FLK2 · Solicitors Accounts

Client money vs business money

SQE1 revision notes — the key rules, leading cases and common traps for this topic, in plain English and current to 2026.

SA.01 - Client Money And The Firm's Money

Classify the receipt first

Rule 2.1 of the SRA Accounts Rules covers money relating to regulated services, money held for third parties in that context, money held as trustee or in a specified office, and money for fees or unpaid disbursements received before the relevant bill. A deposit or completion balance is not the firm's money merely because it will pass through the firm.

Client money normally goes promptly into client account under rule 2.3 and is kept separate from the firm's money under rule 4.1. Check the exceptions rather than treating either statement as absolute. In particular, rule 2.3 includes specified-office obligations, Legal Aid Agency costs and an individually agreed written alternative arrangement.

The narrow rule 2.2 exception

This is an exception to holding money in a client account, not a reclassification as business money. It applies only where the only client money the firm holds or receives falls within rule 2.1(d); any disbursement funds concern costs incurred by the firm on the client's behalf for which the firm is liable; the firm has no other reason to maintain a client account; and the client was told in advance where and how the money would be held. Test the firm's position, not one matter in isolation. The rule expressly disapplies specified obligations for that money; it does not remove the wider duty to safeguard it.

Bills and disbursements

A payment received to settle the firm's outstanding bill can ordinarily go to business account. That does not mean every bill permits a transfer of money already held in client account. Rule 4.3 requires prior billing or written notification of incurred costs, limits the transfer to the identified amount, and requires sufficient funds for that client or third party.

Distinguish a firm's own costs from liabilities of the client, such as SDLT. Putting a client liability on a bill does not turn the money held to pay it into the firm's money. Conversely, an authorised reimbursement of an outlay the firm has already paid is different from holding funds for an unpaid client liability. Check who incurred and owes the expense, the payment's purpose and the applicable withdrawal conditions. VAT treatment is a separate question.

Mixed receipts and balances

Rule 4.2 requires prompt allocation of a payment containing both client and non-client money to the appropriate accounts. Identify the actual ownership of each part; a costs contribution may reimburse a client who has already paid. Return client money promptly when there is no proper reason to retain it (2.5). Neither a five-week reconciliation cycle nor an old fixed transfer period is a permission to delay these obligations.

Sources: SRA Accounts Rules 2, 4 and 5; SRA guidance, Taking money for your firm's costs. These are distinct from the VAT disbursement test in HMRC Notice 700.

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A woman is the treasurer of a small amateur football club. Members pay £20 each month in cash. Under the club rules she accepted on becoming treasurer, she must bank the subscriptions into the club's dedicated account within seven days. One month she receives £200 in subscriptions and spends the cash on her own gas bill that same day. She intends to replace the money from her wages before anyone notices, and pays an equivalent £200 into the club account two weeks later. Which statement best explains how section 5(3) of the Theft Act 1968 applies to the subscriptions when she pays the gas bill?

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