Since 2011, more than 120 taskforces have been launched, bringing together various HMRC compliance and enforcement teams for intensive bursts of activity focused in specific sectors, reportedly collecting more than £400m in additional tax.
A taskforce looking specifically at the legal profession in London was launched in 2012. The taskforce, which ran until early 2015, looked into the tax affairs of 360 businesses or individuals, culminating in a number of high-profile tax prosecutions. Barristers continue to be under the spotlight from HMRC’s specialist unit in Bradford. An HMRC spokesman told Counsel: ‘Legal professionals who know that their tax affairs aren’t in order should come forward now before we find them.’
Early in your career
It is important to get your finances on a sound footing from the outset. The first step is to make sure that you are registered with HMRC for self-assessment tax. Barristers who avoid registrations will find themselves with significant bills (and fines) and possibly no funds with which to pay them. Registering for VAT at the very start of your career avoids any confusion and gives an early cash flow advantage on the VAT treatment of items brought into your business, such as PCs and laptops. There is a relative disadvantage if barrister’s clients, such as private individuals, cannot claim the VAT charged.
Once you have commenced practice, it is highly advisable to open a separate practice bank account to keep professional affairs separate from private transactions. Ring-fencing business transactions will help with record keeping. By maintaining an exclusive practice account, you will usually be able to claim tax relief on the bank costs as the expense will be considered ‘wholly business’, which is not so easy if you have mixed ‘private and business’ use of a bank account.
Managing fluctuating income
In an ideal world, chambers then raises a fee note and you are paid. However, fee notes may not be raised straight away for a number of reasons and there can be further complications which can delay payment. In our experience it can take anywhere from six months to two years to build up a healthy stream of regular receipts, and some barristers will need to obtain finance from the bank to tide them over this initial period.
As mentioned above, it is important for tax relief purposes that you use a separate bank account for practice monies. A further example of this is that you shouldn’t borrow on a private bank account. Instead, try to arrange loans as business or practice borrowings. This will mean that you can then obtain tax relief on the interest charged on the loan and a potential discount of up to 47% on the cost.
Saving for VAT, income tax and expenses
When considering bank accounts, an additional bank account is recommended to save for VAT and income tax liabilities. It is important to recognise that as well as being a barrister, you are also an unpaid tax collector. From the very start of your career you should save a percentage of every payment you receive. Approximately 34% of your receipts at the start of your career should be adequate for your VAT, income tax, national insurance contributions and your student loan. This is generally true until you reach approximately £90k of fees.
Do not be lulled into a false sense of security by your initial tax bills. Your bill will be based on earnings in previous years, which may have been minimal. The tax demand on the income will still come in subsequent years and it is essential that you have the funds available. Do not be tempted to use your tax savings account for any other purpose; it can be very difficult to catch up.
Accountants used to dealing with barristers will be able to give you an estimate of your anticipated tax liabilities. Be aware that VAT is paid every quarter and income tax in 31 January and 31 July. You will also need to add another 10-15% for chambers expenses, which in effect means that more than half of the money you earn isn’t yours. This is only a rough indication, but you need to ensure that you save properly for your tax and other bills. Do not leave it until January to prepare your accounts and tax return, as you may have left it far too late to find the money due by 31 January.
Later in your career: age-old problems
Once established in a good financial housekeeping routine, cash flow problems can still strike. For example, perhaps you or chambers mislay a cheque. Always check the ‘payment summary’ against your bank statements to ensure you’ve banked all your receipts. Work closely with your team at chambers to ensure that bills are sent out promptly and payment is chased. The problem is when the matter is out of your hands. This may be because your client is delaying payment, in which case it may be worth reviewing your own contractual terms and conditions. This will be compounded if it is a particularly long-running case.
The most frequently seen problem is barristers not able to pay their January and July tax bills, largely because they have not put the funds to one side. For relatively short-term cash flow problems, speak with your bank in the first instance regarding some type of facility (see the comments above regarding business borrowing). It is always recommended that you deal with a bank/bank manager who is experienced in the Bar and therefore understands the complications relating to the profession. If your bank declines this, don’t approach any other commercial lenders without paying very close attention to their interest rates and other terms and conditions. Speak to your accountant if you need to consider other options. It may be, for example, that a ‘time to pay’ arrangement can be reached with HMRC for your tax bills. This is a formal arrangement with HMRC to pay any outstanding liability by instalments.
Another serious concern is delays in legal aid payments and the cuts in legal aid fees, and publicly funded barristers are now looking at significant reduction in their earnings. If you are in this position you will have to look even more carefully at how you manage your finances. If the very worst happens, and you feel you are unable to cope with significant debts and there are no alternatives after discussing with your advisers, then consider entering into an individual voluntary arrangement (IVA) administered by an insolvency practitioner.
Cradle to grave
In summary, young barristers must set up their finances in a robust manner and keep them properly maintained throughout their career. This may not be a top priority, so consider how new technologies and cloud accounting can assist; or outsource it all to someone else. The consequences of not paying full attention to your finances far outweigh the cost of looking after it properly.
This content is for general guidance only.
Contributor Tony Reynolds, partner and head of Bar Department, Cassons chartered accountants