where dealt on principal basis
(resupplying is like re-couping the VAT we have paid)
see q1 engage task 1 part 2
76
how is VAT incurred on non-dibs recorded on cl ledger (description)?
"Cash -
Official copies (VAT £2 paid)"
We MUST record this on description on client ledger so that when it comes to billing we remember to bill client for this
(see engage task 2)
77
If client is being given interest from the firm, does this reduce the amount they have to pay of firm's legal fees?
Yes
Reduces amount owed to firm
e.g. invoice for £2,400
paying interest of £250
firm only transfers itself £2150
78
entries for issuing bill
*imp*
DR client ledger who owes it (even if another client paying their bill)
- BUSINESS !!!!!!!!!!!!!!!!! 👨💼🧾 section - fees and VAT
CR profit costs
CR HMRC
79
If client is paying another's client's bills, what entries?
Should you always do this if lender and buyer both clients?
^ assume yes.
Once bill issued against client owes it,
DR other clients ledger (BUSINESS ! 👨💼🧾section)
CR the clients section (👨💼🧾section)
both for fees and VAT.
80
If paying TP under principal method, should entries for VAT and fees be separate or combined in cash register?
Seperate
81
What duty are accounts under to SRA and when ?
theft/fraud or not fit to hold client money
immediately
82
this actually makes sense now
entries where paying on principal method?
(clue: there are 2)
For professional fees:
DR client ledger business section
CR cash business section
For VAT:
CR cash business
DR HMRC
(because there should be no entries for VAT on cl ledger if principal method bcos firm is paying)
(and it is DR HMRC because firm owes to HMRC)
83
If holding mortgage monies as stakeholder in client ledger
Or say if you are acting for buyer and not lender but lender has sent you mortgage monies (but not client money yet cos not completed)
if holding on cl ledger (cos choosing not to doing joint ledger option if both are clients or in case mortgage monies because not completed so holding for lender)
must be CLEARLY LABELLED re who holding for
84
Solicitor's Accounts
flashcards
Decks in class (2)
# Cards
