Getting on Your Feet
On entering pupilage, you will be in receipt of a chambers award. This is to assist you in meeting your living expenses until you are able to earn fees for yourself. All such awards are treated as grants and are not subject to income tax.
Similarly, all expenses associated with obtaining your qualification as a barrister cannot be treated as allowable expenses. This includes interest on bank loans and overdrafts
Once you are in pupilage you need to be thinking about how to establish yourself as a self-employed barrister. Your status will change once you start on your second six. It is at this point that you must register as self-employed. You are then eligible to conduct your own cases and issue fee notes.
Your Chambers will require you to register for VAT from the date you are on your feet. However, you are unlikely to reach the VAT registration threshold of £85,000 in your first year. We also recommend that you set up a separate business bank account. This will receive all fee income and be used to pay all your practice expenses.
We can guide you through the process of registration with HMRC which will cover Income Tax, National Insurance and VAT.
It is vital that you start off in practice with a plan. It is good to set aside a percentage of your fee income to meet your VAT liability due each quarter. You also need to make provision for your income tax liability. The first payment of income tax and national insurance may not be due for up to 22 months after you get on your feet. You are also likely to need to save to fund your student loan repayments.
Our experienced team can help you to calculate the percentage you need to set aside. If you do not make adequate provision, you will find yourself paying significant penalties. HMRC will enforce these penalties if you are unable to pay them on time.
Filing Dates and Payment of Taxes
Your VAT return must be filed with HMRC within five weeks of each quarter end. We recommend that you enter into a direct debit arrangement with HMRC. They will take payment a few days after the due date for filing your return.
HMRC are currently consulting on proposals to tax self employed individuals based on their profits earned in the tax year and as a result we would recommend that those now entering self-employment choose to prepare their annual accounts using 31st March as their year-end date. Most pupils commence pupilage in September or October which means that they are on their feet in March or April.
Under current rules you will prepare your first accounts to the following 31st March and file the accounts and tax return by the following 31st January. That is when your first tax bill is due for payment.
Your payment will comprise the whole of the tax and national insurance liability for your first year in practice. Additionally, a repayment of your student loan assuming that you have profits in excess of the earnings threshold.
You will need to make a first payment on account of your Income tax and National Insurance liability for the next tax year. This is calculated as 50% of the first year bill.
You will then pay the other 50% as a second installment due on the following 31st July.
In our experience your income will rise substantially in the first few years. This means that you will have additional tax to pay each January when the balance becomes payable.
Most barristers are able to prepare their accounts on a cash basis. This means that you only pay tax on fees that you have received in your accounting year. Therefore, your profits after deduction of allowable expenses have all been paid to you. This should enable you to budget for your VAT, tax bills and living expenses. Once you are using cash accounting you can continue to do so until your fee income (excluding VAT) reaches £300,000.
Accounting for Debtors
If your fee income exceeds £300,000 you will need to move to accounting for your debtors when preparing your next annual accounts. This requires careful calculation since for most barristers there is a significant time lag between the issuing of a fee note and receiving payment.
We are experts at analysis of year end debtor ledgers and are able to eliminate conditional fee cases which only fall to be treated as good debt if the fee has become collectable at your year end date. As your accountants we will also ensure that all cases where the payment of the fee note may be in doubt are considered and brought to your attention. We will ensure that you only pay tax on outstanding fees that will pay.
HMRC do allow for stage payments of any additional tax liability due when moving from the cash basis to the debtor basis but without adequate provision many barristers struggle to pay their tax bills on time when they have to move from cash accounting.
We will also carry out a revue for those clients whose fee income is reducing to see if they can benefit from switching back to cash accounting should their fee income fall below £150,000.
Keeping Your Records
It can seem a daunting prospect to face getting on your feet and handling your first cases on your own and wondering how you will find the time to keep your records.
We believe that your time is valuable and have built our systems to enable you to minimize your involvement in the need for bookkeeping.
With your authority we can access your chambers accounting system and obtain all the information relating to your fee income directly. By use of our digital data caption system you can provide us with all your expenses as and when you incur them. We can create a digital link to your business bank account which will feed all your transactions directly into our Xero accounting software. For more information on our barrister accounting packages see our services page