5 single best answer questions on Solicitors Accounts, written to the SRA specification. Pick an answer, then open the explanation: the correct option, why each of the others fails, and the authority behind it. No sign-up.
The SRA Accounts Rules: what client money is and when it must go into client account, the exceptions, withdrawals and interest; correcting breaches; the double-entry records — client ledgers, cash accounts, reconciliations and bills with VAT; disbursements; joint accounts, clients' own accounts and third-party managed accounts; and accountants' reports.
It is examined in both FLK2 sessions — with Wills in Session 1 and with Property Practice in Session 2 — often as a sum or a pair of ledger entries.
Question 1
RepaymentMedium
A solicitor acts for a client buying a small office unit. At the outset the client transferred £2,000 to the firm on account of costs and disbursements, which was paid into the general client account. During the matter the firm paid a search fee of £280 and a Land Registry fee of £135, both from the client account. Before the client's money was received, the firm had paid a surveyor's fee of £240 from its business account; the surveyor is not registered for VAT. The firm also incurred £15 in postage, which it treats as an office expense and does not charge to the client. The matter has concluded. The firm has delivered a bill for profit costs of £900 plus VAT of £180, together with the surveyor's fee of £240, and has transferred the amount of that bill from the client account to the business account.
What sum must the firm now return to the client?
Show the answer and explanationAnswer E+
E
Correct answer
£265, the balance remaining on the client ledger.
Work through the client ledger: receipt £2,000, two disbursements paid from client account, then transfer of the delivered bill, leaving £265 to be returned.
£2,000 − £280 − £135 = £1,585. The delivered bill totals £900 + £180 VAT + £240 surveyor's fee = £1,320, properly transferred to business. £1,585 − £1,320 = £265, which must be returned promptly as there is no longer any proper reason to hold it. The £15 postage is an office expense and is not charged to the client.
£2,000 less the £280 search fee, less the £135 registration fee, less the billed £1,320 (£900 + £180 VAT + £240 surveyor's fee) leaves £265, which must be returned promptly.
SRA Accounts Rules, rule 2.5 — Client money must be returned promptly to the client as soon as there is no longer any proper reason to hold those funds.
Rule card
Repayment: once the bill has been transferred and disbursements paid, any residual client money must be returned promptly under rule 2.5.
Why the other options fail
A
Surface reading
£680, being the sum left on the client account ledger.
This deducts only the £1,320 bill from £2,000 and ignores the £280 search fee and £135 registration fee already paid from the client account.
SRA Accounts Rules, rule 5.3 — Client money may only be withdrawn if sufficient funds are held for that specific client, so payments out reduce the sum available for repayment.
B
Adjacent ruleClosest alternative
£505, the amount standing to the client's credit after the transfer.
This transfers only £1,080 of costs and VAT, leaving the billed surveyor's fee of £240 in the client account when it is now the firm's money.
Ruled out by: The surveyor's fee of £240 was included in the delivered bill, so it is the firm's money and is transferred out rather than left on the client ledger.
SRA Accounts Rules, rule 2.1(d) — Money for fees and unpaid disbursements is client money only if held before delivery of a bill for the same.
C
Surface reading
£445, the amount remaining to the client's credit after the transfer of costs.
This leaves the £180 VAT in the client account; 'fees' include the VAT element, so the whole of the billed amount is transferable to business.
SRA Accounts Rules, rule 2.1(d) — Client money includes money held in respect of fees, which comprise profit costs including any VAT element, before a bill is delivered.
D
Surface reading
£400, the balance on the client ledger.
This deducts the £280 search fee but not the £135 registration fee, both of which were paid from the client account.
SRA Accounts Rules, rule 5.1(a) — Client money may be withdrawn from a client account for the purpose for which it is held, such as paying the client's disbursements.
Question 2
DefinitionMedium
A solicitor is the donee of a lasting power of attorney for an elderly client, having been appointed in that capacity by the client three years ago. The solicitor's firm does not charge for acting under the power. The client's car has been sold and the buyer transfers £6,000 to the firm for the solicitor to apply for the client's benefit. The client's daughter, who manages the household bills, emails the solicitor agreeing in writing that the money can be held in the firm's business account for convenience.
How should the £6,000 be treated?
Show the answer and explanationAnswer D+
D
Correct answer
It is client money and must be paid promptly into a client account.
