Bills and VAT
Solicitors Accounts > Bills and VAT
If you transfer costs from the client account before delivering a bill, you will breach Rule 4.3 and lose marks. Examiners test this procedure constantly because many candidates skip the billing step or reverse the order of transactions.
What Is Bills and VAT in SQE1?
Bills and VAT covers the procedure for charging clients for your work and reclaiming VAT on costs. This topic is critical because it determines when client money becomes firm money. You need to understand that a bill must be delivered before ANY costs can be transferred from the client account to the business account (Rule 4.3)—not before, not simultaneously, but after a proper bill has been issued. You also need to grasp VAT treatment: VAT-registered firms charge VAT on professional fees (currently 20%), but the VAT treatment of disbursements varies depending on whether you act as an agent or principal. For SQE1, this is a high-frequency testing area because the rule is precise and easy to breach.
Key Principles for SQE1
- Bill-first rule (Rule 4.3): A bill MUST be delivered to the client before the firm can transfer ANY costs from the client account to the business account. Money on account of costs remains client money until a bill is delivered.
- VAT on professional fees: VAT-registered firms must charge VAT (currently 20%) on professional fees and clearly identify profit costs and VAT separately in accounting records.
- Agency vs principal disbursements: Agency disbursements (court fees, searches) have NO VAT added on recharge; principal disbursements (expert reports where solicitor instructs) have VAT added on recharge.
- Interim bills permitted: Firms can deliver interim bills during a matter to transfer costs progressively, not just at conclusion.
Exam tip
A bill must be delivered before ANY costs can be transferred from the client account to the business account — this is Rule 4.3 and cannot be breached. Money received on account of costs remains client money until and unless a bill is delivered. VAT-registered firms must charge VAT on professional fees (currently 20%) and clearly identify profit costs and VAT in accounting records. For disbursements: agency (no VAT added on recharge), principal (VAT added on recharge). Get the bills and VAT sequence right: raise bill → deliver bill → then transfer amount from client account to business account.
How This Appears in SQE1 Questions
SQE1 questions commonly test whether a firm has correctly transferred costs - the trap is transferring money before a bill has been delivered (a breach of the Accounts Rules). Questions may also present a bill and ask you to calculate the total including VAT, identify the correct accounting entries for the transfer, or determine whether a payment on account is still client money (it is, until billed).
Quick Example Scenario
A firm holds £5,000 on account of costs from a client. The firm completes work valued at £3,000 plus VAT (£600). The firm delivers a bill for £3,600 and transfers £3,600 from the client account to the business account. This is correct. The bill has been properly delivered before the transfer. The remaining £1,400 stays in the client account as client money - it is still a payment on account of future costs. If the firm had transferred the £3,600 before delivering the bill, that would be a breach of Rule 4.3.
Common Mistakes Students Make
- Transferring costs from the client account before delivering a bill - this is a breach of the Accounts Rules.
- Forgetting to add VAT to the bill - VAT-registered firms must charge VAT on professional fees.
- Treating a payment on account of costs as the firm's own money before a bill is delivered - it remains client money.
- Getting the double-entry wrong on the transfer - practise the entries for raising a bill and transferring funds between accounts.
Quick Summary
- Rule 4.3: bill must be delivered to client before firm can transfer costs from client account to business account
- Payment on account of costs is client money until a bill is delivered; must be held in client account
- Once a bill is delivered, firm may transfer the billed amount (including VAT) from client account to business account
- VAT-registered firms must charge VAT (currently 20%) on professional fees; VAT shown separately on the bill
- Agency disbursements: no VAT added by solicitor when recharging; VAT is outside scope of VAT in solicitor's hands
- Principal disbursements: solicitor charges VAT when recharging to client because solicitor is making a supply
- Accounting entries: when bill raised, debit client ledger (business side); when transfer made, debit client ledger (client side), credit client cash account
- Interim bills: firm may deliver interim bills during matter to transfer costs progressively rather than waiting for matter conclusion
- Firm must not transfer disputed amount from client account until dispute resolved
Want to test this now? Try a few SQE1-style questions below before moving on.
Test Yourself
Test yourself
Quick check questions based on this article.
Question 1
Scenario
A solicitor at Osborne & Tate acts for a client in a commercial dispute. The firm is registered for VAT. The solicitor renders a bill to the client showing professional charges of £6,000 plus VAT at 20%, totalling £7,200. The bill also includes a disbursement of £500 for a barrister's fee, which the solicitor paid from the office account under the principal method. The barrister's chambers is registered for VAT and charged the firm £500 plus VAT of £100, totalling £600. The solicitor includes the barrister's fee on the client's bill as £500 plus VAT of £100. The total bill sent to the client is £7,800, comprising £6,000 professional charges, £500 barrister's fee, and £1,300 VAT. The client transfers £7,800 to the firm's office account. The firm's VAT return is due at the end of the current quarter. The solicitor recently completed training on the firm's new billing software. The client has not queried the bill.
Which of the following best describes the correct VAT treatment of the barrister's fee on the client's bill?
Question 2
Scenario
A solicitor acts for a client in the administration of an estate. The solicitor delivers an interim bill to the client for £3,600 plus VAT at 20%, totalling £4,320. The client has £12,000 held on the client ledger. The solicitor transfers £4,320 from the client account to the business account. The solicitor records the following entries: a debit of £4,320 on the client ledger client account and a credit of £4,320 on the business ledger business account. The firm's accounts manager reviews the entries and tells the solicitor that the treatment of VAT is incorrect. The accounts manager explains that the VAT element must be recorded separately. The solicitor asks the accounts manager to explain which entry is wrong. The solicitor's trainee, who is observing, suggests that the error is that the VAT should have been retained in the client account rather than transferred to the business account. The firm's senior partner reviews the matter and asks the solicitor to correct the entries.
Which correction should the solicitor make to the accounting entries?
Question 3
Scenario
A solicitor delivers a bill to a client for £6,000 plus VAT at 20% in respect of a completed commercial litigation matter. The client pays the full amount of £7,200 by bank transfer directly into the firm's client account. The solicitor now wishes to transfer the billed amount from the client account to the firm's business account. The client has not raised any query or complaint about the bill. The firm's accounts department asks the solicitor to confirm the correct procedure for the transfer. The solicitor recalls that the firm's standard practice is to wait seven days after delivery of a bill before making a transfer, although this is not required by the SRA Accounts Rules. The matter concluded with a successful outcome for the client. The client is a director of a medium-sized technology company.
What is the correct procedure for the solicitor to transfer the £7,200 from client account to business account?
Practice with full exam-style questions
Related Topics
- SQE1 Solicitors Accounts: Complete Guide
- Disbursements
- Client Account Reconciliation
Practise Bills and VAT Questions for SQE1
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