We seek to maintain a seamless invoicing system that ensures a healthy cash flow and a limited cost exposure.
As a general rule, clients should be invoiced on a monthly basis or at the conclusion of a particular piece of work. Where monthly invoicing is not appropriate you should use your discretion as to when to submit an Invoice. As a rule, the timing of Invoices should be agreed with a client at the beginning of each matter. It is also good practice to agree with the client (and circulate to colleagues working on the matter) our payment terms, how regularly you will provide cost updates and Invoices, and the amount of detail to be included in each Invoice. Usually this information would appear in the Engagement Letter. As a rule, you should invoice promptly and, as a rule of thumb, at least every three months. You should pay special attention to unbilled disbursements, which should be invoiced promptly, as disbursements-only invoices if necessary. Where you have funds on Client Account for the purpose, you must not delay in using them for that purpose.
For shorter matters (i.e. those which last, or are expected to, less than three months), Invoices should be sent to the client at the end of the matter and generally without delay. Not only is this an important regulatory requirement, but also it becomes legally and statistically much harder to recover fees after the end of a matter. In exceptional cases, you can issue the Invoice in the normal way, and agree extended payment terms.
Invoices can only be addressed to our client. Where we have more than one client, then any reasonable sharing between them of the Invoice is permitted. In corporate matters where a new company is formed and that company is to pay our Invoice, then that new company should be formed as early as possible and sign up to our Engagement Letter immediately after formation.
Third parties may pay our Invoices. However, as the Invoice is not addressed to them, they are settling the debt of a third party. This can cause two issues.
The first issue concerns VAT. The VAT element paid by a third party is the client's VAT and as such the third party usually cannot recover this (unless part of the same VAT group). The only solution to this is to make the third party a client in the normal way and subject to the usual constraints. If they are to be a client, then you need to consider if they are to be an additional client or in place of the original client. Our normal rules on client set up always apply. In order to set up a new client for invoicing purposes only, you will need to answer yes to all the following questions:
If you are sure the new client is to be set up in place of the original client, you'll need to add in this rider to the new Engagement Letter.
Where we are not changing the client, but simply to be paid by a third party, it is a good idea to email the client the following warning:
"You should bear in mind that there can be tax consequences where a third party pays your fees. You (and they) may need tax advice on this. We can assist, but note that you have not asked us to. We are happy to accept this payment on your behalf. You should of course note that you alone are responsible for ensuring our fees are settled."
The second issue is whether the payment itself might be subject to a later challenge either as a transaction at an undervalue or a deemed dividend without distributable reserves. Where the third party settles a debt for another, it is treated as a gift from the third party to the indebted client. If the third party later becomes insolvent, then the relevant insolvency practitioner for the third party can, subject to time limits, apply to have that payment set aside with the effect that funds would have to be returned. If so, the client would remain liable for the Invoice, but achieving payment in such circumstances is always a challenge. When setting up a matter in Keyed-In you should note any third-party billing arrangements. You can protect yourself from this latter issue by having the third party lend the money first to the client and then for the client to pay us. Where the client does not have a bank account, this loan arrangement can be recorded by a simple exchange of emails. Of course, advice on this arrangement is likely to be outside the scope of your engagement and you should make this clear.
Some example text you may wish to use to record that the third party is lending funds to the client is as follows:
"You have agreed that you will borrow funds from third party so you can pay for our advice to you. For administrative ease you have asked third party to settle our invoices to you directly and we have agreed to mark our invoices as payable by third party. You should note the loan from third party to you in the internal accounting records of client and third party and discuss this with your accountant if you feel you need any advice on these intercompany loans."
If the client is placed into an advertised insolvency process, then it must not pay our bills and any money paid to us might have to be repaid. We will be a creditor in the insolvency and be paid through that route, though usually we would receive little in such a case. If we fear this, we should ensure prompt payment and utilise the funds belonging to our client in our client account wherever possible. Any funds in client account, even if deposited there for our fees, cannot be used without the consent of the relevant insolvency practitioner.
The third issue can arise where the third-party payer is the employer of our client. If an employer pays for advice for the benefit of their employee (for example where an employed director of the company, gets the company to pay the bill), then our client may receive a benefit in kind and thus be taxed on that. We would typically exclude advising on this in the scope of our retainer. There is a tick box during Engagement Letter creation that brings in the following standard text to do this:
"It is possible in this matter that your employer may pay some, or all of, your bill. This might be a benefit in kind and create a tax charge for you. We are not advising you on that and you should discuss that with your accountant or tax adviser. If you want our advice on this, then please write to us and we can have a tax specialist assist."
The fourth issue can arise where the third-party payer is a closed company (i.e. one with fewer than five shareholders) and our client is one such shareholder. The payment of our bill there could be a deemed distribution. That is complex and you should contact a tax colleague to give advice if you spot this or otherwise expressly exclude this from the scope of our engagement.
Hint: Never accept payment of Invoices in cash as this is a money-laundering risk and further banks will rarely accept payment of cash into a third party's account. To be clear, our policy is not to accept any cash from clients at all.
Hint: Invoices are automatically uploaded to NetDocuments.
Hint: Wherever possible, ensure your invoices are over £300 per invoice. This is because the cost of processing each invoice make dealing with invoices below this level a challenge.