Money held as donee of a lasting power of attorney is client money under rule 2.1(c) and must be paid promptly into a client account.
Rule 2.1(c) expressly brings within client money sums held as the holder of a specified office or appointment, giving donee of a power of attorney as an example. No exception in rule 2.3 applies, so the £6,000 must be paid promptly into a client account.
Money held as donee of a power of attorney falls within rule 2.1(c), and rule 2.3 requires prompt payment into a client account since no applicable exception is engaged.
SRA Accounts Rules, rule 2.1(c) — Money held as a trustee or as holder of a specified office or appointment, such as donee of a power of attorney, is client money.
Rule card
Client money extends beyond money for the firm's own clients: trustee and office-holder money is client money even where no fee is charged.
Why the other options fail
A
Surface reading
It is business money, as the solicitor acts as attorney personally.
Money held as the holder of such an appointment is expressly client money under rule 2.1(c), and must be kept separate from the firm's own money.
SRA Accounts Rules, rule 2.1(c) — Money held as donee of a power of attorney is client money.
B
Surface reading
It is client money only if the firm charges fees for acting.
Nothing in rule 2.1 conditions the definition on the firm charging a fee; the appointment itself brings the money within limb (c).
SRA Accounts Rules, rule 2.1 — The definition of client money turns on the capacity in which money is held or received, not on whether fees are charged.
C
Adjacent rule
It is not client money, because the solicitor is not delivering regulated services to the donor.
Rule 2.1(c) makes money held as donee of a power of attorney client money independently of limb (a).
SRA Accounts Rules, rule 2.1(c) — Client money includes money held as a trustee or as the holder of a specified office or appointment, such as donee of a power of attorney.
E
Adjacent ruleClosest alternative
It may be held outside a client account, because an alternative arrangement was agreed in writing with the donor's daughter.
Rule 2.3(c) requires the written agreement of the client, or the third party for whom the money is held; the daughter is neither.
Ruled out by: The written agreement came from the donor's daughter, who is neither the client nor the third party for whom the money is held, so rule 2.3(c) is not satisfied.
SRA Accounts Rules, rule 2.3(c) — An alternative arrangement must be agreed in writing with the client, or the third party for whom the money is held.
Question 3
Obligation not to use client account to provide banking facilitiesMedium
A solicitor acted for a client on the sale of the client's shares in a private company. The sale completed last month and the firm holds the £50,000 balance of the sale proceeds in its client bank account. The client, who is abroad for three months, asks the firm to keep the money and to use it to pay the monthly invoices of the builder renovating the client's home and the client's monthly credit card bills. The client confirms these instructions in writing. No further legal work is required on the share sale.
Which of the following best describes how the firm should respond to the client's request?
Show the answer and explanationAnswer B+
B
Correct answer
The firm should refuse, because the payments would not be in respect of the delivery of regulated services.
Holding the completed sale proceeds and paying the client's personal bills from them would be providing banking facilities through the client account, which rule 3.3 forbids.
Rule 3.3 requires every transfer or withdrawal from a client account to be in respect of the delivery of regulated services. The share sale is complete and no further legal work is required, so the builder's invoices and credit card bills are unconnected with any regulated service; the firm should refuse and return the balance.
The legal work is finished and the proposed payments are the client's personal outgoings. Making them would use the client account to provide banking facilities, contrary to rule 3.3; the balance should be returned to the client.
SRA Accounts Rules, rule 3.3 — You must not use a client account to provide banking facilities to clients or third parties; payments into, and transfers or withdrawals from, a client account must be in respect of the delivery by you of regulated services.
SRA Accounts Rules, rule 5.1 — Client money is withdrawn only for the purpose for which it is held, on instructions, or on the SRA's prior written authorisation or in prescribed circumstances.
Rule card
Rule 3.3: no banking facilities through a client account — every payment in, transfer or withdrawal must relate to regulated services the firm is delivering. Client instructions (rule 5.1(b)) and sufficiency of funds (rule 5.3) do not override this.
Why the other options fail
A
Surface reading
The firm should cease acting and report the client to the SRA.
A request that the firm must decline is not itself a ground for reporting the client; the proper course under rule 3.3 is to refuse and return the money.
SRA Accounts Rules, rule 3.3 — The response required is that the client account is not used for payments unconnected with regulated services.
C
Right outcome, wrong reasonClosest alternative
The firm may make the payments, because the client has given written instructions and the money is held for that client.
