Professional services accounting: Billing, time tracking & IR35

Published 10 March 2026

Table of contents

• What is professional services accounting?
• How professional services billing works
• How to track time and expenses
• Tips for recognising revenue and managing WIP
• How IR35 affects contractors and service firms
• Simplify billing and time tracking with Xero
• FAQs on professional services accounting

Key takeaways

• Pick a billing model that fits the work you deliver – time and materials, fixed fee, milestones, and retainers all work for different projects and client types.
• Track your projects and costs closely so you can invoice clients accurately and understand your firm’s profitability.
• If you work with contractors, make sure you’re clear on IR35 rules to see if you’re responsible for forwarding their Income Tax and National Insurance deductions to HMRC.
• Use professional services accounting software with time-tracking features to make it easier to monitor work and charge your clients the right amounts.

What is professional services accounting?

Accounting for professional services like law, IT, and financial planning is uniquely complex for two main reasons:

• In a professional services firm, you’re selling expert knowledge and experience, which can be harder to price and charge for than goods. It’s likely you’re using retainers, project-based pricing, or a combination of models to bill for work.
• Accounting and professional services businesses are built on relationships, with each client’s requirements governing how much you earn.

Specialised professional services accountants can help you get a clear picture of your finances, manage multiple revenue streams and client workloads, and maintain compliance with tax rules.

How professional services billing works

Some clients hire you for a single project, while others want your time and expertise on an ongoing basis.

Project work typically has an end date by which you’ll have delivered all the services outlined in your client contract. It’s up to you how you charge for projects. Fees for project-based work might:

• be split over the course of several months, with clients paying a portion of the cost each time
• be split between a deposit up front and the rest on completion of the project

Here are the typical billing models and what each one means for your accounting:

Time and materials billing

On a time and materials contract, you’re charging clients for the time you’ve spent working and the materials you’ve used to deliver the service. It’s a flexible approach to pricing, where you could earn vastly different amounts from a client month to month, depending on how much you work for them.

If you use time and materials billing, it probably means you submit your invoice after the time has been used – for example, invoicing for April’s fees at the end of April. But if you agreed the hours with your client up front, you can send your invoice before you start work.

Keep in mind that to bill accurately, you need a tool for tracking time.

Fixed fee billing

With a fixed fee you charge based on the value of the service, not time spent on it. The fee is usually agreed up front with the client, and it might be charged in one lump sum or split across months with multiple invoices. The fee itself is calculated on the deliverables or services provided.

Fixed fee billing gives clients more consistency than time and materials billing in what they pay. Fixed fees also give your firm more cash flow consistency – you know exactly how much money is coming in and when, so you can build your business plans and investments around this.

This can be profitable if you complete a high-value task quickly, with few materials. It can also mean a trickier job puts your profit margin at risk.

Milestone billing

Where there’s a total fee assigned to a client project, milestone billing breaks this down and charges for specific goals and deliverables you reach.

Milestone billing makes the value of your work clear for clients, since they’re paying for what’s being delivered, not simply the hours worked.

Retainers and prepayments

A retainer is a regular payment for ongoing services or consultancy rather than for a specific deliverable or project. Lawyers use retainers for clients who need support with a legal case, and IT firms might use retainers when clients need regular maintenance for their digital infrastructure.

Retainers are often paid monthly. They bring consistent income, not unlike a salary if you’re employed. They can be great for cash flow and offer more stability for your business.

Similarly, prepayments guarantee income for work up front. A prepayment is charged and paid in advance of the work, so you get some of what’s due before you’ve actually earned it.

Understanding when income is paid vs when it’s earned is important when it comes to recognising revenue on your balance sheet.

Managing VAT and multi‑currency clients

If you run a limited company and your business is registered for VAT, you need to charge VAT on the services you sell. Things can get complicated if you work with overseas clients. Whether or not you need to charge VAT depends on whether you offer a B2B or B2C service, and the location where you provide these services.

For services you provide to B2B customers, VAT is typically paid in their country, and the customer self-accounts for the VAT. For services provided to B2C customers overseas, VAT is typically paid to HMRC, in the UK. If you’re working in a legal or accounting firm, you don’t typically need to pay UK VAT on services provided to a non-business customer overseas, but for

If you’re also dealing with multiple currencies, make sure you calculate your fees in your local currency as well as the foreign currency. Consider the exchange rate, too – it can significantly affect how much money you make.

How to track time and expenses

Here are some tips for tracking time and expenses:

Set billable rates and approvals

Whether you’re using professional services accounting software or a simple spreadsheet, the first step is to assign a rate to each of your services. If you use hourly rates, record these for each of your team members, so you can calculate your invoices accurately once work is underway. In project management software, you can set specific fees for staff and services, which helps with invoicing.

If there are costs to cover, make sure you’ve got an approvals workflow for team expenses, so these can be tracked and approved. There are plenty of tools available that can help with expense management and approvals.

