Scottish Advocates and Tax

There are number of special rules governing the financial accounts of Advocates and Barristers in the UK.  For an overview please refer to my blogpost on the CIMA Accountant website.

Computing profits for Advocates

Earnings Basis

The earnings basis is calculated in accordance with UK Generally Accepted Accounting Principles (UK GAAP). Advocates are taxed on the billable value of their work, whether or not paid (and even whether or not billed) and expenditure is accounted for as it is accrued, whether or not it has been paid, by the end of the accounting period.

Old Cash Basis

Under the provisions of the Finance Act 1998, advocates in Scotland (and barristers in England) were permitted to account for their activities on a cash basis for their first seven years, starting from the point at which they charge fees for their own work and start professional practice.  This basis was withdrawn in the Finance Act 2013, but any advocate already preparing accounts under the old cash basis by 31st March 2013 can continue to do so until their 7 years is up or they elect to leave the scheme.

Simplified Cash Basis

The Finance Act 2013 introduced a system of cash accounting for all unincorporated businesses.  The simplified cash basis  is available to businesses with a turnover at or below the VAT threshold (currently £79,000).  If receipts exceed twice the VAT threshold (currently £158,000) the business is required to leave the cash scheme and adopt the Earning Basis (see above).  Business can not generally elect to leave the simplified cash basis, but a change in circumstance eg the business becomes loss-making is cited as an example by HMRC of a valid reason for leaving the scheme.

Comparison of schemes

For most advocates it is likely that a cash basis of accounting will be easier to administer.  Fees are recognised later under the cash schemes, which in turn delays the tax liability providing a cash flow advantage.  The earning basis allows costs that have been accrued but not yet paid to be deducted from turnover.  The earnings basis also allows all interest charges on business loans to be deducted rather than limited at £500 by the simplified cash basis.  The principal difference for most advocates between the earnings basis and either cash basis is the requirement to calculate the value of Work In Progress (WIP) at the period end and include this in the turnover figure.  Capital allowances can be claimed under the earnings and old cash basis, but not under the simplified cash basis.  Capital expenditure that would otherwise qualify for capital allowances can be deducted as it is paid under the simplified cash basis.

Conversion process

When converting from cash to earnings (or from earnings to cash) there are arrangements to prevent the double counting of income.  When changing from the old cash basis to the simplified cash basis, there is not normally any adjustment required, except for most unrelieved capital allowances, which can be claimed in full up to the balance actually paid.

Converting from the old cash to earning basis will normally result in an adjustment to income from the value of WIP.  To ease the transition to the earnings basis, advocates are permitted to recognise 10% of the opening WIP (or 10% of adjusted profits if lower).  Any balance left in year 10 must be brought into the accounts in full.  An advocate can elect to accelerate this process if desired, with the effect of increasing taxable profits.

Converting from the simplified cash basis to the earning basis is similar to the process with the old cash basis, but the adjustment is made in equal instalments over 6 years.  As with the process above, the adjustments can be accelerated if desired.

Converting from the earnings basis to the simplified cash basis requires an adjustment for closing WIP.  The value of WIP extinguished in the accounts is deducted from the fees received to prevent the income being taxed twice.  Most unrelieved capital allowances can be claimed in full (to the extent that they have been paid).

Home office costs

There are two main options available to advocates to recover the use of their home as their office:

1. Allocation of actual costs of Heat & Light etc apportioned on a reasonable basis
2. A fixed allowance per month based on the hours worked

Allocation of actual costs

This method requires records to be kept of costs incurred and also a basis to be agreed for apportioning them to business use.  Where are portion of your home is designated as being exclusively for business use, you will be liable for Capital Gains Tax (CGT) on this part of your home.  If you property increases significantly in value you could find much or all your benefit of claiming expenses being offset by CGT.

Fixed allowance based on hours

If you keep records of the number of hours worked at home, the Finance Act 2013 allows you to claim the following fixed allowances:

Engaging an accountant

The process of accounting for your business to HMRC including the conversion from one basis to another can divert you from your core activities.  For more information on an accountancy firm that can set you up with online accounting and also provide the more traditional services you expect from an accountant please contact Alterledger or visit the website alterledger.com.