Raising the Bar - on time recording, duality and the tax advantages of the van
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There are proposed changes to barrister time recording put forward by the
Legal Services Commission (LSC) and the Crown Prosecution Service (CPS) and
Attorney General. The LSC are considering insisting upon records that are
readily auditable to demonstrate proper stewardship of public funds. For the Bar
these suggestions provide a strong basis for showing good conduct by its
practitioners in the billing of publicly funded cases.
It has been argued that the proposals go too far, for example there is a
request that the conduct rules be extended so that barristers must maintain case
files showing what work has been performed, when work is performed (time and
date), and how long it took. These records should be kept up-to-date by
recording information within 48 hours of the work being done.
In addition there is a request that summary information regarding the total
number of hours worked per day by barristers across all cases (including
private, legal aid, prosecution) be made available to the LSC or CPS. This
request is to enable those organisations to be satisfied as to the
reasonableness of the hours claimed in legal aid or prosecution cases, in the
context of the total hours worked.
The first cynical reaction of the accountant and/or tax advisor would be
“duality of purpose” - that this onerous work would assist with the calculation
of barrister work-in-progress (WIP). (Perhaps the second cynical reaction is to
thank heavens accountants do not currently have to show when their work was
Work in progress (WIP) and UITF40
The question is, will this time recording help in the professional judgement
and calculation of barrister WIP at their tax year end?
There are many barristers who feel they have taken a severe tax battering of
late with the move from cash accounting to include debtors and the introduction
of UITF40. There are concerns that the profession is paying tax now on money
that has not been received and possibly (due to the nature of payment terms)
will not be received for a long time hence. Help is obtained from the HMRC
guidelines on UITF40.
It is difficult to see therefore how the time recording proposals will help
with the calculation? Is the reality that the suggested improvements would in
fact create more arguments for uncertainty and lower work-in-progress, and
therefore a lower tax bill?
What are the current rules for time recording? The current Bar Code of
Conduct Rule 701(f) only requires barristers to ‘ensure that adequate records
supporting the fees charged or claimed in a case are kept at least until the
last of the following: his fees have been paid; any taxation or determination or
assessment of costs in the case has been completed; or the time for lodging an
appeal against assessment or the determination of that appeal, has expired.’
What are the proposals? Rule 701(f) be amended to require records to be kept
for three years after the last of the stated events has taken place.
Retrospective audit and drawback provisions
The problem of record keeping arises where there is the need to occasionally
to carry out a retrospective audit of claims submitted on all publicly funded
cases to ensure that in their totality claims can be justified.
Does this give greater argument to increase the uncertainty and therefore and
to justify not recognising revenue until later, and to making greater drawback
provisions? In other words, paying less tax! What guidance is given by HMRC?
Legal Aid: “Returning of the excess”
Legal aid in some cases is not agreed until after the matter has been
settled. In lengthy cases agreement can take many years. Often the payments on
account will be for a greater amount than the eventually agreed fee and the
barrister has to return the excess. It has been agreed with HMRC that the
relevant tax point is payment, normally a payment on account, or the agreement
of the fee, whichever comes first.
Professional judgement has to be applied in making the decision and the
accounting treatment will depend on the degree of uncertainty. In principle,
revenue should be recognised according to the work done to date, rather than
according to progress payments received, so in this case the new time recording
proposals could be useful. If a reasonable estimate can be made of the revenue
that has been earned as a result of the work done to date, then that should be
recognised in the accounts.
Prudence should be built in to that estimate in response to uncertainty. It
may be that the level of uncertainty is so high that no reliable estimate can be
made until either later in the process or until the case is completed and the
fee agreed. A barrister should not recognise all the progress payments received
as revenue, even if they do bear a close relationship to the work done to date,
if it is likely that some of the amounts received will have to be refunded;
hence there should be provision for the excess to be returned.
It would again seem that the new time recording proposals give greater
justification for prudence and this could help the barrister’s tax position.
“No win, no fee” basis
Where a barrister works on the “no win, no fee” basis the revenue should not
be recognised until a case has been won. Only at that stage does the barrister
have the right to consideration.
“Pay at end” basis
When a barrister works on a “pay at end” basis the fee is not agreed in
advance, nor will the rate be fixed. The consideration is negotiated at the
conclusion of the case. The difference from “no win, no fee” is that the fee
will always be due.
Where there is some uncertainty about the fee but a reasonable estimate can
be made, at least of the minimum that will be earned, then an estimate should be
made of the part of the total fee that has been earned as a result of work done
to the balance sheet date. Where there is genuinely so much uncertainty that no
reliable estimate can be made of the total fee or any part of that total that
has been earned to date, no revenue should be recognised until such time as the
uncertainty has reduced and a reliable estimate can be made.
In these cases it would appear improved time recording systems will help with
Budget 2008 and “Plant & Machinery”
Legislation will be included in the Finance Bill 2008 to introduce a new
annual investment allowance (AIA) for the first £50,000 of a business’s
expenditure on most plant and machinery each year. For tax purposes a barrister
is in business and they do use ‘plant & machinery’. The tax relief will apply to
expenditure incurred on or after 6 April 2008. Will every barrister be able to
use their allowance? Barristers can enjoy an immediate 100% tax relief for such
expenditure for 2008/09. The interaction with the Chambers “Plant & Machinery”
will have to be considered. There is no doubt that whether or not proposed time
recording proposals are accepted there will be more emphasis on electronic
recording and improved IT systems and hardware.
