PRINCIPAL OR AGENT: WHEN DO THIRD-PARTY COSTS COUNT AS TURNOVER?

Changes to revenue recognition are expected to affect how many UK solicitors report income from accounting periods beginning on or after 1 January 2026. For solicitor LLPs and other professional service firms, one area to review carefully is the treatment of third-party costs recharged to clients.

Under the revised rules, firms will need to consider whether they are acting as principal or agent when costs are incurred and recharged. This matters because, in some cases, amounts previously shown within gross turnover may instead need to be treated as pass-through amounts outside revenue.

For legal practices, this could be relevant to costs such as:

• Counsel's fees
• Expert witness fees
• Search fees
• Court fees
• Other outsourced professional services 

The key question is whether the firm controls the service before it is transferred to the client, or whether it is simply arranging for a third party to provide that service directly to the client.

Principal: the firm controls and provides the service before it is transferred to the client. 

Agent: the firm arranges for another party to provide the service to the client. 

If the firm acts as agent, amounts recovered from the client for third-party services should generally not be recognised as turnover. Instead, only the firm’s own fee or commission element would be included in revenue.

Example: 

Current gross turnover 

• Legal fees: £100,000
• Counsel's fees recharged: £20,000 

Turnover reported: £120,000 

Potential net turnover 

• Legal fees: £100,000
• Counsel's fees treated as a client cost only passes through the LLP 

Turnover reported: £100,000 

In this example, the firm’s profit may be unchanged but reported turnover falls from £120,000 to £100,000. That change could affect KPI reporting, partner expectations, banking covenants, benchmarking and the way performance is explained to stakeholders.

The treatment may depend on client engagement letters, supplier terms, billing arrangements, how costs are described on invoices and who is responsible for delivering the underlying service.

As a minimum, firms should identify the types of third-party costs they recharge, assess whether they are acting as principal or agent, document the accounting judgement reached and consider the impact on budgets, management accounts and external reporting.

Our specialist accountancy team can help you review your revenue recognition policies, identify affected contracts and explain the potential impact of the FRS 102 changes in clear, practical terms. If you would like to understand how the new rules could affect your firm’s turnover, covenants or KPI reporting, please get in touch.