Commentary

B5.670 Solicitors—overview

Business tax
Business tax | Commentary

B5.670 Solicitors—overview

Business tax | Commentary

Solicitors

B5.670 Solicitors—overview

Interest on client accounts

In Brown v IRC1, a solicitor, carrying on a large practice, placed clients' money on deposit and also made loans to clients. He contended that the interest received, less that paid to clients, was earned income. The House of Lords held that the interest did not belong to the solicitor and so was not earned income. Following that decision, legislation was enacted to empower the Law Society to make rules prescribing when a client should receive interest on his money.

The current rules are set out in the deposit interest provisions of the Solicitors' Accounts Rules 19912. Under these rules a solicitor who is required to account to a client for interest may either:

  1.  

    (a)     open a separate designated account for the client and account to the client for the interest earned on the account; or

  2.  

    (b)     deposit the money in a general client deposit account and account to the client for an amount equal to the interest it would have earned if it had been deposited in a separate designated account3

Separate designated accounts

A solicitor is not charged to tax in respect of interest on a separate designated client account4. Where the money is held in a separate designated account, the application of the provisions for deducting income tax at source5 (which have been removed for 'deposit takers' and building societies from 6 April 2016, see A4.405) depends on the status of the client. Before 6 April 2016 the bank or building

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