The settlement cheque and the firm's bill
You act for Nadia in a personal injury claim. On 12 May the defendant's insurer pays £50,000 into the firm's client account in full and final settlement of Nadia's claim. Nadia's signed retainer provides that the firm may deduct its billed profit costs and disbursements before paying the balance to her. On 15 May the firm delivers a bill for profit costs of £6,000 plus VAT of £1,200, and for disbursements of £2,400 already paid from the business account, which included £800 of VAT (a court issue fee and an expert's fee). The money stays in client account until 30 June, when the file is closed and the balance is paid to Nadia. Nadia queries why she is paying VAT twice on the disbursements.
1. What may the firm properly deduct, what is the balance payable to Nadia, and when may the money be withdrawn?
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Client money: the £50,000 is client money and must be held in the client account (SRA Accounts Rules 2019, r.2.1). It is not the firm's money and must not be used to fund the firm's own expenditure.
Withdrawal for costs: the firm may withdraw client money in payment of its own costs only after it has delivered a bill (or given written notification of costs where the client is an authorised person or similar business). A bill was delivered on 15 May, so from that date the firm may transfer its costs to the business account. It could not have done so on 12–14 May.
VAT on disbursements: Nadia's concern is answered by the distinction between disbursements and re-disbursements. A court fee and an expert's fee are disbursements for VAT purposes – the firm is acting as the client's agent and merely paying the supplier. The firm does not charge VAT again on them; the £800 is the supplier's VAT, already included in the £2,400. If they had been re-disbursements (for example travel or photocopying), the firm would charge VAT on top.
Computation:
- Profit costs £6,000 + VAT £1,200 = £7,200
- Disbursements £2,400 (VAT inclusive, no further VAT)
- Total £9,600
- Balance to Nadia: £50,000 − £9,600 = £40,400
Ledger discipline: the transfers must be recorded on the client ledger and the business ledger; the client account must never be overdrawn on any individual client's ledger.
2. What is the position on interest, and on a separate £1,500 cheque that arrives on 20 May?
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Interest (r.7, SRA Accounts Rules 2019): the firm must account to the client for a fair sum of interest where it is fair and reasonable to do so, having regard to the amount, the length of time held, and prevailing interest rates. £50,000 held for around seven weeks is a sum and a duration on which a fair rate of interest is likely to be payable; the firm's published policy cannot simply exclude interest on large sums held for a substantial period. If the money had been placed in a separate designated client account for Nadia, the interest earned follows to her. The sum should be credited to her ledger before the balance is paid out on 30 June.
The £1,500 cheque: Nadia's employer sends it in reimbursement of her lost earnings, payable to the firm. That is a receipt on behalf of the client for a specific purpose, so it is client money and must be paid promptly into the client account – it must not be paid into the business account or netted off against fees.
It also cannot be used to discharge the firm's outstanding £500 invoice to Nadia on an unrelated conveyancing matter without her informed agreement. Money held for a specific purpose is not available for set-off at the firm's own hand, and unilaterally appropriating it would breach the duty to account and the principle that client money is held on trust. The firm should pay the £1,500 into client account, account for it to Nadia (or apply it as she directs in writing), and pursue the £500 by ordinary billing and, if necessary, assessment or debt recovery.