Every SRA-regulated solicitor firm in England and Wales must comply with the SRA Accounts Rules. One of the most frequent compliance obligations is the annual accountant's report. But not every firm needs to file one. The SRA provides an exemption for firms that hold only small amounts of client money. This article explains the thresholds, the conditions, and what your COFA needs to know to stay compliant.
What Is the SRA Accountants Report?
The accountant's report is a formal document submitted to the SRA by a qualified reporting accountant. It confirms that the firm has complied with the SRA Accounts Rules during the accounting period. The report must be filed within six months of the end of the firm's accounting reference date.
The reporting accountant must be a member of a recognised supervisory body (such as ICAEW, ACCA, or ICAS) and must not be a partner, member, or employee of the firm. The cost of preparing the report typically ranges from £500 to £2,000 depending on the firm's size and transaction volume.
The Client Money Exemption: De Minimis Thresholds
Rule 12.2 of the SRA Accounts Rules sets out the exemption. A firm does not need to submit an accountant's report if, throughout the accounting period, it meets both of the following conditions:
- Condition A: The firm held no more than £10,000 of client money at any time during the period.
- Condition B: The average client money balance during the period did not exceed £250.
These are cumulative conditions. Both must be satisfied. If at any point the firm holds more than £10,000 of client money, the exemption is lost for the entire accounting period. Similarly, if the average balance exceeds £250, the exemption is lost.
The average is calculated by dividing the total of all client money balances at the end of each day by the number of days in the accounting period. This is not a simple month-end average. It requires daily tracking.
Worked Example: Qualifying for the Exemption
Consider a sole practitioner conveyancer who handles only occasional client money. Over a 365-day accounting period, the firm holds client money on 10 separate transactions. Each transaction involves a deposit of £2,000 held for an average of 5 days. The maximum balance at any one time is £4,000 (two concurrent transactions). The average daily balance is calculated as follows:
Total client money held across all days = 10 transactions x £2,000 x 5 days = £100,000. Divided by 365 days = £274 per day. This exceeds the £250 average threshold. The exemption is lost. The firm must file an accountant's report.
Now adjust the scenario: the same firm holds only 5 transactions of £1,000 each for 3 days. Total = 5 x £1,000 x 3 = £15,000. Daily average = £15,000 / 365 = £41. Maximum balance at any time = £2,000 (two concurrent). Both conditions are met. The exemption applies.
Why the Exemption Exists
The SRA introduced the de minimis exemption to reduce the regulatory burden on firms that handle very little client money. The cost of an accountant's report can be disproportionate to the risk when client money holdings are minimal. The exemption allows those firms to redirect resources to other compliance areas.
However, the exemption does not remove the firm's obligation to comply with all other SRA Accounts Rules. The firm must still maintain proper client account records, reconcile accounts every five weeks, and ensure client money is held in a designated client account. The exemption only removes the requirement to file the accountant's report itself.
What Your COFA Needs to Monitor
The COFA (Compliance Officer for Finance and Administration) is responsible for ensuring the firm meets its SRA Accounts Rules obligations. If the firm intends to rely on the exemption, the COFA must put in place systems to monitor client money balances daily. This is not a "set and forget" exemption. A single transaction that pushes the balance above £10,000, or a series of transactions that push the average above £250, will trigger the reporting requirement.
Practical steps for the COFA include:
- Implementing daily reporting of client money balances from the firm's accounting software.
- Setting alerts for when the balance approaches £8,000 to allow a buffer.
- Calculating the rolling average balance at least weekly.
- Documenting the firm's reliance on the exemption in the compliance file.
If the exemption is lost mid-year, the firm must arrange for an accountant's report covering the full accounting period. The report must be filed within six months of the period end. There is no partial exemption for part of the year.
Common Misunderstandings About the Exemption
Several misconceptions arise in practice. First, some firms believe that if they hold client money for only a few days, the average will automatically be low. As the worked example above shows, even short-term holdings can push the average above £250 if the volume is high enough.
Second, the exemption is not available to firms that hold client money on behalf of third parties, such as in a conveyancing transaction where the firm acts as stakeholder. The rules apply to all client money, regardless of the purpose.
Third, the exemption does not apply to firms that are required to hold client money as part of a court order or statutory requirement. If the firm is a trustee or executor holding client money in that capacity, the exemption may still apply, but the COFA should seek specific advice.
What Happens If You Incorrectly Claim the Exemption?
If the SRA discovers that a firm incorrectly claimed the exemption, it may treat this as a breach of the SRA Accounts Rules. The SRA can impose sanctions ranging from a formal warning to a fine or referral to the Solicitors Disciplinary Tribunal. The firm will also be required to file a retrospective accountant's report, which may attract additional scrutiny.
The reporting accountant who later reviews the firm's records may also report the breach to the SRA under their duty to report material breaches. This can trigger an investigation.
When Should You Seek Professional Advice?
The decision to rely on the exemption should not be taken lightly. If your firm handles any client money at all, even small amounts, the COFA should review the position with a legal-sector-specialist accountant. The cost of an accountant's report is often modest compared to the risk of non-compliance.
For firms that are close to the threshold, it may be more prudent to file the report voluntarily. This provides certainty and avoids the risk of a retrospective breach. The SRA's guidance notes that the exemption is intended for firms that genuinely hold minimal client money, not as a way to avoid the cost of compliance.
If your firm is considering a change in practice that might increase client money holdings, such as starting a conveyancing department or taking on probate work, the COFA should reassess the exemption status before the change takes effect.
Practical Steps for Your Firm
If you believe your firm qualifies for the exemption, take these steps:
- Confirm the accounting reference date and the period covered.
- Extract daily client money balances from your accounting system for the full period.
- Calculate the maximum balance and the average balance.
- Document the calculation and retain the records for at least six years.
- Record in your compliance file that the firm is relying on the exemption.
- Ensure the COFA monitors balances going forward to maintain the exemption.
If you are unsure about any step, speak to a solicitor accountant who specialises in SRA compliance. The cost of a short review is far less than the cost of a breach.
For more detailed guidance on the SRA Accounts Rules, see our SRA Accounts Rules Essentials guide. If you need support with your firm's compliance framework, our COFA compliance support service can help. Firms considering a change in structure may also benefit from our LLP accounts service.