»Ê¹ÚÌåÓýapp

It is customary for solicitors in practice to receive and hold money on behalf of their clients. Such money must be paid into a bank account (either current or deposit) and must be kept separate from the practice’s own bank account. »Ê¹ÚÌåÓýapp account may be either designated for a particular client or a general, undesignated client account.

Occasionally solicitors may also hold money for non-clients. In this situation the rules in respect of interest payments are the same as for its own clients: that is, it depends on whether or not there is a designated account.

Interest on the bank deposits

Where the money belonging to a particular client is deposited in a separate designated account, that client is usually entitled to the interest. When the interest is passed from the solicitor to the client it is a flow of money, not consideration for any supply, and so is outside the scope of VAT.

Where client’s money is held in a general account it is usual for the practice to keep any interest earned from the bank. However, a solicitor may occasionally pass to the client a sum equivalent to the interest that would have been earned if the money had been in a separate designated account.

Any interest earned, either by the solicitor or if it is passed to the client, is regarded as consideration for a supply of services to the bank. »Ê¹ÚÌåÓýapp supply is exempt under the VAT Act 1994, Sch 9, Grp 5, item 2. »Ê¹ÚÌåÓýapp gross interest received is the amount of the exempt output and may affect the partial exemption calculations of whoever keeps it.