A beginner's guide to the fee policy 2011/2012

Last updated 6 September 2011

Introduction and background

Why the SRA revised the fee structure

The way the cost of regulation was allocated among the profession through the practising certificate fee led to anomalies and unfairness in the context of modern legal practice. However, the Legal Services Act 2007 changed the SRA's statutory powers in enabling firm-based regulation alongside the regulation of individuals.

The new fee structure introduced in 2010 creates a fairer system reflecting regulatory activity, as it allows the SRA to allocate less of the cost to individuals and more to private practice firms.

Rationale behind the new regulatory fee structure

The fee policy shifts from collecting the cost solely through the practising certificate fee charged to individual solicitors, to collecting approximately 40 per cent from individuals and 60 per cent of the cost from firms (i.e. recognised bodies and recognised sole practitioners), with the attempt to achieve a fairer system.

Logistics

Fee due date

You will receive your total bill during the 2011/2012 renewal cycle, which begins in September 2011. The bill should be paid on or before 31 October 2011.

Correcting your firm's turnover figure

We wrote to all SRA regulated organisations in May asking them to review the turnover figure provided at last year's renewal. The last opportunity to amend the figure held was 31 August 2011. After this date it is at the discretion of the SRA whether to accept your updated turnover figure. If you have further queries relating to turnover, or would like us to consider amending the figure already provided, please contact operationsfees@sra.org.uk with the following information:

• Firm ID
• Firm name
• The turnover figure we have currently
• The turnover figure you believe we should have
• Period that the new figure relates to (i.e. dates to which the turnover figure applies)
• Explanation for why this is different, including any additional information requested in the guidance notes (e.g. in case of new, merged, split firms, change in accounting period)

If you have sent the SRA a letter or email with updated turnover information and you have not heard from us, it is likely that we have accepted your figure.

Online fee calculator

We encourage you to use the online fee calculator to obtain an estimate of the fees due for your firm's renewal in 2011 using our agreed fees.

Go to the fee calculator

Impact

Rationale for using turnover to determine the firm fee

Turnover is a sensible variable, as it is a figure that the profession already captures as part of their annual accounts processes, and it is often used when renewing indemnity insurance. For most firms, this should minimise additional cost or effort. However, this would depend on the insurers used and the information they collect. It also takes into account how much business a firm does, and allows for a good fit in terms of ability to pay. This is a particular benefit for firms with a relatively low level of earnings per practising certificate holder.

The turnover model, in particular, allows for a positive impact for low income solicitors, in that those who were just above the threshold of £20,000 would previously have incurred much higher fees, whereas, under the new system, there is a more gradual increase in fees.

Impact on in-house solicitors

Those working in-house (i.e. public sector, commerce and industry) or in not-for-profit organisations will only pay towards the individual practising certificate fee and will not pay an additional firm-based regulatory fee.

Regulatory fees structure

Distribution of costs between individuals and firms

For each aspect of the funding requirement (i.e. regulation and compensation fund), there is both an individual and a firm component. The individual component is about 40 per cent and the firm component (which applies to all recognised bodies and recognised sole practitioners) about 60 per cent. This may well change in the following years to reflect our increasing focus on firms.

Practising certificate and registration fees

There is an individual fee and a firm-based fee. The firm-based fee is calculated on turnover (defined as England and Wales gross fees). A letter was sent out in May 2011 providing an opportunity to confirm the turnover figure held.

For an early estimate of the fees payable in 2011 please use our online calculator (www.sra.org.uk/fee-calculator).

The figures have been updated with the final fee structure and turnover bandings following approval by the Legal Services Board.

Banded turnover

The banded turnover model is the SRA's approved structure for calculation of firm fees. This model is simple, cost effective, provides a reasonable proxy for the volume of work a firm undertakes and takes some account of a firm's ability to pay. The bandings allow a sliding scale to be applied to reflect the fact that firms generate very different gross fees, from low to very high. This also allows us to ensure that no one group (identified broadly by size) is shouldering more than their fair share of the fee burden, making it fairer on firms of different sizes.

Maternity leave discount

A discount for maternity is given at 50 per cent of the regulatory individual fee (excluding a £48 charge for handling the application).

Compensation fund fee structure

The nature of the compensation fund is that it protects the public against loss incurred through a "failure to account" by a member of the profession or regulated firm. It benefits all individuals and firms in that it maintains public confidence in the profession. Accordingly, it is appropriate that all solicitors contribute something to the fund.

Turnover definition and guidance

Definition of firm turnover

1. The recognised body's or recognised sole practitioner's turnover figure means the total gross fees arising from work undertaken from offices in England and Wales.
   • Gross fees includes all professional fees of the firm, including remuneration, retained commission, and income of any sort whatsoever of the firm (including notarial fees).
   • Specifically excluded are interest, reimbursement of disbursements, VAT, remuneration from a non-private practice source, dividends, rents, and investment profit.
2. The figures that will be used when billing firms in October 2011 will need to be based on closed accounts, audited where possible. Therefore, all firms that previously provided estimated turnover should now provide the SRA with an update of their closed accounts figures. Closed accounts are defined as having ,in order of preference,
   1. an audited set of financial statements,
   2. an unaudited set of financial statements signed off by an accountant,
   3. a submitted tax return for the year.
3. The turnover figure must be for a 12-month period.

Work in progress (WIP) must be included

The opening and closing WIP should be accounted for when calculating turnover.

