Opinion Mixed On Likely Impact Of Tax Changes For UK Law Firms

by Robin Pilgrim, LawAndTax-News.com, London

04 February 2004

Following last week's meeting of the Association of Partnership Practitioners (APP), opinion is divided over the likely impact of planned accounting changes for law firms which were recently announced by the UK government.

Under proposed new rules, unveiled last month, changes in the accounting treatment for revenue could affect the way in which firms and partnerships account for work-in-progress for which income has yet to be received. The resulting tax charge could represent up to half of a firm’s annual bill, experts have estimated.

The changes will affect regular partnerships, limited liability partnerships and companies, although it is thought that sole practitioners and regular partnerships will be hit particularly hard by the accounting adjustment, as they frequently have unbilled work-in-progress amounting to as much as three months' input.

Speaking to The Lawyer news service, George Bull, of accountancy firm, Baker Tilly revealed that the prevailing mood at the APP meeting was not as "alarmist" as might have been expected.

However, managing partner of Clarke Wilmott, David Sedgewick suggested that for law firms with a heavy litigation bias, the accounting changes could be "very significant".

Referring to his own company, Mr Sedgewick revealed that there can sometimes be up to four months' worth of work in progress at any one time.

"We're also growing," he explained, "which means our profit for tax purposes grows, but the cash to pay the tax lags behind. We're already thinking of changing the way we pay out our profits at the end of the year, and we've already made cash collections the key criteria on which partners are assessed."

The consultation period for the proposed changes ends on February 13th.

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