I’m a legal advisor… Get me out of here!
Forgive the title of this… I promise that it is the only reference to the jungle reality show recently on our television screens and anything Ant and Dec! However, the title seemed a good way of describing how legal businesses and their advisors may well be feeling at the moment.
After all, the stance of our friends at HMRC towards the legal profession over the last year has been as if they were tax avoidance vehicles rather than commercial businesses looking to succeed in a difficult economy.
Battered, bruised, and frustrated are all words that could be used to describe lawyers’ feelings…almost like completing a bush tucker trial (sorry!).
For example, October 2013 saw the end of the ability to use service companies to reduce your effective rate of income tax by making a transfer pricing adjustment between the partnership and the company.
This was followed up, despite massive industry pressure, by Finance Act 2014 which saw the final introduction of targeted anti-avoidance legislation concerning corporate members and disguised employment.
Previous issues of Legal Update have commented in detail on all these measures, so I won’t revisit them, but six months on, it is clear that the measures have had a significant impact on the structure of legal practices and the effective rate of tax of the members or partners in those practices.
So, battered and bruised my friends in the legal sector may be, but where does it leave them?
1. Make sure you consider your structure in the light of the Revenue measures and that it is still fit for purpose.
2. Corporate partners can still work if the share of profits allocated to them are reasonable in the light of services and capital provided. Alternatively, full incorporation could be a solution which delivers significant tax benefits. Over a fifth of legal practices are now limited companies.
3. Cash flow is king, particularly for legal practices. If the impact of the measures is to increase partners’ tax liabilities, then you should ensure you have modelled this forward and planned your cash flow accordingly
4. Consider other ways of reducing your effective rate of tax; pension contributions, qualifying investments in Enterprise Investment Scheme or Seed Enterprise Investment Scheme companies are all potential options.
So next time the jungle drums are beating and you think you’ve had enough, don’t shout “get me out”…consider the options and plan accordingly.