Why WIP Valuation Matters for Your Law Firm
Work in progress (WIP) represents the value of unbilled legal services that your firm has delivered but not yet invoiced. For a law firm, WIP is often one of the largest assets on the balance sheet, particularly in litigation, conveyancing, and corporate transactions where matters run for weeks or months before billing.
The method you choose to value that WIP directly affects your reported profit, your tax liability, and the financial picture you present to lenders, buyers, or incoming partners. A solicitor who gets this wrong can overstate profit in one year and face a tax bill on income not yet received, or understate profit and create a misleading impression of the firm's performance.
This guide covers the two principal WIP valuation methods available to UK law firms: the earnings basis and the billings basis. We explain how each works under FRS 102, the tax consequences, and the practical factors that should drive your decision.
The Two Main WIP Valuation Methods
Earnings Basis
The earnings basis values WIP at the proportion of the total fee earned by the date of the balance sheet, based on the time recorded and the agreed charge-out rate. It recognises revenue as the work is performed, regardless of when the bill is raised.
Under FRS 102, the earnings basis is the default method for recognising revenue from contracts where the outcome can be reliably estimated. Section 23 of FRS 102 requires revenue to be recognised by reference to the stage of completion of the transaction at the balance sheet date. For a law firm, that stage is typically measured by time spent as a percentage of total estimated time.
Example: Your firm is handling a commercial litigation matter with a fixed fee of £50,000. By 5 April 2026, your fee-earners have recorded 60% of the estimated total hours. On the earnings basis, you recognise £30,000 of revenue as WIP, even though no bill has been sent.
Billings Basis
The billings basis values WIP at the lower of cost and net realisable value. It recognises revenue only when a bill is raised. Until that point, the WIP is carried at the direct cost of the time recorded (typically the fee-earner's salary cost plus a proportion of overheads), with no profit element recognised.
This method is simpler but more conservative. It defers profit recognition until billing, which can smooth out fluctuations but may also understate the firm's true economic position at any balance sheet date.
Example: Using the same £50,000 litigation matter, your fee-earners have recorded 60% of the hours. The direct cost of those hours is £12,000. On the billings basis, you recognise £12,000 as WIP, not £30,000. The £18,000 profit margin is deferred until the bill is raised.
Tax Implications of Each Method
Earnings Basis and Tax
Since the Finance Act 2002, most law firms have been required to use the earnings basis for tax purposes. HMRC's position is that profits should be computed on an earnings basis, reflecting work done rather than bills raised. This applies to sole practitioners, partnerships, LLPs, and limited companies alike.
If your firm uses the earnings basis for its statutory accounts (as most do under FRS 102), the tax computation will generally follow the same method. The profit figure in your tax return will include the value of unbilled work at the year end.
Practical consequence: Your firm may pay tax on profit from work that has not yet been billed or paid. This creates a cash flow timing difference. A solicitor in a growing firm can face a significant tax bill on WIP that will not convert to cash for weeks or months.
Billings Basis and Tax
Using the billings basis for tax is possible but requires a specific adjustment. If your statutory accounts use the earnings basis, you must make a tax adjustment to defer the profit element of WIP. This is typically done by creating a "billings basis adjustment" in the tax computation.
HMRC permits this adjustment only where the billings basis gives a "fairer view" of the profits. In practice, this is most common for very small firms or sole practitioners where the administrative burden of the earnings basis outweighs the benefit.
Important: Once you adopt the earnings basis for tax, you cannot switch back to the billings basis without HMRC's agreement. The change is treated as a change of accounting policy, which HMRC scrutinises carefully.
FRS 102 Requirements for Law Firms
FRS 102 is the accounting standard used by most UK law firms, including those structured as LLPs and limited companies. Section 23 (Revenue) is the relevant section for WIP valuation.
Under FRS 102, revenue from the provision of services is recognised when:
- The amount of revenue can be measured reliably
- It is probable that the economic benefits will flow to the firm
- The stage of completion can be measured reliably
- The costs incurred and costs to complete can be measured reliably
For most law firm work, these conditions are met as the work progresses. Time recording provides a reliable measure of stage of completion. The earnings basis is therefore the natural fit under FRS 102.
However, FRS 102 does not mandate a single method. It requires that the method chosen faithfully represents the transfer of services to the client. If your firm's billing patterns mean that the earnings basis would overstate recoverable WIP (for example, in conditional fee agreements where recovery is uncertain), a more conservative approach may be justified.
