Accrual of income for a barrister

[Brendan Burgess]

A young barrister asked me about her financial planning generally.

She will be paid virtually no fees in 2011. Probably enough to cover expenses,but very little else.

However, she has been on the winning side of a case and she will get a fee of around €20k. These will not be paid to her until February of next year. The case was taken on a no-foal no-fee basis.

I told her that as all the work was done in 2011, she should accrue the fees in 2011 and use up her lower rate tax bands and tax credits.

Her accountant said that this was not allowed and she must account for her fees on a cash received basis.

I explained to her that she would have to maintain the same accounting policy next year, so in 2012 she should also accrue income on a similar basis.

I can't understand this. Does the accruals basis of accounting not apply to barristers?


Brendan

 

[DB74]

I'm not aware of any special tax rules applying to barristers.

It sounds like the accountant is confusing VAT on a cash-receipts basis with fees on an accruals basis

She should certainly have an entry for WIP at her year-end for the €20K

 

[T McGibney]

In general, accounting rules prohibit the profit element of work in progress from being accrued as income. This applies to individuals but not to professional service companies, where directors' own time etc must be factored into the WIP calculation. For a 'one-man-band' business person with low overheads, this effectively means that income is realised only when invoiced.

 

[Brendan Burgess]

DB

Thanks for that. I wouldn't regard this as work in progress. The case is over. The fees will be agreed soon. It will just take time to get paid.

I think it would be very different if she had put in a lot of work, but the case had not come to a hearing.


Tommy

Thanks for that.

Is there anything to stop her invoicing the solicitor in December 2010?

The fee will have been agreed at that stage. It will just take a few months for the losing party to pay the fees and then for the solicitor to pass it on.

Brendan

 

[T McGibney]

Is there anything to stop her invoicing the solicitor in December 2011?

I think not. Assuming of course that the solicitor has no objection.

Should make good sense in terms of utilising 2011 tax credits etc

 

[Gekko]

Will she have the funds to pay the VAT on 19/23 January if she issues the invoice during December?

 

[WindUp]

VAT can still be on a receipts basis

 

[Gekko]

Will she have the funds to pay the VAT on 19/23 January if she issues the invoice during December?

VAT can still be on a receipts basis

Sorry, I was assuming that she accounts for VAT on an invoice basis. If she does, she should get authorisation to switch to the cash receipts basis. If she's already on the cash receipts basis, then as WindUp suggests, she's on the pig's back.

 

[onq]

If she's earned under €37,000 per annum, I see no need for her to be registered for, or charge, VAT - unless she's already registered of course

In that case its possible case she can issue a Pro-Forma Invoice to get paid and an Invoice on receipt of payment.