When Does a Solicitor Firm Qualify for the SRA Accountant's Report Exemption?

Every SRA-regulated solicitor firm in England and Wales must comply with the SRA Accounts Rules 2019. A firm that has held client money during an accounting period must normally obtain an annual accountant's report. But not every firm has to. Rule 12.2 exempts firms whose client money stays within set limits, and firms that hold only Legal Aid Agency money. This guide sets out the exact test, two worked examples, and what your COFA needs to monitor to rely on the exemption safely.

What Is the SRA Accountant's Report?

The accountant's report is a formal document prepared by a qualified reporting accountant and, where it is qualified, delivered to the SRA. It confirms whether the firm has complied with the SRA Accounts Rules during the accounting period. Where required, it must be obtained within six months of the end of the firm's accounting reference period.

The reporting accountant must be a member of a recognised supervisory body (such as ICAEW, ACCA or ICAS) and must be independent of the firm. The work involved is proportionate to the firm's size and the volume of client account transactions, which is precisely why the rules provide an exemption for firms that handle only small amounts of client money. Removing a disproportionate compliance step from low-risk firms lets them focus their effort on the parts of the Accounts Rules that matter most for client protection.

The Rule 12.2 Exemption: The Two Routes

Rule 12.2 of the SRA Accounts Rules sets out two separate routes to exemption. A firm does not need to obtain an accountant's report for an accounting period if either of the following applies.

• The Legal Aid route. All of the client money the firm held or received during the accounting period was money received from the Legal Aid Agency.
• The low-balance route. The statement or passbook balance of client money the firm held or received did not exceed an average of £10,000 and a maximum of £250,000 (or the equivalent in foreign currency) during the accounting period.

Most firms that ask about the exemption are looking at the low-balance route, so the rest of this guide focuses there. Note the structure of that route carefully: it is itself a two-limb test, and both limbs must be satisfied.

Condition A: the maximum balance must not exceed £250,000

The peak client money balance at any point in the accounting period must not exceed £250,000. This is the ceiling. A single completion that pushes the client account balance above £250,000, even for one day, takes the firm out of the low-balance route for the whole period.

Condition B: the average balance must not exceed £10,000

The average client money balance across the accounting period must not exceed £10,000. The average is taken from the statement or passbook balances over the period. A firm that holds modest sums, even fairly often, will usually sit well inside this limit; a firm that routinely holds five-figure or six-figure balances (typical of an active conveyancing or probate caseload) will not.

These two limbs are cumulative. Both must be met. If the peak exceeds £250,000, or the average exceeds £10,000, the low-balance route is not available and the firm must obtain a report (unless the Legal Aid route applies instead).

The £250 Myth

A persistent error circulates that the average limb is £250 rather than £10,000, sometimes paired with a worked example concluding that a few thousand pounds held for a few days "loses" the exemption. That is wrong, and it matters: it scares low-risk firms into commissioning reports they do not need. The figures in Rule 12.2 are an average of £10,000 and a maximum of £250,000. There is no £250 threshold anywhere in the rule. If you have seen the £250 figure, discard it and work from the correct limits below.

Worked Example One: a Firm That Qualifies

Consider a sole practitioner who advises mainly on wills and small estates and only occasionally touches client money. Over a 365-day accounting period the firm holds client money on ten separate matters. Each matter involves around £2,000 held for about five days, and at most two matters overlap, so the peak balance is roughly £4,000.

To estimate the average, add up the balance held across all days. Ten matters, each £2,000 for five days, gives 10 × £2,000 × 5 = £100,000 of balance-days. Divided by 365 days, the average balance is about £274. Test that against the rule:

• Condition A (maximum £250,000): peak of about £4,000. Comfortably under. Met.
• Condition B (average £10,000): average of about £274. Far below £10,000. Met.

Both limbs are satisfied, so the firm qualifies for the exemption and does not need to obtain an accountant's report for that period. The number of separate transactions did not threaten the exemption; the balances were simply too small to come anywhere near either limit.

Worked Example Two: a Firm That Does Not Qualify

Now consider a high-street firm with an active residential conveyancing department. Across the year it consistently holds client money: deposits on exchange, completion monies passing through the client account, and retentions. Its client account balance hovers around £180,000 for most of the year, and on busy completion days it briefly peaks at £310,000.

• Condition A (maximum £250,000): the peak of £310,000 exceeds the £250,000 ceiling. Breached on this limb alone.
• Condition B (average £10,000): an average of roughly £180,000 is far above the £10,000 average limit. Breached on this limb as well.

This firm fails both limbs and must obtain an accountant's report for the period. Note that breaching either limb on its own would have been enough: a firm whose balance never reaches £250,000 but averages, say, £40,000 across the year still falls outside the low-balance route because the average limb is breached. Conversely, a firm with a low average that nonetheless spikes above £250,000 on a single large completion is also out, because the maximum limb is breached.