Instructions under rule 5.1(b) permit a withdrawal that is otherwise proper; they cannot authorise use of the client account as a banking facility prohibited by rule 3.3.
Ruled out by: No further legal work is required on the share sale, so even a written instruction cannot make the payments referable to the delivery of regulated services.
SRA Accounts Rules, rule 5.1(b) — Client money may be withdrawn following receipt of instructions from the client, subject to the other requirements of the Rules.
D
Adjacent rule
The firm may make the payments, because sufficient funds are held in the client bank account on behalf of that client.
Rule 5.3 is a limit on withdrawals, not an authority to make them. It does not displace rule 3.3, which requires payments to relate to the delivery of regulated services.
SRA Accounts Rules, rule 5.3 — Client money may only be withdrawn if sufficient funds are held for that specific client; this is a restriction, not a permission.
E
Surface reading
The firm may retain the money in a separate designated deposit client account and account to the client for the interest earned.
The prohibition in rule 3.3 applies to any client account, however designated. Accounting for interest does not make the retention and payments referable to regulated services.
SRA Accounts Rules, rule 3.3 — The prohibition on providing banking facilities applies to the use of a client account generally.
Question 4
Submission, reduction and payment of bills including the VAT elementEasierEthics
A solicitor acts for a client in a boundary dispute. At the outset the solicitor gave the client a written estimate of £1,500 plus VAT for the work up to trial preparation, and the client paid £5,000 generally on account of costs. Three weeks ago the firm delivered a bill for professional charges of £2,000 plus VAT of £400, and transferred £2,400 from the client bank account to the business bank account. That sum remains in the firm's business bank account. The firm has since accounted to HMRC for the VAT on the bill in its quarterly return. The client has complained that the charges greatly exceed the estimate and that no revised estimate was ever given. The supervising partner accepts that the charges were excessive and decides to reduce the profit costs by £500, with a corresponding reduction of £100 in the VAT. The matter is continuing and further work is anticipated.
What should the firm now do in respect of the £600?
Show the answer and explanationAnswer A+
A
Correct answer
Return the £600 to the client account promptly and record the reduction on the business side of the client ledger.
When a delivered bill is reduced, the excess already transferred to the business account becomes client money and must be returned promptly, with the reduction of charges and VAT recorded on the business side of the client ledger.
The firm's entitlement to the £2,400 rested on the bill. Once the partner reduced the charges by £500 and the VAT by £100, the firm holds £600 to which it is not entitled; that is client money and rule 2.3 requires prompt payment into the client account. The reduction is recorded on the business side of the client ledger, reversing the profit costs and HMRC entries. Acting in the client's best interests also requires the firm to deal with the complaint about the estimate and repay the money without delay.
On reduction of the bill the firm is no longer entitled to the £600; it is money held for the client and must be paid promptly into the client account, the reduction of both profit costs and VAT being recorded on the business side of the client ledger against the profit costs and HMRC accounts.
SRA Accounts Rules, rule 2.3 — Client money must be paid promptly into a client account unless one of the listed exceptions applies.
SRA Accounts Rules, rule 8.1(a)(ii) — Bills of costs and non-client money transactions are recorded on the business side of the client ledger account.
SRA Principles, Principle 7 — A solicitor must act in the best interests of each client.
Rule card
Reduce bill → reverse the excess profit costs and VAT on the business side of the client ledger → the overheld sum is client money → pay it promptly into the client account.
Why the other options fail
B
Right outcome, wrong reasonClosest alternative
Retain the £600 in the business account, showing a credit balance on the client ledger business side.
A credit balance on the business side of a client ledger is the classic indicator that client money is being held outside the client account; the entries must reflect that the £600 is now the client's money and it must be moved.
Ruled out by: The client had paid £5,000 generally on account, and the £600 ceased on reduction to be the firm's money; leaving it in the business account as a credit balance on the business side means client money is held outside the client account.
SRA Accounts Rules, rule 8.1(a) — Client money is recorded on the client side of the ledger and non-client money on the business side, so the ledger must show the true character of the money.
C
Outdated law
Withdraw the delivered bill, deliver a fresh bill for the reduced amount, and return the £600 only after the client approves it.
A firm may reduce a bill it has delivered and record the reduction; making repayment of money that is now the client's conditional on the client's approval of a new bill is not in the client's best interests.