What constitutes a barrister’s plant & machinery? For example:
• Home Computers and IT Links
• Furniture for home office/study
Motor cars do not qualify as “plant & machinery” for the purposes of the
annual AIA but vans do qualify, so obviously anticipate to see a change of
vehicle parked outside Chambers from 6 April in a “hunger” to use the £50,000
allowance. It is hard to envisage the line of transit vans though!
Duality of Purpose
Those barristers claiming the AIA might have worries about the concept of
duality of purpose for tax - this can be explained by the case Mallalieu v
Drummond (HMIT) (1983) 57 TC 330, where the black clothing required for a
barrister’s appearance in Court was held to be needed for the more conventional
use of clothing the body as well. The legislation defines the allowability of
expenses in section 34, Income Tax (Trading and other income) Act ITTOIA 2005.
Under this section if an expense is incurred for more than one purpose, say for
business and for pleasure, then no deduction for business the proportion is
Clearly with the claim for “plant & machinery” utilised in the office at
home, care must be taken to protect claims for tax relief from restriction under
the duality rules. What is the purpose of the expenditure?
Chambers: “Shared premises”
What is the tax planning interaction of Chambers new plant & machinery
purchases – for example, of furniture, fittings and IT systems - and the
individual barrister and his AIA?
What is the tax position of Chambers? Where an individual or individuals
control(s) an unincorporated business or more than one unincorporated business,
but he/she/they do not control a “related” unincorporated business, each
separate and distinct business will be entitled to its own AIA. However, if they
are deemed to be “related” then the AIA will be shared between the businesses.
The conditions that determine whether two businesses are related are ‘the shared
premises’ condition and ‘the similar activities’ condition.
The “shared premises” condition is met if at the end of the accounting period
the two businesses are carried on from the same premises.
The “similar activities” condition is met if two businesses under common
control carry out the same qualifying activity in a tax year.
Barristers are quite clearly trading in their own capacity and although they
share their chambers they are not under common control. However, this position
has yet to sink in with the Barrister’s clerk!
There is great scope for tax planning to maximize the use of the allowance
amongst the profession of barristers but how can the £50,000 annual allowance be
Chamber: The business
To clarify, a barrister in his/her own sole trade capacity is therefore a
business and entitled to his/her own AIA. It is assumed that Chambers will be
classified as a Trade Protection Association and again entitled to an AIA if
chargeable to corporation tax – for this not to be allowed there would need to
be a very aggressive stance by HMRC?
Chambers: JD Weatherspoon case and budgets
This case has highlighted how building improvements such as toilets and
drainage can qualify for “plant and machinery”. The key point here is that all
Barristers should be linking with Chambers to review the “plant and machinery”
budgets, including green expenditure, “features not fixtures” and the impact of
So who said the Budget 2008 was dull?
Chambers: Green warmth
It is well known that the traditional buildings used by Barrister’s Chambers
are “slightly” old fashioned and in winter might be described as “a tad chilly”!
Do not worry, the taxman is going to create a tax incentive for green warmth.
The Energy Efficient and Water Saving (environmentally-beneficial) Enhanced
Capital Allowance (ECA) schemes allow businesses investing in designated
technologies that reduce energy consumption, save water or improve water quality
to write off 100% of the cost against the taxable profits of the period during
which the investment was made. The result is:
• Water Technology Criteria List will be revised to include one new
technology, waste water recovery and reuse system; and the
• Energy Technology Criteria List will be revised to include four additional
sub-technologies, compressed air master controllers, compressed air flow
controllers, heat pump dehumidifiers and white LED lighting.
The qualifying criteria for good quality Combined Heat and Power technology
within the Energy Efficient Technologies scheme, has also been reviewed to
ensure that it includes all the necessary equipment to enable such facilities to
use solid refuse waste as fuel. Steps will be taken to revise the qualifying
criteria at the same time as the other changes.
New Lists will be published later in 2008. Once these have been published a
Treasury Order will link then to the schemes. The lists are available on the
internet at www.eca.gov.uk.
It would appear that (possibly) in 2008 it will be “goodbye Aston Martin” and
“hello White Van Man” - tax efficient, cash flow efficient and helps reduce
higher tax bill created by UITF 40 and the onerous inclusion of WIP. What else
other than a van will help utilize the £50,000 AIA for a barrister? Do not
despair a “twin cab pick-up” also qualifies as “plant & machinery” as a “van” so
there will be variety amongst the Aston Martin replacements outside Chambers.
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West
Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email;
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN:
0754522180 (2nd edition) and Equine Tax Planning ISBN:
0406966540. The third edition of Tax Planning For Farm and Land
Diversification is currently being written and will be published shortly.
To order a copy call Tottel Publishing on 01444 416119.
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Article Published/Sorted/Amended on Scopulus 2008-08-04 14:40:32 in Tax Articles