The practical line, then, is not "how many transactions" but "how much, on average, and how high at the peak". Firms with any meaningful conveyancing, probate or personal-injury client money flow will usually be over the limits and inside the reporting requirement.

Why the Exemption Exists

The exemption reduces a disproportionate regulatory step for firms that handle very little client money. Where holdings are minimal, the risk to clients is correspondingly low, and the SRA accepts that an annual accountant's report adds limited protection in those cases. The exemption lets those firms direct their compliance effort elsewhere.

Crucially, the exemption only removes the requirement to obtain the accountant's report. It does not remove any other obligation under the SRA Accounts Rules. A firm relying on the exemption must still hold client money in a properly named client account, reconcile the client account at least every five weeks with the reconciliation signed off by the COFA or a manager, account to clients for a fair sum of interest, and observe the prohibition on using a client account to provide banking facilities. For the wider framework, see our SRA Accounts Rules essentials guide.

What Your COFA Needs to Monitor

The COFA (Compliance Officer for Finance and Administration) carries primary responsibility for the firm's compliance with the Accounts Rules, including whether the firm genuinely qualifies for the exemption. If the firm intends to rely on the low-balance route, the COFA needs visibility of two figures across the period: the running average client money balance and the peak balance.

Practical steps for the COFA include:

• Tracking the client account balance from the firm's accounting system so the running average and the peak are known through the year, not just at the period end.
• Setting an internal alert well below £250,000 so a large incoming completion does not breach the maximum limb unnoticed.
• Reviewing the average periodically, especially after taking on any work type that increases client money flow.
• Documenting the firm's reliance on the exemption, and the supporting figures, in the compliance file.

If the firm exceeds either limit, the exemption is lost for the whole period and an accountant's report covering the full period must be obtained within six months of the period end. There is no partial exemption for the part of the year before a threshold was crossed, which is exactly why the position should be monitored in-year rather than reconstructed afterwards.

Common Misunderstandings About the Exemption

Several misconceptions recur in practice. First, the belief that a high volume of short-term holdings automatically breaks the exemption. As Worked Example One shows, frequent small transactions can still produce an average far below £10,000; it is the size of the balances, not their frequency, that drives the average.

Second, confusion over the figures themselves, usually the mistaken £250 average addressed above. The correct limits are an average of £10,000 and a maximum of £250,000.

Third, the assumption that "exempt from the report" means "exempt from the rules". It does not. Every other Accounts Rules obligation continues to apply, and a firm that mishandles client money while exempt from the report is still in breach.

Fourth, overlooking the Legal Aid route. A firm whose only client money in the period was received from the Legal Aid Agency is exempt under that separate limb, regardless of the balances involved.

What Happens If You Incorrectly Claim the Exemption?

If the firm relies on the exemption when it does not in fact qualify, the missing accountant's report is itself a breach of the Accounts Rules, and the underlying client money may not have received the scrutiny the report provides. The SRA can take regulatory action ranging from a formal outcome to referral to the Solicitors Disciplinary Tribunal, depending on the seriousness and any wider client money concerns. The firm will also generally need to obtain a report for the period in question after the event.

A reporting accountant who later reviews the firm's records and identifies a material breach has their own duty to report it to the SRA, which can prompt closer regulatory attention. The safer course where the position is genuinely borderline is to establish the figures properly rather than assume the exemption applies.

When Should You Seek Professional Advice?

The decision to rely on the exemption should be evidence-based, not assumed. If your firm handles any client money at all, the COFA should confirm the average and peak balances against the Rule 12.2 limits before treating the firm as exempt. Where the figures sit close to either limit, or where the firm is changing the kind of work it does, a review with a legal-sector accountant removes the guesswork.

If your firm is planning a change that will increase client money flow, such as opening a conveyancing or probate line, reassess the exemption status before the change takes effect. A firm that was comfortably exempt as a pure advisory practice can move firmly inside the reporting requirement once it starts holding deposits and completion funds. Our SRA Accounts Rules service and COFA compliance support can help you confirm where your firm sits.

Practical Steps for Your Firm

If you believe your firm qualifies for the low-balance route, take these steps:

1. Confirm the accounting reference period and the dates it covers.
2. Extract the client money balances for the full period from your accounting system.
3. Identify the peak balance and test it against the £250,000 maximum.
4. Calculate the average balance across the period and test it against the £10,000 average.
5. Check whether the Legal Aid route applies instead, if all client money came from the Legal Aid Agency.
6. Document the calculation and your conclusion, and retain the records.
7. Have the COFA monitor the average and peak going forward so the exemption holds for future periods.

If you are unsure about any step, speak to an accountant who specialises in SRA compliance before you rely on the exemption.

For the wider framework, see our SRA Accounts Rules essentials guide. To talk through where your firm sits against the Rule 12.2 limits, get in touch, or read more about our SRA Accounts Rules service.