Two questions decide how you sleep: whether the client account is genuinely compliant, and what this firm actually earns once everyone has been paid properly for the work they do. Everything else is administration around those two.
Rule 1.2 of the SRA Accounts Rules is one sentence long and it is the sentence that matters most to you: "The authorised body's managers are jointly and severally responsible for compliance by the authorised body, its managers and employees with these rules."
Managers means the partners in a partnership, the members of an LLP and the directors of a company. Jointly and severally means each of you, for all of it. Nothing in that rule is softened by incorporating. A limited company limits your exposure to trade creditors; it does not put a legal person between you and the SRA on client money, and it does not carve your responsibility into shares. That is why we treat client account work as owner-level work rather than bookkeeping, and why the reconciliation is the first thing we look at in a new firm.
Rule 4.3 Before you move client money across to pay your own costs, you must first give the client a bill or other written notification of costs. The transfer must then be for the specific sum in that bill, and it must be covered by the money you hold for that particular client. In practice this is the rule firms breach more often than any other, and almost never dishonestly.
Two ordinary habits do it. The first is transferring against a bill that is going to be raised, on the reasonable assumption that it will be raised this week. The second is a round-sum sweep across several matters at month end to clear the office account overdraft — which also runs straight into Rule 5.3, because you may only withdraw where sufficient funds are held for that specific client. There is no netting off between clients.
Rule 8.4 then requires you to keep readily accessible a central record of all bills and other written notifications of costs. If the reporting accountant cannot tie a transfer to a bill in that record, the transfer is a finding.
Rule 8.3 requires a reconciliation at least every five weeks, for all client accounts you hold or operate, of the bank or building society statement balance with the cash book balance and the client ledger total. Three figures, agreed to each other. A reconciliation that ties the bank to the cash book and stops there is not compliant, and the leg it leaves out is the one that matters: the client ledger total is the only one of the three that proves each individual client's money is actually there. Bank and cash book can agree perfectly while a client ledger sits overdrawn.
The record of that reconciliation must be signed off by the COFA or a manager of the firm, and any differences must be investigated and resolved promptly. Rule 8.2 requires statements at least every five weeks for all client and business accounts, and Rule 13 requires the records to be kept securely for at least six years.
If you want to know where you stand before we speak, our free client account health check walks twelve questions across these obligations and returns a red, amber or green picture with what to fix first. It is information, not advice, and it takes about five minutes.
Where the cash went
Lockup is work in progress days plus debtor days. Work in progress is fee income you have earned and not yet billed. Debtors are fee income you have billed and not yet been paid. Added together they are the number of days of fee income the partners are permanently financing, and neither of them appears as a problem anywhere in the profit and loss account.
An illustrative example. A firm bills £1.8 million a year, which is £4,932 of fee income a day. It carries 60 days of work in progress and 70 days of debtors, so 130 days of lockup — about £641,000 tied up in work that has been done and not converted to cash. Taking 20 days out of that, by billing closer to the work and chasing from day one rather than day sixty, releases roughly £99,000 into the firm. These are illustrative figures, not a benchmark.
The number is worth having because it changes the conversation. Once a partnership can see that a month of lockup is worth £150,000 of its own money, the argument about interim billing policy tends to resolve itself. Our lockup calculator works it out on your figures, and the lockup guide sets out what to do about each half of it.
The second question is harder than it looks, because a law firm's profit figure includes payment for the owners' own fee earning. Until you charge a notional salary for the hours the partners bill personally, you cannot tell whether the firm makes a return on the capital and risk you have put into it or simply pays you for your own time with extra admin attached.
The tax side compounds it. In a partnership or an LLP, members are taxed on the profit share allocated to them whether or not they draw it, so a firm that allocates generously and pays drawings conservatively is handing its members a tax bill on money still sitting in lockup. Payments on account fall due on 31 January and 31 July, based on the year just filed. With income tax at 40% and Class 4 National Insurance at 2%, the marginal cost of profit share is 42% above £50,270 and 47% above £125,140 for 2026/27. We set the reserve at firm level so nobody is relying on their own discipline — see partner tax and drawings.
Coming, not current
On 2 June 2026 the SRA announced that it had submitted proposed rule changes to the Legal Services Board for final approval, following a consultation that ran from December 2025 to February 2026. The SRA's stated expectation is that, subject to LSB approval, the new rules come into force by early 2027. They are not in force now, and nothing below is current law.
The £600,000 line is the one to plan for. In a great many owner-managed firms the managing partner is both the person who decides how the firm is run and the person named as COFA. If that is your firm and turnover is anywhere near £600,000, the change is a reallocation of roles rather than a paperwork exercise — and it is far easier to do deliberately in 2026 than under a deadline. See our COFA support page for what the role actually carries.
One firm doing the client account work, the accounts, the tax and the partner reserves — so nothing falls between a bookkeeper, a general practice accountant and you.
