Law firms in trouble

Over 2,000 law firms are set to go the wall in the next 12 months. That’s the doom-laden prediction of R3 - the Association of Business Recovery Professionals - which claims the twin perils of partners’ tax liabilities and the Legal Services Act will be the death sentence for many firms.

By the end of July, partners in law firms must make their second tax payment for the year. Unlike many other businesses, Limited Liability Partnership (LLPs), partnerships and sole practitioners are not directly assessed for tax on the business’ profits but will commonly arrange to settle individual partners’ liabilities. Ideally, a tax reserve fund will have been maintained for this purpose but this is not always the case.

Lee Manning, R3 President, said:

‘This requires very careful planning and steps should be taken to apply for a reduction of payments on account if earnings are expected to reduce over the coming year. This time of year is known to put real cash flow pressure on firms and more often than not we see a spike in banks being asked to fund taxation liabilities.’

‘The legal services sector is a very crowded market and so firms that are not competitive are unlikely to thrive. Careful planning and management of taxes can help give businesses an edge and make this time of year less daunting.’

Adding further fuel to legal pyre, research by R3 using data from Bureau van Dijk’s ‘Fame’ database, finds that over 2,000 law firms are at risk of failure in the next 12 months – this equates to 29.1% of firms in the UK and Ireland, higher than the cross sector average of 21.8%.

A key challenge for them is The Legal Services Act – dubbed ‘Tesco Law’. It legislates for Alternative Business Structures (ABS) - to make legal services easier to access by allowing non-lawyers to invest in and own legal businesses. But it poses a real and tangible threat to the legal services market - particularly for small high street firms.

Lee Manning continued:

‘Traditionally a firm would practice a range of different areas of law. With the introduction of "Tesco law", new specialist firms will begin to emerge and they will be difficult for the high street to compete with, partly because small practices cannot afford the level of branding and marketing that these new firms will be able to take advantage of. It is also unlikely that they will have the resources or the technology to compete with these Alternative Business Structures.’