Money upfront – too good to be true? SRA Accounts Rules reviewed

Kate Arnott, head of professional services, partner at MHA MacIntyre Hudson, says the new rules do appear more flexible than the old rules, however there are wider obligations to consider.

At first sight, the release of the Solicitors Regulation Authority (SRA) Accounts Rules 2019 seemed to provide the opportunity for law firms to bill in advance – fortuitous given the unprecedented year we have just seen, perhaps a much-needed boost to cashflow could be obtained?

The new rules do appear more flexible than the old rules, however there are wider obligations to consider, which include: acting with honesty, integrity and in the best interests of each client and in a way that upholds public trust and confidence in the profession.

The SRA released new guidance in September 2020 to help clarify the position on billing in advance of work being undertaken and on transferring disbursements to the business account before they have been paid or incurred.

Monies received in advance can be in respect of legal fees, unpaid disbursements, or for a transaction where the firm is acting on behalf of a client. The new Accounts Rules allow for agreements between firms and clients in certain circumstances.

Rule 4.3(c) of the Accounts Rules states “any such payment must be for the specific sum identified in the bill of costs, or other written notification of the costs, and covered by the amount held for the particular client or third party.”

The new guidance states that Rule 5.1(a) allows money for paid disbursements to be transferred from the firm’s client to business account as long as the money is being used “for the purpose for which it is being held.” Therefore, with prior agreement with the client, the SRA doesn’t see a risk in transferring monies for disbursements already made.

However, law firms should not invoice in advance for disbursements where the liability to pay remains with the client, for example Stamp Duty Land Tax.

Under the previous rules billing in advance was not permissible, unless done as an agreed fee. The new guidance states that firms may be able to bill in advance but remember there are risks in doing so, the client may want their money back and if there are insufficient funds in the business account, this may also call into question the firms protection of the funds.

From an accounting point of view, billing in advance may also have VAT and deferred income implications, so it’s worth seeking advice before changing any practices.

The risk of billing in advance for fees or disbursements is that firms may not be acting, or be seen to be acting, in the best interests of their client. With cashflow being the primary driver for firms wishing to bill in advance, it’s really important to remember the principles and code of conduct and to ensure integrity all times.

If you have any questions or need advice on this matter, please do get in touch.