SRA Principles, Principle 7 — A solicitor must act in the best interests of each client.
D
Adjacent rule
Return only the £500 profit costs element, as the VAT has already been paid over to HMRC.
A reduction in professional charges carries with it a reduction in the VAT charged on them; the firm adjusts its VAT account by a credit note and the full £600 belongs to the client.
SRA Accounts Rules, rule 8.1(a)(ii) — Bills of costs are recorded on the business side of the client ledger, so a reduced bill requires reduction of both the charges and the VAT recorded there.
E
Surface reading
Retain the £600 in the business account on account of the further costs which are already anticipated in this continuing matter.
Money held generally on account of future costs is client money; it cannot be left sitting in the business account merely because more work is expected.
SRA Accounts Rules, rule 2.3 — Client money must be paid promptly into a client account unless an exception applies.
Question 5
Disbursements using the agency and principal methodsMedium
A VAT-registered firm acts for a client in a contested probate claim. Counsel's fee note is addressed to the firm and states fees of £2,000 plus VAT at 20% of £400. The firm treats counsel's fees on the principal method. The firm holds £5,000 of client money for this client. The firm pays counsel £2,400 today from its business bank account. No bill of costs has yet been delivered to the client.
What entry falls to be made on the client ledger account when the payment to counsel is recorded?
Show the answer and explanationAnswer C+
C
Correct answer
£2,000, debited to the business side of the client ledger.
On the principal method the payment of counsel's fee is split: the full payment on the cash account, the VAT on the HMRC account, and the VAT-exclusive amount on the business side of the client ledger.
The firm treats counsel as supplying it, so the £400 VAT is the firm's input tax recorded on the HMRC account, and £2,000 is debited to the business side of the client's ledger as a payment made from business money on the client's behalf. The VAT will be charged on to the client when the firm bills, on a VAT invoice covering its own charges and the disbursement.
On the principal method the whole £2,400 goes through the cash account, the £400 VAT is recorded on the HMRC account as input tax, and the VAT-exclusive £2,000 is debited to the business side of the client ledger.
SRA Accounts Rules, rule 8.1(a)(ii) — All receipts and payments which are not client money are recorded on the business side of the client ledger account.
SRA Accounts Rules, rule 8.1 — Accurate, contemporaneous and chronological records must be kept of the transactions on each client's matter.
Rule card
Principal method: cash account, whole payment; HMRC account, the VAT; client ledger business side, the VAT-exclusive amount.
Why the other options fail
A
Right outcome, wrong reason
£400, debited to the client ledger business side.
This reverses the entries: it is the VAT that goes to the HMRC account and the VAT-exclusive fee that is charged to the client ledger.
SRA Accounts Rules, rule 8.1(a)(ii) — The business side of the client ledger records the firm's payments on the client's behalf that are not client money.
B
Surface reading
£1,666.67, debited to the business side of the client ledger account.
This extracts VAT from £2,400 as though that were a VAT-inclusive sum. The fee note already separates the fee of £2,000 from VAT of £400.
SRA Accounts Rules, rule 8.1 — Records must be accurate, so the ledger must record the figures shown by the fee note.
D
Outdated law
Nil; the payment is recorded only on the cash account and the HMRC account.
Disbursements are recorded on the client ledger when they are paid, not when the bill is delivered; a payment made on the client's behalf must appear on that client's ledger.
SRA Accounts Rules, rule 8.1(a) — The client ledger must record all receipts and payments relating to the client's matter, on the appropriate side.
E
Adjacent ruleClosest alternative
£2,400, debited in full to the business side of the client ledger account.
Debiting the whole VAT-inclusive sum to the ledger is the agency method treatment, used where the fee note is treated as addressed to the client; here the firm has adopted the principal method.
Ruled out by: The firm treats counsel's fees on the principal method, so the VAT is separated out to the HMRC account rather than debited to the client ledger with the fee.
SRA Accounts Rules, rule 8.1(a)(ii) — Payments which are not client money are recorded on the business side of the client ledger account, the amount recorded depending on the treatment adopted.
Where candidates lose marks in Solicitors Accounts
Money received for your fees before a bill is delivered is client money; once the bill has been sent, it is office money. The same receipt can change character during a matter.
Money held for a disbursement you have not yet paid is client money; money for one you have already paid is not.
Client account must not be used as a banking facility: money goes through it only in connection with the legal services you are delivering.