Tax issues for barristers: frequently asked questions - Peter Morris answers some of the common questions specifically concerning tax and members of the Bar

This is a now a fairly complicated question, since a barrister’s profits may be computed in one of three ways: the earnings basis; the old cash basis; or the new (simplified) cash basis.

Under the earnings basis in accordance with the Generally Accepted Accounting Principles (GAAP), barristers are essentially taxed on the billable value of their work, whether or not paid (and even whether or not billed) and expenditure is relieved when incurred, whether or not settled, by the end of the accounting period.

The old cash basis, whereby self-employed income is taxed when received and expenditure is relieved when paid, was available to barristers for the first seven years of practice, after which they had to switch to the earnings basis and a ‘catch-up charge’ applied (see below). In the Finance Act 2013 this was withdrawn (with retrospective effect from 6 April 2013) and replaced by the new cash basis. However, barristers who used this basis of accounting for the tax year 2012/13 can continue to use it until the seven years has elapsed.

The new cash basis introduced a simplified basis of cash accounting and is available to most unincorporated businesses, including barristers. It applies from the tax year 2013/14 onwards and has its own special set of rules.

You may need to move from one basis to another, for example from the earnings basis to the new cash basis or vice versa, in which case there are various rules for transitioning and for avoiding double counting of income and expenses. It is advisable to seek professional accounting help for this.

From the tax year 2013/14 onwards, barristers have the option of using the new cash basis of accounting. Unlike the old cash basis, there is no seven year time limit but there are entry and exit thresholds based on the level of receipts.

The new cash basis can be joined where receipts for the accounting year of assessment do not exceed the VAT registration threshold. Where receipts for an accounting period exceed twice the amount of the VAT threshold it is mandatory to leave the new cash basis for the earnings basis when preparing the next set of accounts, unless receipts in the subsequent accounting period fall back below the entry threshold.

Again, this is a complex area. I can help you to determine whether you are eligible to use the new cash basis, and assist you in electing to join it.

Prior to the introduction of the new cash basis, a ‘seven year rule’ applied which meant that when barristers first began accepting fee instructions they were able to use the old cash basis for calculating their income and expenses for tax purposes. However, once they had been accepting instructions for seven years, the old cash basis was no longer permitted and they would need to begin to compute their profits by reference to fees earned whose amount has been agreed or in respect of which a fee note has been delivered. The one-off additional profit arising from this switch is called the ‘catch-up charge’.

If you used the old cash basis of accounting for the tax year 2012/13 you can continue to use it until the seven years has elapsed, so the catch up charge will still apply if and when you switch to the earnings basis. The catch-up charge effectively gets added to your total taxable income and is treated slightly differently to your ordinary profits. It is not liable to Class 4 NICs, but it does count as net relevant earning for pension purposes. It can be spread over ten years.

On leaving the new cash basis, a barrister may elect for the opening debtors and work in progress for the subsequent accounting period to be treated as ‘adjustment income’ which is brought into charge over six years beginning with the first of the years in which the whole of the adjustment income would otherwise be chargeable to tax.

Do contact me for specific advice.

As well as fees received (if on the old or new cash basis) earned income would include any other profits which you derive from your profession, such as commission payments for published articles, or fees for acting as an arbitrator. Salaries for teaching law and from part-time judicial appointments are included in the return as employment income (although PAYE income tax will usually have already been deducted from such payments). Income arising from investments is taxed in the year of assessment in which the income arises.

Contact me for more help with calculating income and expenses.

For expenditure to be deducted from income, it must be of a revenue nature and incurred ‘wholly and exclusively for the purposes of the profession’.

Separate allowances – ‘capital allowances’ – are given for capital expenditure. In essence, a proportion of the capital expenditure, known as the Annual Investment Allowance (AIA) or Writing Down Allowance (WDA) is allowed as a deduction from income each year as if it were a revenue expense. Again, the expenditure must be wholly and exclusively for the purposes of the profession.

As a general rule, an expense which is incurred repeatedly is regarded as revenue, whereas an expense incurred as a one off would tend to be capital. For example, lease payments for the rental of equipment would be regarded as revenue expenses, but an outright purchase of the equipment would be treated as capital.

Such things as Chambers’ rent, stationery, travel and hotels would normally be revenue expenses, while furniture, sets of law reports and computers would be capital expenditure. There are many other items which could fall into one or the other category and be claimed for.

Applying the test of ‘wholly and exclusively for the profession’ is not always simple, as sometimes you may have a dual business and non-business purpose in incurring an expense – for example, subsistence when in chambers, or dining expenses. In that case the expense is non-deductible in its entirety.

I can help you to determine which expenses and allowances you can claim.

The case of Mallalieu v Drummond (1983) determined that the cost of court clothing, such as dark suits and court shirts, is not allowed as a deduction, since the barrister is said to be wearing these clothes partly for the personal reasons of modesty and warmth, so they have a dual purpose.

However, wigs and gowns count as capital expenditure and qualify for a capital allowance. There is an alternative method which involves not charging for the initial wig and gown and thereafter charging the replacement value as renewals when such clothing is replaced.

The cost of travel between a barrister’s home and Chambers or Court (and associated costs such as that of a parking space) is generally not allowable, as these are both deemed to be your place of work. However, the cost of travel from Chambers to the Court and travelling between Chambers is allowable. Business mileage costs follow the same treatment (there is specific case law on this point: Newsom v Robertson (1952)).

A detailed record should be maintained of your business mileage so as to arrive at the correct proportion of all motoring expenses which can be claimed in your accounts.

(For the avoidance of doubt, car benefit rules apply to employees and not to self employed persons, so you can ignore any advice you might hear to the contrary!)

For more detailed advice on business motoring and travel, do contact me.

The potential opportunity for barristers to operate through LLPs or limited companies could have far-reaching consequences. I will be keeping a careful eye on developments when it comes to alternative business structures, in order to give you the best possible advice.