Law firms ‘face working capital squeeze’

Professional services firm KPMG said some law firms may need to raise extra capital because of complex new rules.

According to KPMG, law firms with salaried or fixed share members - where over 80 per cent of their remuneration is fixed - will be considering the cost implications of Government proposals to be included in the Finance Bill 2014 to reclassify certain members of limited liability partnerships (LLPs) as employees for tax purposes since April 6 2014.

Analysts predict that the costs of this move can be significant, with employers required to pay PAYE, and National Insurance contribution at 13.8 per cent.

Gareth Harris, the director and head of professional services for KPMG restructuring, said yesterday: “Firms used to use the tax reserves to fund their working capital requirements, however, if the tax status of certain members changes from self-employed to employed they will no longer be able to do this, and will have an additional significant monthly bill.

“At a time when many law firms are still struggling in a tough market, this will be yet another blow for those firms trying to control costs and lockup.

“We recommend that firms urgently calculate the working capital impact and what it will mean for their facility requirements with funders. If additional funding may be required those discussions need to start now.”

Nick Pheasey, KPMG private client tax partner, said: “LLPs should already be considering not only the cost implications but also the working capital effect. The new rules are complex and we have worked with many firms to determine the impact and help them to understand the potential options to restructure their businesses.”

Gary Richards, the chairman of the Law Society’s tax law committee, said yesterday: “We remain concerned about the impact this will have on firms and issued a practice note to our members to help them.

“So far, it looks like most firms affected are raising capital - whether or not actually needed - either directly from partners or via bank lending to partners.

“Therefore it is doubtful whether much, if any, tax will be collected.”