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HMRC considers pupillage awards to be taxable. There are two methods of bringing pupillage awards into tax: (i) the award for the first six months (first six) is exempt from tax but that for the second six is taxable as an ordinary trading income; (ii) both first six and second six awards are taxable in the tax year of receipt. In most cases it would seem sensible to choose option 1 and practice would commence on completion of the first six months of pupillage.
All businesses have to register for Value Added Tax (VAT) when income exceeds £85,000 over a 12-month period. Barristers generally use the Standard Rate or Flat Rate Scheme (FRS). FRS was popular among barristers due to its simplicity. However, changes to the calculation with the introduction of a ‘limited cost business’ from 1 April 2017 meant that it is probably no longer financially efficient, although it is still the simplest calculation.
Since the ‘Making Tax Digital’ (MTD) legislation came into effect from 1 April 2019 businesses have had to keep digital records and submit VAT returns using compatible software. This has seen a large number of barristers using compliant online accounting software such as Xero which will compute and file an MTD VAT return, and also OCR software such as Dext to ensure all receipts and purchase invoices are easily recorded and processed into your accounting software. The simplicity of these products has seen most barristers now choose to file Standard Rate VAT returns as it is almost always more financially efficient to do so now.
Cash basis accounting is a straightforward way of working out the tax payable through self-assessment, based solely on income received and expenses paid. There is no need to calculate debtors and creditors at the year end, nor estimate accruals and prepayments. We would therefore recommend everyone to start on the cash basis to prepare their accounts where possible.
The principal features of cash basis accounting include: entry threshold for fees received to be below £150,000; expenditure includes assets normally taxed through capital allowances; an election must be made in each tax return for which it applies; and the exit threshold for fees received is £300,000 (if you exceed this amount you will normally have to move onto the traditional (accruals) basis). The alternative is to use the traditional basis which results in taxing barristers on the billable value of their work, whether paid or not. This basis results in including debtors and work in progress to their accounts which can often result in a significant amount of tax being payable on fees you have not received.
Taxpayers have the right to select their own year-end. The assessable profits for tax purposes are those for the selected accounting year ending during the tax year to 5 April.
Most barristers choose either a 31 March or 30 April year-end. A March year-end keeps the accounting year-end in line with the personal tax year-end and largely means tax becomes payable as it is earnt. An April year-end results in tax being charged on accounts 11 months in arrears (see below) meaning less tax is payable when taxable profits are rising in the early years of trading (note this advantage disappears if taxable profits plateau). It also has the advantage that your accounts can be prepared well before the personal tax year and any tax planning, such as making pension contributions, can be made with precise figures.
If the chosen year-end is after 5 April, then any profits apportioned to 5 April are taxed twice. The profits taxed twice are called ‘overlap profits’ and relief is given when self-assessment ceases. Overlap relief is not indexed for inflation so is likely to become worth less and less as time goes on.
For example, you choose a 30 April year end and your first year’s accounts are from 1 May 2021 to 30 April 2022 and you have profits of £60,000. As there is no year-end in the year to 5 April 2022, taxable income is calculated as 11/12ths of £60,000, being £55,000 for your 5 April 2022 personal tax return. When preparing your 5 April 2023 personal tax return the accounts used are those in the accounting period 6 April 2022 to 5 April 2023 which is the same year-ending 30 April 2022 accounts previously used. There are therefore £60,000 of taxable profits, with £55,000 of overlap relief.
Tax is payable on 31 January and 31 July each year. It is based upon half the previous year’s tax due with any adjustment adding to the following January payment. In the early years at the Bar, with income often on the increase, the balancing payment in January can be sizeable and it also increases the next payment on account.
Nick Bonnello is the Managing Director of RWB Chartered Accountants and heads up the specialist Barrister Tax and Accounts team. For further details please go to: www.rwbca.co.uk/our-services/barristers
HMRC considers pupillage awards to be taxable. There are two methods of bringing pupillage awards into tax: (i) the award for the first six months (first six) is exempt from tax but that for the second six is taxable as an ordinary trading income; (ii) both first six and second six awards are taxable in the tax year of receipt. In most cases it would seem sensible to choose option 1 and practice would commence on completion of the first six months of pupillage.
All businesses have to register for Value Added Tax (VAT) when income exceeds £85,000 over a 12-month period. Barristers generally use the Standard Rate or Flat Rate Scheme (FRS). FRS was popular among barristers due to its simplicity. However, changes to the calculation with the introduction of a ‘limited cost business’ from 1 April 2017 meant that it is probably no longer financially efficient, although it is still the simplest calculation.
Since the ‘Making Tax Digital’ (MTD) legislation came into effect from 1 April 2019 businesses have had to keep digital records and submit VAT returns using compatible software. This has seen a large number of barristers using compliant online accounting software such as Xero which will compute and file an MTD VAT return, and also OCR software such as Dext to ensure all receipts and purchase invoices are easily recorded and processed into your accounting software. The simplicity of these products has seen most barristers now choose to file Standard Rate VAT returns as it is almost always more financially efficient to do so now.
Cash basis accounting is a straightforward way of working out the tax payable through self-assessment, based solely on income received and expenses paid. There is no need to calculate debtors and creditors at the year end, nor estimate accruals and prepayments. We would therefore recommend everyone to start on the cash basis to prepare their accounts where possible.
The principal features of cash basis accounting include: entry threshold for fees received to be below £150,000; expenditure includes assets normally taxed through capital allowances; an election must be made in each tax return for which it applies; and the exit threshold for fees received is £300,000 (if you exceed this amount you will normally have to move onto the traditional (accruals) basis). The alternative is to use the traditional basis which results in taxing barristers on the billable value of their work, whether paid or not. This basis results in including debtors and work in progress to their accounts which can often result in a significant amount of tax being payable on fees you have not received.
Taxpayers have the right to select their own year-end. The assessable profits for tax purposes are those for the selected accounting year ending during the tax year to 5 April.
Most barristers choose either a 31 March or 30 April year-end. A March year-end keeps the accounting year-end in line with the personal tax year-end and largely means tax becomes payable as it is earnt. An April year-end results in tax being charged on accounts 11 months in arrears (see below) meaning less tax is payable when taxable profits are rising in the early years of trading (note this advantage disappears if taxable profits plateau). It also has the advantage that your accounts can be prepared well before the personal tax year and any tax planning, such as making pension contributions, can be made with precise figures.
If the chosen year-end is after 5 April, then any profits apportioned to 5 April are taxed twice. The profits taxed twice are called ‘overlap profits’ and relief is given when self-assessment ceases. Overlap relief is not indexed for inflation so is likely to become worth less and less as time goes on.
For example, you choose a 30 April year end and your first year’s accounts are from 1 May 2021 to 30 April 2022 and you have profits of £60,000. As there is no year-end in the year to 5 April 2022, taxable income is calculated as 11/12ths of £60,000, being £55,000 for your 5 April 2022 personal tax return. When preparing your 5 April 2023 personal tax return the accounts used are those in the accounting period 6 April 2022 to 5 April 2023 which is the same year-ending 30 April 2022 accounts previously used. There are therefore £60,000 of taxable profits, with £55,000 of overlap relief.
Tax is payable on 31 January and 31 July each year. It is based upon half the previous year’s tax due with any adjustment adding to the following January payment. In the early years at the Bar, with income often on the increase, the balancing payment in January can be sizeable and it also increases the next payment on account.
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