Capture time wherever you’re working

Opt for time-tracking software you can use on desktop and mobile. This way, no matter where you’re working, you’re accurately monitoring progress and time spent. Keep accurate records to help you bill for the right amount of work, and avoid undercharging if, for example, you haven’t recorded time spent on work.

Rebill expenses and receipts

Keep records of any expenses you’ve incurred in the course of your client work. This is important if clients need to reimburse you for expenses – like travel costs for delivering a service in their workplace. If you’re recharging clients for expenses, itemise these separately on your invoices, and keep hold of any receipts as proof for HMRC.

Automate invoices from timesheets

Connect time tracking and invoicing software to speed up billing and make it easier to charge clients correctly. Depending on the accounting software, you may be able to create a project, record time and expenses against the project, then invoice for it.

Tips for recognising revenue and managing WIP

If you use accrual-based accounting (as UK limited companies must), only recognize revenue when you’ve delivered the services or met your contractual obligations– not when you receive payment.

If a client pays you in advance, record the amount as a liability (deferred income) on your balance sheet until the work is complete. Once the service is delivered, move the amount from liabilities to revenue.

Recognising revenue at the correct point helps keep your accounts accurate and ensures compliance with accounting standards issued by the Financial Reporting council (FRC), including its five-step revenue recognition model.

Professional services accounting software can simplify this process by allowing you to set up separate liability and income accounts and transfer amounts when they’re earned. Your accountant or bookkeeper can also manage this for you.

Here’s more information on accrual accounting

How IR35 affects contractors and service firms

IR35 is UK legislation that determines whether contractors who provide services through their own limited company should pay tax as employees or as self-employed for a particular engagement. It exists to make sure employed and self-employed people pay similar levels of tax, and contractors aren’t avoiding employee tax rates while doing the same work as them.

Sometimes professional services firms hire contractors to deliver work. If that’s you, you’ll need to know who is responsible for determining contractors’ status and how to treat their invoices.

Determining a contractor’s IR35 status and issuing an SDS

If you hire contractors, and your firm is classified as a medium or large private-sector business, it's your responsibility to determine whether they’re ‘inside’ of IR35 (treated as your employee for tax purposes) or ‘outside’ of IR35 (self-employed for tax purposes). If your firm is a small business, the contractor determines their IR35 status.

Employment status is determined by several factors established through case law, including control, substitution and mutuality of obligation. If you’re responsible for making the decision, you also need to explain it to the contractor in a Status Determination Statement (SDS).

Invoice and payroll if inside IR35

If a contractor falls ‘inside’ IR35, they can still invoice you through their company, but the fee payer must deduct Income Tax and employee National Insurance through PAYE and pay employer National Insurance before paying the contractor’s company.

Modern professional services accounting software lets you process inside-IR35 payments through payroll while still paying the contractor’s company.

Here’s HMRC guidance on paying workers inside IR35.

Keep records for HMRC

You need to keep records of your dealing with workers inside IR35 for at least 6 years. Your records should include things like:

• payroll records
• communications with agencies supplying workers
• status determination statements and any disagreements
• information about the person you hired and payments made to them

HMRC has a full list of required IR35 records.

Simplify billing and time tracking with Xero

With Xero professional services accounting software, managing your finances and delivering high-quality services for multiple clients is a smoother process.

Xero lets you track time from anywhere, and turn timesheets into invoices for clients. Capture receipts on the go using integrated tools like Hubdoc, and manage expenses on the move. And, Xero’s online invoicing and automated reminders make it easier to schedule billing and nudge clients to pay on time.

Get one month free

FAQs on professional services accounting

Getting your finances in check can help you run a more successful firm. Here’s more information on professional services accounting:

What is the difference between WIP and unbilled revenue?

Work in progress (WIP) is work still being completed, while unbilled revenue is work you’ve completed but haven’t yet invoiced for.

How do I treat VAT on client retainers and deposits?

While a client retainer or deposit both involve charging for work you haven’t yet completed, it’s still a payment for services you’ll deliver, so it’s subject to VAT – just like other project income. For a deposit, the tax point (when you charge VAT) will be when you issue the invoice or receive the payment, whichever comes first.

What time-tracking evidence do clients expect for approval?

Many clients work on trust, and might not expect to receive timesheets or evidence of billable hours. For those that do, you could export your timesheet for the relevant period.

What utilisation rate should a small firm target?

The utilisation rate refers to how much of your firm’s time is actually used for productive work, like billable hours and client jobs. The utilisation rate formula is:

Total billable hours ÷ total available hours

While there isn’t an ideal rate, yours can show you whether you need to hire more staff, to take on new clients, or make better use of your existing team.

How do I handle multi‑currency invoices for overseas clients?

You’ll need to consider exchange rates and how they’ll affect what you receive. If you’re invoicing clients in one currency and receiving their payment in another, calculate the fee in both your local currency and the foreign currency. You may need to make adjustments to counteract currency exchange rate fees.

The easiest way to invoice overseas clients is to use multi-currency accounting software.