Accounting for bad debt

Bad debt should be handled under normal accounting procedures. Where it has been allowed for in the turnover figure for your last closed accounting period prior to 1 November 2010, that is acceptable. If a bad debt has been discovered after closing your accounts, your turnover figure cannot be re-adjusted. Those adjustments could potentially be accounted for in the following year's closed accounts.

Inclusion of notarial fees in turnover figure

We had a number of responses to our first 2010 consultation on fairer fees from notaries. After consideration, the SRA Board concluded that the SRA's new entity-based regulatory powers mean that, if notarial services are provided through a firm regulated by the SRA, the SRA bears some regulatory responsibility—if not for the notarial act itself, then for the way in which the firm offers and delivers the service to clients. For example, if the firm were to advertise notarial services in a misleading way, that would be a matter for the SRA; it might also be an issue for the notary regulator, in relation to the individual. Including gross fees from notarial activities delivered by the firm can therefore be justified. As such, notarial fees should be included in a firm's turnover figure.

International turnover

For the purposes of the fee calculation, the SRA only requires a firm's total gross fees arising from work undertaken from offices in England and Wales. International turnover should not be included.

Gross fees versus turnover

For the purposes of the SRA renewal period, "gross fees" is used synonymously with the term "turnover".

Definition of closed account

Closed accounts are defined as having one of the following (in order of preference):

1. An audited set of financial statements;
2. An unaudited set of financial statements signed off by an accountant;
3. A submitted tax return for the year.

Period of turnover data

The turnover figure should, wherever possible, be for the last complete (12 months) accounting period prior to the 1 November 2010 (e.g. 31 March 2010). The latest acceptable annual accounting period end date is be 31 October 2010.

Turnover figure must be based on closed accounts

See our definition of "closed account" above. The figures that will be used when billing firms in this year's practising certificate renewal process will need to be based on closed accounts. Therefore, all firms that previously provided estimated turnover should now provide the SRA with their closed account figures. Firms that do not yet have accounts which closed within the period from 1 November 2009 to 31 October 2010 should provide us with an estimated turnover figure as well as the previous year's turnover figure from closed accounts. They should then contact the SRA as soon as they have a final turnover figure from closed accounts. The SRA will determine at our discretion whether to use the 2009 figure if we have still not received an updated audited 2010 figure by the end of August 2011.

Approximate turnover figures

The turnover figure should be an exact figure if at all possible. For firms that have had to disaggregate international turnover, a figure rounded to the nearest £1,000 will be acceptable if more detail is unavailable.

Turnover data for new firms

The turnover figure provided must be for a 12-month period.

For a brand new firm (i.e. not a successor firm nor one resulting from change in status), an estimate for the first 12 months of practice (irrespective of whether this is after 31 October 2010) will be accepted; the basis upon which the firm has made the estimate should be provided. In many circumstances, VAT Returns Box 6 could potentially be used as a reasonable proxy for estimation purposes and pro-rated (scaled up to a 12-month period) as necessary.

Change in accounting periods

The turnover figure provided must be for a 12-month period.

If a recognised body or recognised sole practitoner has changed its annual accounting period, its latest closed accounting period prior to the 1 November 2010 will be shorter or longer than 12 months. The following approach should be used, and an explanation of how the turnover figure has been derived should be provided:

• Preferably, provide the turnover for the 12-month period immediately preceding the new accounting period end date (as long as prior to 1 November 2010).
• Alternatively, if this is not possible, take the last closed accounts period prior to 1 November 2010 and scale it appropriately (e.g. if the last closed accounting period was for six months, it should be doubled; if the last closed accounting period was for 15 months, it should be divided by 15 and multiplied by 12)

Incorrect turnover information

Under the SRA enforcement policy, we are able to penalise or refer those members of the profession who have submitted incorrect turnover data to the Solicitors Disciplinary Tribunal. In extreme circumstances, we have the right to revoke recognition.

Recent mergers or splits

Where in the 12 months following the submission of the historic turnover figure your firm merges or splits, a notice of succession (form NS1) must be submitted and signed by all affected parties. If your firm has succeeded to the whole or a part of one or more firms you must deliver form NS1 to the SRA within 28 days of the change. For the purpose of determining the fee for renewal, "succeeded" includes any taking over of the whole or any part of a firm, for value or otherwise. Alternatively, if your firm has split or ceded part of its practice to another firm(s) and wishes this change to be considered by the SRA when determining the fee for renewal, again you must deliver form NS1 to the SRA within 28 days of that change.

The form NS1 must identify all the firms affected by the merger or split and the resulting apportionment of the historic turnover figures for those firms. This is to enable the SRA to ensure that the turnover figure on which the 2011 renewal fee is based reflects the impact of that merger or split. You can access further information about the Notice of Succession requirements and download form NS1 at www.sra.org.uk/ns1

Income from locum activity

Income from locum work is excluded from turnover; the income received is received by the firm employing the locum and, as such, will be reflected in their turnover figure.

Secondment fees

The turnover figure should include income received through secondment fees. Secondment fees are still fee income derived, in part, from the individuals being regulated and the firm's reputation.

Income from commission received

Yes, income received from commission is included as per the definition below:

The recognised body's turnover figure means the total gross fees arising from work undertaken from offices in England and Wales.

• Gross fees includes all professional fees of the firm, including remuneration, retained commission, and income of any sort whatsoever of the firm (including notarial fees).
• Specifically excluded are interest, reimbursement of disbursements, VAT, remuneration from a non-private practice source, dividends, rents, and investment profit.

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