Billing in advance – A tricky path to take

As part of our ‘Technical Corner’ we want to bring you information that will help you to continue to learn and grow in your career.

One of the first points noted when the SRA Accounts Rules 2019 were released was that there seemed to be the opportunity for law firms to bill in advance, which had previously been prohibited.

There is definitely more flexibility with the new Accounts Rules, but one must consider the wider obligations, 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.

In September last year, the SRA issued guidance to help clarify the position in respect of billing in advance of work being undertaken, as well as the transfer of disbursements to the business account before they have been paid or incurred.

There is an allowance for billing in advance under the new Accounts Rules where agreements have been made between firms and clients in certain circumstances. When funds are received in advance, they can be in respect of legal fees, unpaid disbursements, or for a transaction where the firm is acting on behalf of a client.

Rule 4.3(c) of the SRA Accounts Rules 2019 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”.

According to the guidance, 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”. With prior agreement with the client, the SRA do not foresee a risk in transferring monies for disbursements already made. The important term here is “incurred”. This would not apply to disbursements which are “anticipated”.

As well as not invoicing in advance for disbursements, a restriction also applies where the liability to pay remains with the client, for example Stamp Duty Land Tax.

Billing in advance was not permissible under the previous rules, unless set out as an agreed fee. The new guidance states that firms may be able to bill in advance but warns 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 call into question the firms protection of the funds.

There are also accounting issues that arise as a result of billing in advance, such as VAT and deferred income implications, so it is worth seeking advice before changing any practices.

The main issue with billing in advance is an ethical one – Are firms acting, or being seen to be acting, in the best interests of their client? Often the reason firms want to bill in advance is to improve cash flow, but the code of conduct and integrity should be at the forefront of their minds.

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