, Lawyers Budgeting for Change part 2: leadingcounsel.co.uk
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Lawyers Budgeting for Change part 2

Last week we looked at the recent budget generally before turning this week to the impact upon lawyers in particular. The only thing that perhaps needs to be changed from last week's article is the suggestion (by way of example) that Ricky Hatton was likely to bring forward his remaining fights to ensure that money is received before the new tax deadline. After the Pacquiao fight there may well not be any more fights. (Personally I think that getting himself motivated to take on a lower calibre of opponent and lower paydays would be difficult and he ought to quit with his money, health and charisma intact: after all he's only ever been beaten by men who in each case at the time were regarded as the best pound pound boxer in the world.). However everyone else, and in particular for these purposes lawyers, will be having to look ahead to see the impact of the budget for them.

The first likely change arising from the budget will be that lawyers are likely to look carefully at the way they receive their money. There is now an enormous gulf between receiving capital (effectively 18% tax) and receiving income (effectively 51 1/2 percent tax), the latter therefore nearly 3 times the rate. Not everyone of course has any choice about how to realise monies but when looking at the new business structures which will be permitted under the Legal Services Act when it comes into force, and the use of corporate structures for running solicitor practices, one should expect tax considerations to be regarded as highly material when firms plan out their structure and how to take their rewards. It is of course by no means as simple as just deciding to dispose of shares and hence pay CGT rather than receive income, but at the very least the existence of such a gulf between the different types of taxation means that how to receive monies is likely to have a significantly higher impact upon the business structure planning than would previously have been likely to be the case.

There is also inevitably going to be an impact upon couples who both work (whether as lawyers or indeed in different areas). The tax hike means there is a significant gap between the impact of one person making most of the money and the earnings being split more equally between two people. It is now going to be much more advantageous if the money is split between two people more equally than if it is loaded in one direction. Where people who live together work for the same firm, expect them to try and co-ordinate their contracts so the benefit is as equal as possible. In any event expect such people whether through changed hours or otherwise to try and reduce their workload where necessary so as to help out and allow their partner to work longer hours. Couples will be looking to employers to facilitate this and those employers who do are likely to prove popular.

There will probably be substantial interest in taking foreign placements and to some extent some talent will haemorrhage abroad to more tax friendly jurisdictions. There is a limit to how many people this will be viable for and of course in a recession there are likely to be plenty of people wanting to work.

There may be a reluctance on behalf of many to work ridiculous hours. It is one thing to work ridiculous hours and receive plenty of money for it, but it is another to work ridiculous hours and lose a substantial proportion of that money. Many lawyers are not likely to be operating at a level which makes expensive tax avoidance schemes worthwhile. Those who are and who can save the money are unlikely to find the tax changes a disincentive. Those who are going to be hit might well do so. There have been many indications in surveys and articles about the stress that long working hours causes for lawyers and plenty of disenchantment with the legal life from such lawyers. That is only likely to get worse when people feel they have all the problems and pressure of long hours but do not even get to keep enough of the money that is the reward for such antisocial hours. Many will now have even less enthusiasm for working longer hours. The firms who are going to succeed may have to work out how to divide the work and the responsibility in such a way as to prove attractive for the considerable number of people who will not want to waste their time working to breach the upper rate tax band.

Michael J. Booth QC