What are exempt supplies for VAT purposes?
Some land
Insurance
Some postal services
Finance
Health services
Burial and cremation
What are some examples of taxable supplies chargeable at zero rate?
Water, food, books, international services and transport
What are some examples of supplies which the reduced rate of 5% applies to?
Mobility aids, installation of energy saving materials, children’s car seats
When is deemed basic tax point (i.e. time of supply) for goods?
When removed / made available to purchaser
When is deemed basic tax point (i.e. time of supply) for services?
When completed
When can the basic tax point be varied?
- Supplier issues a tax invoice within 14 days after basic tax point – then becomes date of invoice unless longer period has been agreed with HMRC
- Before a basic tax point arises, supplier issues a tax invoice or receives payment - supply will be treated as taking place at date of invoice or payment
When must a taxable person making a taxable supply to another person provide them with a tax invoice?
Within 30 days after time of supply
What is HMRC’s position on disbursements?
Not part of legal services therefore do not need to charge VAT on them
If payment is for an item required by the solicitor to provide legal services then how is this regarded by HMRC?
Not a disbursement therefore taxable
What are 3 examples of disbursements?
SDLT
Court fee
Company registration fee
Surveyor’s fees
What are 3 examples of non-disbursements?
Postage
Land Registry search fee
Travel fare
For disbursements including a VAT element, e.g. payments made by the firm to a taxable person in respect of taxable supplies, such as counsel, surveyor, accountant, estate agents etc, how is VAT dealt with?
- Payment made by firm will include a VAT element which is passed on to the client
- Firm does not charge client any additional VAT
- Clients who are registered for VAT will want to recover it from HMRC and can only do this if they have a VAT invoice addressed to them
What is the agency method?
Method used to deal with taxable supply following an invoice received addressed to the client
How does the agency method work?
- Payment can be made from the client bank account if there is sufficient money there held for the client but can also be made from the business bank account
- Firm does not separate the supplier’s fees and VAT in the firm’s accounting records – just records total paid
What is the principal method?
Method used to deal with taxable supply following an invoice received addressed to the firm
What money must the firm use to pay an invoice received addressed to the firm?
Firm’s business money
Firm then resupplies item to client at same price, and will charge the client output tax on both the firm’s professional charges and the disbursement
How is a disbursement which is to be treated on the principal method recorded?
- CR the disbursement and the VAT on it to the cash account business section (common but not essential to show the two elements separately)
- DR VAT to HMRC ledger
DR VAT exclusive amount to client ledger account business section
Make a memorandum note in the “Details” column of the client ledger of the amount of VAT which must be added to the VAT charged to the client when an invoice is issued
- When a bill is issued, add the VAT on the principal method disbursement to the VAT on the professional charges and make the normal entries for delivery of a bill
DR client ledger account business section, with VAT and costs as two separate amounts
CR the profit costs account with costs
CR HMRC account with total VAT charged
What is the obligation on solicitors regarding interest on client money?
Fair sum of interest must be accounted to clients
Can a firm enter into a written agreement with the client on the payment of interest?
Yes
Could therefore technically agree to pay no interest
If a firm is holding client money in a separate designated deposit bank account, how would an interest accrued be recorded?
DR cash account - client section
CR client ledger account - client (on deposit) section
What are the two methods by which the firm can deal with interest?
- Pay client money into separate deposit bank account for that client
- Pay into general account and then set own policy on accrual of interest
In a property transaction, when the firm receives a deposit to hold as stakeholder, what are the options for recording this?
- Credit to Stakeholder joint ledger account in joint name of seller and buyer
- Credit to seller’s ledger account BUT must be clearly labelled as stakeholder money for both buyer and seller
Make inter-client transfer following completion
If a seller is buying a subsequent property but have not yet received sale money therefore require a bridging loan, how is this recorded?
Solicitor holds it to the order of the borrower and so it must be credited to borrower’s ledger account (not in name of bank)
If a mortgage advance is received, what are the two methods by which a this can be dealt with, if the firm is acting for both lender and borrower?
Method 1 = mortgage advance CR borrower’s ledger account when received; details column must include name of the lender and fact that it is a mortgage advance
Method 2 = mortgage advance is credited to a separate ledger account in the name of the lender on receipt – on day of completion, funds become available to the borrower so an inter-client transfer should be made to borrower’s ledger account