Practical Factors in Choosing Your Method
Nature of Your Work
Firms handling long-running matters with predictable billing cycles (such as corporate transactions or litigation) often find the earnings basis more appropriate. It matches revenue to effort and gives a truer picture of the firm's performance during the year.
Firms with short-cycle work (such as high-volume conveyancing or debt recovery) may find the billings basis simpler. The difference between the two methods is usually small when matters complete within the same accounting period.
Cash Flow Considerations
If your firm is growing rapidly, the earnings basis will increase your tax bill because you are recognising profit on work not yet billed. Some firms choose the billings basis to defer tax, but this must be done correctly and consistently.
A law firm with significant WIP should model the cash flow impact of each method before deciding. A specialist solicitor accountant can run these projections for you.
Partner Profit Sharing
If your firm uses the earnings basis for statutory accounts, it may be tempting to use the same basis for partner profit sharing. However, some firms calculate partner profit shares on a cash-received basis to avoid partners paying tax on income they have not yet drawn. This creates a disconnect between the accounting profit and the distributable profit, which must be managed carefully.
For more on how partner profit shares interact with accounting methods, see our guide on fee share vs equity partner structures.
Common Mistakes in WIP Valuation
Mistake 1: Using the Wrong Method for Tax
Some firms prepare statutory accounts on the earnings basis but then attempt to use the billings basis for tax without making the proper adjustment. HMRC will challenge this. If your statutory accounts show WIP at £500,000 on the earnings basis, your tax return must reflect that figure unless you have made a valid billings basis adjustment.
Mistake 2: Ignoring Recoverability
Whichever method you choose, you must assess WIP for recoverability. If a matter is unlikely to be billed in full (for example, because the client has financial difficulties or the case is weak), the WIP must be written down to net realisable value. This applies under both methods.
Mistake 3: Inconsistent Application
Once you choose a method, you must apply it consistently from year to year. Changing methods without a valid commercial reason and HMRC approval will trigger an enquiry. If you are considering a change, speak to a legal-sector-specialist accountant first.
WIP Valuation in Practice: A Worked Example
Consider a two-partner law firm with the following year-end position:
- Total time recorded but unbilled: 4,000 hours at £200 per hour = £800,000
- Direct cost of those hours (fee-earner salaries and overheads): £320,000
- Estimated profit margin on unbilled work: 60%
Earnings basis WIP: £800,000 (full charge-out value, subject to recoverability assessment)
Billings basis WIP: £320,000 (cost only)
The difference is £480,000. On the earnings basis, the firm's profit is £480,000 higher than on the billings basis. At a 45% marginal tax rate for the partners, the additional tax bill is £216,000. That tax is payable on profit that has not yet been converted to cash.
This example shows why the choice of method is not merely an accounting technicality. It has real cash flow consequences for partners.
How to Make the Right Decision for Your Firm
There is no single "correct" WIP valuation method for all law firms. The right choice depends on:
- The nature and duration of your matters
- Your firm's growth trajectory and cash flow needs
- Your accounting framework (FRS 102, FRS 105, or another)
- Your partners' tax positions and preferences
- Your reporting requirements to lenders or buyers
Most firms using FRS 102 adopt the earnings basis because it gives a more accurate picture of economic performance. However, a firm with significant WIP and tight cash flow may legitimately prefer the billings basis, provided it is applied consistently and correctly for tax.
If you are preparing to sell your practice, the method matters even more. A buyer will scrutinise your WIP valuation carefully. For guidance on how WIP affects practice valuation, see our practice valuation services.
Next Steps for Your Firm
Review your current WIP valuation method and confirm that it is:
- Consistent with your accounting framework (FRS 102 or otherwise)
- Correctly reflected in your tax computations
- Applied consistently from year to year
- Supported by appropriate recoverability assessments
If you are unsure whether your current method is correct, or if you are considering a change, we recommend a review of your firm's accounting policies. Our team at Accounts for Lawyers specialises in solicitor accounting and can help you choose and implement the right WIP valuation method for your practice.
We also provide COFA compliance support to ensure your firm's accounting policies meet SRA requirements.
Contact us to discuss your firm's WIP valuation approach and ensure your accounts reflect the true economic position of your practice.