Changes to the taxation of fixed-profit partners in limited liability partnership (LLPs) due to come into effect in April this year could prove a shot in the arm for the finances of law firms, despite the predicted rise in NICs payments, according to analysis by Menzies.
Most commentators have been critical of the new legislation, which is designed to target 'disguised employment' by introducing new rules around the levels of economic risk and profit share which LLP partners will have to satisfy. If partners are judged not to meet the new tests for self employment, LLPs will become liable for employer's NICs national insurance contributions (NIC), effectively increasing the costs of remuneration for such individuals by 13.8%.
However, Peter Noyce, head of professional services at Menzies, says there is a 'bigger picture to consider', given that under the proposals a partner in an LLP will not be deemed as employed if their capital contribution is more than 25% of their expected profit share.
Noyce said: 'Many partners will choose to inject capital into the LLP to protect their self-employed status. This would immediately give firms a more robust capital base, a stronger balance sheet and improved working capital. This could also lead to a more for focused and engaged fixed share equity partner that suddenly has capital "at risk" and therefore perhaps becomes even more motivated for their practice to succeed.'
Those LLPs which cannot meet the capitalisation requirement may instead decide to adopt a remuneration scheme which is more closely dependent on the firm's profits. As a result, they are likely to adopt a more prudent approach to drawings throughout the year, which would improve working capital and cash flow, especially at the pinch points of tax and VAT payment dates, according to Menzie's analysis.
Noyce argues that a by-product of the new tax provisions may well be better-capitalised law firms with greater financial stability, a critical development given the high levels of competition in many areas of legal services and the recent influx of new entrants to the market.
'I very much doubt those drafting the legislation at HMRC were thinking of good practice and the Solicitors Regulation Authority (SRA) concerns about financial stability. But in a strange way they could end up being incredibly and remarkably complementary,' Noyce said.
