Owner-Managed Businesses

Contingency fees and income recognition

Produced by Tolley
  • 16 May 2022 11:01

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Contingency fees and income recognition
  • Continuing service contracts
  • Cash basis accounting for legal professionals
  • Single one-off transactions, discontinued or completed work
  • Retainers
  • Contingent fee income
  • Commission received
  • Interest received
  • Disbursements and recharged costs

Contingency fees and income recognition

Professional income can arise from the following contractual conditions:

  1. continuing service contracts, which are continuous engagements advising clients ― under these contracts the professional firm performs work on an ongoing basis throughout the compliance period

  2. one-off transactional contracts, which are single standalone transactions, where invoices are issued on completion of the task

  3. contingent fees, where the level of the fee is determined by a third party event; under such arrangements the firm’s fees are often set so that they would obtain no reward if the venture is unsuccessful

  4. retainer fees, where the level of fee is low as the firm is merely being retained to provide advice as and when necessary

  5. disbursements and recharged costs

Accounting standards have been framed to consider how to recognise the income into the appropriate accounting period.

For accounting periods commencing on or after 1 January 2015, the relevant accounting standards are FRS 102 and FRS 105, which applies to micro-entities.

Continuing service contracts

Revenue from continuing service contracts is recognised when it can be estimated reliably at the end of the reporting period. The requirement to be ‘estimated reliably’ can normally be determined by considering whether:

  1. the amount of revenue can be measured reliably ― usually by reference to a quote or a communicated set of ‘charge out rates’

  2. it is probable that the economic benefits associated with the transaction will flow to the entity ― simply confirming that the entity will ultimately receive the funds or equivalent

  3. the stage of completion of

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