Client ledgers kept properly, the five-weekly three-way reconciliation done and evidenced, and transfers tied to bills so rule 4.3 is not a running risk.
How we run itArranged, prepared and signed by a registered auditor, with the year's work done so the report is clean before it is written rather than fixed afterwards.
The report, explainedAnnual accounts, the partnership or corporation tax return, VAT, and management figures that arrive while you can still do something about them.
Accounts and taxProfit allocation, tax reserves held at firm level, payments on account forecast, and a drawings policy the firm can actually sustain through a slow quarter.
Drawings and reservesFee earners and support staff, auto-enrolment, and members caught by the salaried members rules put on the payroll properly rather than discovered later.
Law firm payrollLLP or limited company, modelled on your figures including the dividend rates that changed on 6 April 2026 and the SRA authorisation consequences.
LLP vs limited companyClient account bookkeeping and the five-weekly three-way reconciliation. The firm's annual accounts, the partnership or corporation tax return, partner tax reserves and drawings, payroll, VAT and the management figures you run the firm on. All the preparation that decides whether the report is clean.
Buzz Accounting Ltd is licensed by the AAT and a member of the ICPA. It is not a chartered accountancy firm and not a registered auditor.
Colin Ellis, ICAEW and a Responsible Individual, prepares and signs the SRA Accountant's Report itself. Rule 12.5 of the SRA Accounts Rules requires a member of ICAEW, ICAS, ACCA or ICAI who is, or works for, a registered auditor — and only that person can sign it.
Anstey Bond LLP is a separate firm, registered for audit by the ICAEW. Companies House OC360626.
No, and this is the most expensive misunderstanding we meet. Rule 1.2 of the SRA Accounts Rules says the authorised body's managers are jointly and severally responsible for compliance by the authorised body, its managers and employees with the rules. That wording follows you into a limited company or an LLP. The corporate wrapper limits your exposure to trade creditors; it does not divide up responsibility for client money, and it does not put a company between you and the SRA. If a shortage arises on the client account while you are a manager, you are answerable for putting it right. Incorporation changes your tax position and your filing obligations. It changes nothing about who owns the client account problem.
Almost always lockup. Lockup is work in progress days plus debtor days: fee income that has been earned but not yet billed, added to fee income that has been billed but not yet paid. Both are financed by the partners, either through undrawn profit or through the overdraft, and neither shows up as a problem in the profit and loss account. A firm can grow turnover every year and go backwards in cash if lockup days grow faster than fees. The fix is rarely dramatic: bill closer to the work, take money on account where the retainer allows it, and chase from day one rather than day sixty. Our lockup calculator puts a pound figure on it.
Rule 4.3. Before you transfer client money to pay your own costs you must first give the client a bill or other written notification of costs, and the transfer must be for the specific sum in that bill and covered by the money you actually hold for that particular client. Two habits breach it. One is transferring against a bill that has not yet been raised, on the understanding that it will be. The other is a round-sum sweep across several matters at month end, which also runs into rule 5.3, since you may only withdraw where sufficient funds are held for that specific client. Rule 8.4 then requires a readily accessible central record of every bill or written notification of costs.
On 2 June 2026 the SRA announced that it has submitted a package of rule changes to the Legal Services Board. Subject to LSB approval the SRA expects them in force by early 2027, so they are not law today. Every firm holding client money would submit its annual accountant's report to the SRA rather than only qualified ones, with exempt firms providing information on their exemption status. A mandatory annual declaration would sit alongside it as the COFA's responsibility. Reporting accountants would submit directly to the SRA with a copy to the COFA, and fixed financial penalties would extend to late or non-submission. There is also a governance change for larger firms.
Because of point five in the same June 2026 package. At firms with turnover over £600,000, or holding more than £2 million of client money, individuals who can make significant decisions about how the firm is run would not be able to hold the COLP and COFA roles as well. In a great many owner-managed firms the managing partner is both the person deciding how the firm is run and the person named as COFA, so the change would require a real reallocation of roles, not a paperwork tidy. There is a partial exemption proposed for smaller sole owner-manager firms. It remains subject to LSB approval, so plan for it rather than act on it.
Possibly not. Rule 12.2 exempts a firm where all client money received in the accounting period came from the Legal Aid Agency, or where the statement or passbook balance of client money held did not exceed an average of £10,000 and a maximum of £250,000. Both limbs of the second test must be satisfied, not either one, and the average is worked out by summing all your reconciliation balances and dividing by the number of reconciliations. The balance measured is the total across every client account, plus any joint accounts and clients' own accounts you operate. Rule 12.1 also catches you if you merely operate a joint account or a client's own account as signatory.
A free review: we read your last accounts and your most recent reconciliation, put a number on your lockup, and tell you plainly what we would fix first. If there is nothing worth changing we will say so.
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