Why money paid in advance is kept in a client account
Rule 4.1 requires a firm to keep client money separate from its own money, which is held in the firm's business account. SRA guidance lists the risks to a client where a firm bills for work it has not yet done, or for disbursements not yet incurred, and pays the money into its business account. The client may end the retainer and want the money back, or the matter may not go ahead. The firm may have to close suddenly or may become insolvent, and money that is not held in a ring-fenced client account can then be absorbed into the insolvent estate.
Rule 4.3 governs transfers of client money for the firm's costs. Before making such a transfer, the firm must give the client or the paying party a bill of costs or other written notification of the costs incurred. The guidance states that this requirement is intended to provide a safeguard to the client or paying party.
When money on account is client money
Under rule 2.1(d), money held or received "in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same" is client money. In the SRA Glossary, fees means the firm's own charges or profit costs, including any VAT element. Disbursements means costs or expenses paid or to be paid to a third party on behalf of the client or trust, including any VAT element, but not office expenses such as postage and courier fees. Money received before a bill for the firm's fees and the VAT on them is therefore client money, and so is money received before a bill for a disbursement that has not yet been paid.
What the payment is called does not change this. SRA guidance treats money received in advance for the firm's fees, whether based on an estimate or charged as a fixed fee, as client money. A fixed fee paid in full at the first meeting is client money if no bill for it has been delivered.
Client money must be paid promptly into a client account (rule 2.3). The exceptions that can apply to money on account are payments from the Legal Aid Agency for the firm's costs (rule 2.3(b)), an alternative arrangement agreed in writing with the client in the individual circumstances (rule 2.3(c)), and the arrangement in rule 2.2 described below.
Money received after a bill has been delivered, in settlement of that bill, falls outside rule 2.1(d). SRA guidance states that a payment received in settlement of a final or interim bill of costs can properly be paid into the firm's business account. VAT on the firm's fees is part of its fees, so the same applies to the VAT included in the bill.
What happens to the money at each stage
The table follows money paid on account through a matter.
| Stage | Position under the Rules | Where the money goes | Rule |
|---|---|---|---|
| Received before any bill | Client money, including any part for VAT on fees and any part for unpaid disbursements | Client account, promptly, unless rule 2.2 or an exception in rule 2.3 applies | Rules 2.1(d) and 2.3 |
| Work done but no bill given | Still client money. Doing the work does not by itself allow a transfer to the business account | Stays in client account | Rules 2.1(d) and 4.3 |
| Firm pays a disbursement from its own money | Money held for that disbursement may reimburse the firm | Transferred from client account to business account | Rule 5.1(a) and SRA guidance |
| Bill or written notification of costs incurred given | The firm may use client money for the specific sum identified, covered by the amount held for that client | That sum may be transferred to business account. The rest stays in client account | Rule 4.3 |
| Payment received in settlement of a delivered bill for fees | Outside rule 2.1(d), including the VAT element | Business account | Rule 2.1(d) and SRA guidance |
| Final bill paid from money held | Any balance is still held for the client | Returned promptly once there is no longer any proper reason to hold it | Rule 2.5 |
Transferring money for costs to the business account
Where a firm holds client money and some or all of it will be used to pay the firm's costs, rule 4.3 requires the firm to give a bill of costs, or other written notification of the costs incurred, to the client or the paying party. It must do so before it transfers any client money from a client account to make the payment. The payment must be for the specific sum identified in the bill or notification and must be covered by the amount held for that particular client or third party.
Completing the work is not enough. Once the bill or notification has been given, the firm may transfer the sum it identifies and no more, and the rest stays in client account. SRA guidance expects a bill to set out only the fees and disbursements that have been incurred. Every withdrawal from client account must also be appropriately authorised and supervised (rule 5.2), and sufficient funds must be held on behalf of that specific client or third party to make the payment (rule 5.3).
Disbursements already paid and disbursements not yet paid
A firm may pay a disbursement, such as a court fee, from its own business account and then reimburse itself from money held on account. SRA guidance addresses whether a bill is needed first. It states that rule 5.1(a) allows money for paid disbursements to be transferred from client account to business account, because the money is being used for the purpose for which it is held. The SRA expects the firm to have explained to the client how and when it may make such payments and then reimburse itself, for example in the client care letter.
The guidance treats a disbursement that has not been incurred, or has not been paid by the firm, as a different case. Rule 4.3 must be satisfied before money for it is transferred to business account. Under the guidance, if a bill includes an anticipated disbursement, leaving the money for it in client account until it is paid is not a breach of rule 4.3. The guidance also states that billing in advance is permissible under the Accounts Rules, provided the firm acts in accordance with the SRA's Standards and Regulations and safeguards the money entrusted to it. The SRA's stated view is that billing in advance for a disbursement the client remains liable to pay, such as Stamp Duty Land Tax, and receiving that money into the business account would be improper and a breach of its Standards and Regulations.
Holding money on account outside a client account
Under rule 2.2, a firm is not required to hold money within rule 2.1(d) in a client account if all of these conditions are met.
- The only client money the firm holds or receives falls within rule 2.1(d).
- Any money held for disbursements relates to costs or expenses incurred by the firm on behalf of the client and for which the firm is liable.
- The firm does not maintain a client account for any other reason.
- The firm has informed the client in advance of where and how the money will be held.
