How To Change From Old Cash Basis to Earnings Basis for Barristers: A Transitional Adjustment

Introduction: A Critical Decision for Barristers

In the legal profession, particularly among self-employed barristers, the choice of accounting basis can profoundly impact tax liability and financial management. Since the tax year 2013/14, barristers in the UK have had the option to adopt the cash basis for tax accounting. While this was a welcome development, it also brought about the question: when in their career and by what means should a barrister transition from a cash basis to an earnings basis?

What Is the Cash Basis?

The cash basis is a simplified accounting method where you only declare the money you have received and the expenses you have paid within the tax year. This method is particularly popular among self-employed individuals and small businesses, including barristers.

What Is the Earnings Basis?

Contrastingly, the earnings basis, or accruals basis, records income and expenses as they are earned or incurred, not necessarily when the money changes hands. This method adheres more closely to Generally Accepted Accounting Principles (GAAP).

Why This Matters

The decision to switch from the cash basis to the earnings basis is not one to be taken lightly. It involves considerations related to turnover, debtors, VAT registration, and even the types of cases a barrister takes on. Furthermore, HMRC imposes certain transitional rules and adjustments that must be meticulously followed.

In this article, we will walk you through the process, the eligibility criteria, and the transitional adjustments you need to be aware of when considering such a change. Whether you are new to the profession or looking to optimise your tax position, this guide is for you.

Understanding the Mechanics: Cash Basis vs Earnings Basis

Cash Basis: The Simplicity Factor

In the cash basis, the tax treatment is straightforward. Income is only recognised when it is received, and expenses are deductible when they are paid. For barristers, this could mean that professional fees are only considered as income when they are actually received from clients or solicitors. On the expenditure side, costs like chamber fees or legal research expenses become deductible when they are actually paid.

Limitations of the Cash Basis

However, the cash basis has limitations. For instance, if your turnover exceeds £300,000, you must leave the cash basis and switch to the earnings basis. Additionally, the cash basis does not allow for a detailed view of debtors and creditors, which could be crucial for barristers dealing with complex cases that span multiple accounting periods.

Earnings Basis: The Comprehensive View

The earnings basis provides a more holistic view of a barrister’s financial position. Under this method, income is recorded as it is earned. So, if you have provided legal services but have not been paid yet, this would still be recognised as income. Similarly, if you have incurred expenses but have not paid them, they are still deductible.

When Should Barristers Consider the Earnings Basis?

The earnings basis is generally more suitable for barristers with a high volume of work in progress or those dealing with complex financial transactions. It is especially beneficial if you are working on cases that are likely to extend over a long period or if you often have significant amounts of income that are yet to be received.

Transitional Adjustment: Cash Basis to Earnings Basis

When you switch from the cash basis to the earnings basis, a transitional adjustment will occur to account for income and expenditure that may be double-counted or omitted. This adjustment income is usually spread over six years to ease the tax burden. Understanding how to calculate this adjustment is crucial for barristers to avoid any tax complications.