Now that the UK patent and trademark agents amongst us have heard from our regulator that there will be no suspension in the introduction of the new rules on client money that will commence on 1 January 2015, many of you will be polishing up your procedures manual.
The purpose of this post is to explain how Agreed Fees work. I mentioned them in my February 2014 post here.
The example I have in mind is that you have undertaken to do a piece of work for a client that involves substantial disbursements. This could be a foreign filing program for a trademark or a national phase entry program on a PCT application. You have carefully worked out what you expect the disbursements to be because it's highly unlikely that the client will instruct you without knowing what he is in for.
Some of these disbursements will be in overseas currencies so you've done the sums on today's exchange rate. Your terms of business will have explained your client how you bill disbursements, which might for example include adding a percentage to cover the administrative costs.
If you want the money in advance then the simplest way forward to is to use an Agreed Fee. An "agreed fee" is one that is fixed - not a fee that can be varied upwards, nor a fee that is dependent on the transaction being completed. An agreed fee must be evidenced in writing. This definition comes from Rule 17.5 of the Solicitor's Accounts Rules. I see no reason why IPREG would not follow this example and when operating under those rules (which I did for many years, my firms relied on it a lot). You issue your VAT invoice (The best possible evidence in writing) for the agreed fee and when it's paid, its office money.
It never touches your client account. Simples. Even if your client can only afford to part pay the invoice that's fine, the part he can pay goes into your office account and stays there (SRA Rule 12.7 (c) (iv) is your authority if you need it).
The downside of an agreed fee is that it is fixed. If exchange rates move against you, tough. Therefore, you might say to your client that you will do the work and bill it when you have complete certainty. This is fine if you have a lot of working capital. Again, you don't need to use a client account.
If however, you want to ask the client for a sum on account of costs generally, you can and must stash any such payment into your client account. You need to make it clear on what terms this sum of money is paid and what interest will be paid to them on it. I am a big fan of 0%. When the time comes to issue an invoice for the work, you transfer payment from the client account into your office account. The downside of this is that it makes life awkward if you don't have very much working capital and need to use the clients money to pay the disbursements as you go along so that you are forever dipping into the client account. This really does need a good bookkeeper, so its not a plan for a solo. The best approach then would be to pay all the disbursements out of client account at the same time as you issue your invoice to the client. Do remember to make it clear on the invoice that you wish you exactly how much he now needs to pay you. If you end up being overpaid then you have to put the overpayment into your client account or send it straight back.
Now that you can fix a renewal fee budget with a supplier like Envoy or get Valipat to help you manage the costs of a PCT national phase, the agreed fee is relatively risk free.
It looks from the rule that even if you never receive client money you still need to set up a client account. Another solution is to become unregulated!
ReplyDeleteAn entirely appropriate option for the non-litigator
ReplyDeleteThanks Barbara, very helpful indeed.
ReplyDeleteWe have a client account but are very small, near solo, and it has always worked well and been easy to follow. And we have not needed a clever book keeper, but I guess we have always had enough funds in office money to pay out.
The big advantage of using client account is risk, the funs are held in advance for disbursements is in your client account, so once you pay it out of office account, and issue balancing invoice, you can transfer fund straight away and your cash flow is back on track but client has reassurance, its separate money until then. I would suggest its larger firms that would need to monitor as cash coming in and going out could happen from several parts of the firm at once, that would require active coordination.
Interestingly you said......Your terms of business will have explained your client how you bill disbursements, which might for example include adding a percentage to cover the administrative costs.
ReplyDeleteI wonder if firms do include the actual percentage added on to disbursements in their Ts and Cs. Is there a rule one should do so, do you know?
There has been no change to rule 10 on fees which simply says that they should be justifiable with basic guidance that fees charged should be based on the information provided in any letter of engagement. If you are adding a significant percentage I would have said you needed to justify that. If you are simply rounding your disbursements to the nearest pound, that hardly seems worth mentioning. Brevity in terms of engagement is an important thing too. It gets more interesting if you haven't paid the disbursements so are doing a tentative conversion to produce the amount on the bill. I don't explain that in my terms of engagement when I do it but if someone asks. which occasionally they have, they get chapter and verse on my numerical methods. At the moment I'm using the www.xe.com conversion rate plus 5% plus £10 - which gets me pretty close to what it actually costs via my payment provider. However, increasingly, I'm paying the disbursements and then billing the exact amount rounded up to the nearest pound. Maybe when hoarding your working capital delivers you interest, I may change that.
ReplyDeleteThank you, yes that is just about what we do too.
ReplyDeleteI don't think interest at current rates will be much!
Is there not a problem with using an "agreed fee" when it comes to the filing of patent or trade mark applications? That is, when you are asking for money up-front in respect of the filing of such an application, how do you provide evidence that the fee is not one that is dependent on the transaction being completed?
ReplyDeleteI am not sure how many clients would be happy to pay money up front if you are specifically required to advise them that you will retain the fee even if you do not file the application! Perhaps I'm getting the wrong idea of what is meant in Rule 17.5 by "the transaction", but I cannot see what else (other than filing the application) it would mean in this context.
I think you are being too literal. The SRA rule is considering agreeed fees for say business or property sales which transactions might not complete. In the context of a trademark application non-completion of the transaction would be refusal of registration. It happens!
ReplyDeleteThat is one way of looking at it, certainly. It is a shame that we do not have any guidance from IPReg on this point, though - especially as it is possible that they might disagree with your view.
ReplyDeleteCIPA has now published a notice here that says much the same thing with a big emphasis on getting the invoice out first and the client having no further claim over the funds.
ReplyDeleteBut when would the client have a claim over the funds? I wonder if anyone knows the answer to that?
Deletethat depends on your terms of trade but generally speaking the client has no claim for a refund when he has paid a VAT invoice delivered in accordance with your terms of trade
DeleteRegarding the agreed fee approach: Do you mind if I ask how you record the filing fee in your accounts when you pay it? Do you record it as an expense of the practice, seeing as you have quoted an all-inclusive fee for preparing and filing? Or do you record it on the client ledger? (The SRA rules say that all movements of office money related to a client matter must be recorded in the client ledger.)
ReplyDeleteYou are thinking of 29.4
ReplyDelete29.4 All dealings with office money relating to any client matter, or to any trust matter, must be appropriately recorded in an office cash account and on the office side of the appropriate client ledger account.
In my simple computerised accounts system the fees from my IPO deposit accounts are recorded as cost of sales but separately I record the disbursements against each client so I can link them and there is also a spreadsheet that records the movements so the account can be properly reconciled. Thats probably an idiosyncracy of my own but the idea is that the client should know when and what payments were made if necessary. The detail of the SRA rules is sometime difficult to reconcile with real life but they do answer questions
A follow-up question to that asked by Anon 08/03/2016: If you charge an agreed fee of £500 which includes an (as yet unpaid) application fee of £170, do you record this as fee = £500 or do you record it as fee = £330, recharged expense = £170?
ReplyDelete