The money is still client money. Rules 2.3, 2.4, 4.1, 7, 8.1(b) and (c) and 12 do not apply to it. SRA guidance points out that the firm must still give a bill or other written notification of costs under rule 4.3(a), and must return client money promptly under rule 2.5 once there is no longer any proper reason to hold it.
Money paid into the wrong account
Banking money received wholly on account of costs in the business account, when neither rule 2.2 nor an exception in rule 2.3 applies, breaks rule 2.3 and rule 4.1. A single payment that also settles a delivered bill is a mixed payment and is governed by rule 4.2, described below. Rule 6.1 requires the breach to be corrected promptly upon discovery, and money improperly withheld from a client account must be immediately paid into it. A bill delivered later does not undo the breach, because the money was client money when it was received. Apart from rules 2.2 and 2.3, nothing in the Rules allows money for unbilled fees to wait in the business account until a bill is sent. Money improperly withdrawn from a client account, for example by transferring more than a bill identifies, must be immediately replaced.
Mixed payments
A mixed payment is a payment that includes both client money and money that is not client money (SRA Glossary). One payment that settles a delivered bill and adds money on account of further work is an example. The part that settles the bill can go to the business account, and the part on account is client money under rule 2.1(d). Rule 4.2 requires the firm to allocate promptly any funds from a mixed payment to the correct client account or business account. It prescribes no order of steps and no number of days, and it applies to both parts. Neither the client's part nor the firm's part may be left in the wrong account.
A worked example
Ruth instructs a firm, which operates a client account for money it holds for other clients, in a dispute with a builder about defective roof repairs. On 3 February, before any bill, she pays £2,700 on account of the firm's fees and VAT and of a surveyor's fee. All of it is client money under rule 2.1(d), and the firm must pay it promptly into the client account.
On 24 February the firm pays the surveyor's invoice of £540 from its business account, as its client care letter told Ruth it might. Under rule 5.1(a), as SRA guidance explains, the firm may reimburse itself by transferring £540 from the client account, which then holds £2,160 for Ruth.
On 31 March the firm sends Ruth a bill for fees of £1,100 plus VAT of £220, a total of £1,320. The bill identifies a specific sum and the money held for Ruth covers it, so the firm may transfer £1,320 to the business account. The other £840 has not been billed and stays in the client account.
In June the dispute settles. The firm sends a final bill for fees of £650 plus VAT of £130 and transfers £780. There is no longer any proper reason to hold the remaining £60, so the firm must return it to Ruth promptly (rule 2.5).
Change the facts. If the cashier had paid the £2,700 into the business account on 3 February, the firm would have broken rules 2.3 and 4.1. On discovering the error on 10 February, it would have to pay the £2,700 into the client account immediately (rule 6.1). A bill sent later would not have made the original payment into the business account compliant. If on 31 March the cashier had transferred the whole £2,160, the unbilled £840 would have been withdrawn in breach of rule 4.3 and would have to be replaced immediately.
The traps SQE1 questions set
- Money for the firm's fees received before a bill for those fees is client money, whatever the payment is called and even if the fee is fixed.
- VAT on fees is part of the fees. Money for fees and VAT received before a bill is client money. A payment in settlement of a delivered bill, including its VAT, can go to the business account.
- Doing the work does not allow a transfer for fees. A bill or other written notification of the costs incurred must be given first.
- A transfer for costs must be for the specific sum identified in the bill or notification and covered by the amount held for that particular client. Delivering the bill does not allow the firm to take anything more.
- A disbursement the firm has already paid from its own money can be reimbursed from client account under rule 5.1(a). To transfer money for a disbursement the firm has not paid, the firm must satisfy rule 4.3.
- A later bill does not cure the payment of money on account into the business account. Money improperly withheld from the client account must be paid into it immediately on discovery (rule 6.1).
- Rule 2.2 applies only if every condition is met. A firm that maintains a client account for any other reason cannot use it, and telling the client after the money has arrived is not informing the client in advance.
- Money left over after the final bill must be returned promptly once there is no longer any proper reason to hold it.
A sole practice authorised by the SRA advises only on employment disputes and has no client account. Before a new client pays £870 on account of fees and VAT, the solicitor explains in writing that the money will be held in the firm's business account as part of the firm's own money and will not be ring-fenced. The firm holds and receives no other client money, and none of the £870 is for disbursements. Does holding the £870 in the business account breach the Accounts Rules?
Show the answer
No. The £870 is client money under rule 2.1(d), because it is received for fees before a bill. Rule 2.2 removes the requirement to hold it in a client account, because it is the only client money the firm holds or receives, no money is held for disbursements, the firm maintains no client account for any other reason, and the client was informed in advance of where and how the money would be held. It remains client money. Where it is to be used to pay the firm's costs, the firm must still give the client a bill or other written notification of the costs incurred (rule 4.3(a)), and it must return any surplus promptly once there is no longer any proper reason to hold it (rule 2.5).
Sources
- SRA Accounts Rules (version in effect from 25 November 2019), rules 2.1 to 2.5 (client money)
- SRA Accounts Rules, rules 4.1 to 4.3 (keeping client money separate, mixed payments and transfers for costs)
- SRA Accounts Rules, rules 5.1 to 5.3 (withdrawals from client account) and rule 6.1 (correcting breaches)
- SRA Glossary, definitions of costs, disbursements, fees and mixed payments
- SRA guidance, Taking money for your firm's costs (published 14 September 2020)
- SRA guidance, Do I need to operate a client account? (updated 16 February 2023)
Law as at 14 October 2026.