Rule 12.2(b) exempts a firm from obtaining an Accountant's Report only if the client money it held or received did not exceed both an average of £10,000 and a maximum of £250,000. Both limbs. Most firms have never worked the average out, and one busy completion can decide it.
Article · 20 July 2026
Firms tend to remember one number from Rule 12.2, and it is usually £250,000. The exemption has two limbs and both have to be satisfied. No Accountant's Report is required if, in the accounting period, the statement or passbook balance of client money you have held or received did not exceed an average of £10,000 and a maximum of £250,000, or the equivalent in foreign currency. A firm that never went above £250,000 but averaged £40,000 is not exempt.
The average is the limb nobody calculates, and it is the one that catches people. It is also entirely knowable from records the firm already has to keep.
Rule 12.1 applies if you have, at any time during an accounting period, held or received client money, or operated a joint account, or operated a client's own account as signatory. The trigger is wider than holding client money — a firm with no client account at all can still be caught by acting as signatory on a client's own account, for example under a power of attorney or a deputyship.
Where it applies, you must obtain the report within six months of the period end, and deliver it to the SRA within those six months only if it is qualified to show a failure such that money belonging to clients or third parties is, has been, or is likely to be placed at risk.
Rule 12.3 defines the statement or passbook balance as the total of all client accounts held or operated by you, plus any joint accounts and clients' own accounts you operate, as shown by the statements obtained under Rule 8.2. It is a total across accounts, not the balance on your main client account.
The SRA's guidance on the exemption says the average is calculated by summing all the reconciliation balances and dividing by the number of reconciliations. That is the sentence that makes the whole thing workable, because Rule 8.3 already requires a reconciliation of the bank statement balance, the cash book balance and the client ledger total at least every five weeks, signed off by the COFA or a manager. The compliance task you already do produces the figure that decides whether you need the report.
The exemption thresholds apply to accounting periods ending on or after 1 November 2015.
Take a small firm doing wills, probate and a little commercial work, reconciling every five weeks, which gives eleven reconciliations in the accounting period. These balances are illustrative.
The maximum is £240,000, comfortably inside the £250,000 limb. The total of the eleven balances is £318,500, and dividing by eleven gives an average of £28,955. That is nearly three times the £10,000 limb, so the firm is not exempt and must obtain a report.
Now remove the single conveyancing completion that produced the £240,000 balance. The remaining ten balances total £78,500, an average of £7,850, with a maximum of £18,700. Both limbs are satisfied and the firm is exempt.
One file, in one five-week window, moved the firm from exempt to not exempt for the whole year. That is the shape of this rule, and it is why a firm that takes on the occasional property matter should run the calculation rather than assume.
Rule 12.2(a) exempts a firm where all of the client money held or received during the accounting period is money received from the Legal Aid Agency. All of it. A firm doing predominantly legal aid work with one privately funded matter does not qualify under this limb, although it may still qualify under the £10,000 and £250,000 test.
Rule 12.4 is the one people forget. Even where an exemption applies, the SRA may require a firm to obtain and deliver a report on reasonable notice — where the firm has ceased to operate or to hold client money, or where the SRA considers it in the public interest. A firm closing down should expect to need a final report.
There is a third possibility that some firms have moved to deliberately. Rule 2.2 allows a firm not to hold money in a client account where the only client money it holds is money for its own fees and unpaid disbursements received before a bill is delivered, where any money held for disbursements relates to costs the firm is itself liable for, and where the firm does not otherwise maintain a client account — provided it has told the client in advance where and how the money will be held. Where those conditions are met, rules 2.3, 2.4, 4.1, 7, 8.1(b) and (c) and rule 12 itself do not apply to that money.
That is a real structural option for a firm whose only client money is money on account of its own costs. It is not available to a firm handling completion monies, damages, or estate funds, and the advance notification condition is not a formality. It changes the shape of the practice, so it is a decision to take deliberately rather than by drift.
Rule 12.5 requires the report to be prepared and signed by an accountant who is a member of one of the chartered accountancy bodies — ICAEW, ICAS, ACCA or ICAI — and who is, or works for, a registered auditor. Both conditions together. We are an AAT-licensed practice and an ICPA member, so we cannot sign it and we are not a registered auditor. We do the client account work, the records and the accounts; the report is prepared and signed by a registered auditor.
At the moment, a firm that concludes it is exempt simply says nothing. That is one of the things the SRA's June 2026 package would change: under the proposals the SRA announced on 2 June 2026 that it has submitted to the Legal Services Board, exempt firms would have to provide information on their exemption status. Those rules are not in force and are subject to LSB approval, with the SRA expecting them to take effect early in 2027 — but a self-assessed exemption that has never been calculated is a poor thing to have to describe to a regulator. The full picture is in what the June 2026 package would change.
The mechanics of the report itself are in our guide to the Accountant's Report, and the reconciliation that produces these numbers is in our guide to the three-way reconciliation. If you would rather see where the firm stands across the rules as a whole, the client account health check covers twelve questions in about ten minutes, and our report service explains how the work is split.
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Only if you satisfy both limbs of the exemption. Rule 12.2(b) removes the requirement where, in the accounting period, the statement or passbook balance of client money held or received did not exceed an average of £10,000 and a maximum of £250,000. Failing either limb means you need the report. In practice the average is the limb that catches firms, because a single large completion or estate distribution sitting in one five-weekly reconciliation can lift the average well above £10,000 even where the peak never came close to £250,000. Run the calculation from your reconciliations rather than estimating it.
The SRA's guidance says the average is calculated by summing all the reconciliation balances and dividing by the number of reconciliations. Rule 12.3 defines the balance as the total of all client accounts held or operated, plus any joint accounts and clients' own accounts you operate, as shown by the statements obtained under rule 8.2. Since rule 8.3 already requires a three-way reconciliation at least every five weeks, a twelve-month accounting period normally produces ten or eleven reconciliation figures. Add them, divide by the number of reconciliations, and compare the result with £10,000. The maximum limb is simply the highest of those balances against £250,000.
Possibly, under a different limb. Rule 12.2(a) exempts a firm where all of the client money held or received during the accounting period is money received from the Legal Aid Agency. The word doing the work is 'all' — one privately funded matter that produces client money takes the firm outside this limb, although it may still be exempt under the £10,000 average and £250,000 maximum test. It is also worth remembering rule 12.4: even where an exemption applies, the SRA can require a report on reasonable notice, including where a firm ceases to operate or to hold client money, or where it considers it in the public interest.
Sometimes, and rule 2.2 is the route. Where the only client money a firm holds is money for its own fees and unpaid disbursements received before a bill is delivered, any money held for disbursements relates to costs the firm is itself liable for, and the firm does not otherwise maintain a client account, that money need not be held in a client account provided the client was told in advance where and how it would be held. Where those conditions are met, rule 12 does not apply to that money. It is not available to a firm handling completion monies, damages or estate funds, so it changes what work the firm can do.
No, and the distinction matters. An Accountant's Report is a reasonable assurance engagement on compliance with the SRA Accounts Rules. It is not a statutory audit of the firm's financial statements, and the SRA does not require law firms to have audited annual accounts. Most law firm LLPs sit below the statutory audit thresholds, which from accounting periods beginning on or after 6 April 2025 require two of turnover over £15 million, a balance sheet total over £7.5 million, or more than 50 employees. A firm can therefore have no statutory audit at all and still need the rule 12 report.
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