, Lawyers Budgeting for Change part 3: leadingcounsel.co.uk
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Lawyers Budgeting for Change part 3

So aside from the impact upon lawyers individually, what changes to the market and influences on legal work there and we expect to flow from the recent budget?

The first obvious impact is going to be an increased amount of tax work. Far more people than previously thought it worth their while are going to be looking seriously at how to minimise their tax bills. This is likely to mean that tax advice and schemes are going to be far more popular. Not only will there be an enormous increase in the amount of advisory and other tax work available, but this may itself have an impact on the structure of legal services market. Solicitors have to a large extent fallen well behind accountants in the provision of tax advice, even though that tax advice is a matter of law. If the amount of tax advice is increasing significantly, and if accountants manage to take a large part of that work, that may encourage them towards a trend of effectively operating a legal arm. The increase in tax work may thus increase the profile of accountancy firms in the market (operating through their own acquired or developed legal firm).

At the same time the tax take will almost certainly be nothing like as great as was predicted by the Chancellor. This is both because the amount predicted as likely to be obtained from the tax hike was ludicrously optimistic, and because his prediction for economic recovery was equally optimistic. This means the revenue will not receive anything like as much money as has been forecast. In consequence the revenue will be under fierce pressure to bump up receipts wherever possible. This is likely to lead to a rush of legal challenges in connection with tax schemes, thus also increasing the amount of legal work. However the effects will almost certainly be felt more widely. The revenue will be pushing for speedy payment wherever possible and this may well trigger an extended round of individual bankruptcies and liquidations. Significantly, the revenue are likely to be much more aggressive as regards trying to get money where there are unpaid revenue debts outstanding on liquidation. I would envisage that the revenue will be much more inclined to fund or support attempts in liquidation to seek to make directors responsible for debts of the company. Expect therefore an increase in insolvency work.

Lawyers (under the Clementi reforms introduced through the new Legal Services Act) are shortly going to be able to operate through limited companies, bringing in outside investors. This would mean that those practices who do decide to incorporate, and to decide in consequence to keep the accruing profits (or a large percentage thereof) within the business, could bring in outside funding by (in part) sale of shares. The lawyers would then be taxed on the capital gain on the shares. As previously indicated, capital taxes are now miniscule compared with income taxes (running a little more than one third of the rate). Expect therefore in practice the new Clementi reforms to also become a tax scheme. It may well drive more towards incorporation and outside investment than would otherwise have been interested, because it does afford some people an opportunity to receive money by way of capital and much more favourably than if it were being received by way of income.

It will be ironic if the tax scheme has the impact of making many more firms consider pursuing the opportunities arising from the recent Clementi reforms. That may of course prove to be a very good thing or a very bad thing. Only time will tell.

Michael J. Booth QC