Accounting practices for professional services

Professional services cover a dynamic group of business activities. These would include solicitors, architects, consultants, and surveyors to name but a few.

Like many other businesses, this sector will be facing numerous challenges in the current economic climate. Changes in legislation, law and government policy will mean companies have to constantly develop to keep up with ever changing business environments. With customers demanding better value for money, businesses must be able to deliver an impeccable service while remaining conscious of cost.  It is important therefore when dealing with these businesses to consider what these challenges are in order to assist with the continued success of running a profitable successful business, respondent to change.

Some of the challenges when thinking about professional service clients may include:

  • Changing government regulations & policies in the UK and overseas- i.e. recent budget
  • Adoption of an appropriate strategy in order to keep up with uncertain market conditions- i.e. marketing costs are usually cut if a company is struggling therefore will effect professional service clients
  • Maintaining working capital in the business and dealing with constraints on this
  • Ensuring your workforce remains motivated in a highly competitive employment market
  • Ensure that all employees are adequately trained to reduce the risk of errors and loss of time
  • Fraud within the workforce
  • Smaller firms may need to consider cover for key individuals departing  in the business

When thinking about professional services, solicitors in particular, one area of great importance is the treatment of ‘disbursements’. Payments made on behalf of a client for use in their business are classed as disbursements. When treating payments as disbursements this means VAT cannot be charged to the client on these payments or claimed on these payments.

The reason for this is because it’s the client who has used the goods and not the company who are making the payment. The company making the payment is simply acting as an agent for their client. Disbursements are kept completely separate from VAT calculations but there must be documents to support your reasons for leaving these payments out of the calculations.

As well as disbursements there are also ‘recharges’ to think about which may be relevant to most professional service client. Recharges as slightly different to disbursements in that they are charges claimed back by the business from the client they relate to. For example, if you pay for travel costs which are in connection to a job your are working on, and you are due to be repaid for them you must charge VAT on these. This is because they are costs which have been used directly by your business and not the client, even though they are to be repaid to you. There must be a valid VAT receipt in order to charge the VAT on these costs.

The above points are just two very small areas to think about when dealing with professional services but they are areas which are common in this line of business so should take some careful consideration.