The date 31 January is usually a firm’s tightest cashflow point, with partners’ tax, a quarter’s VAT and quarter’s rent all payable within five weeks of each other in most cases. Exacerbated by the fact that cash in-flows are usually very quiet in December and January, firms often face a serious cashflow crunch come late January.

For those firms that have a 30 April year-end, it is not this year’s position that will be the big crunch, it is that in a year’s time. Firms should not only be looking at a temporary cashflow fix to meet this year’s crunch point, but partners should commit now to addressing potential cashflow problems that may come up in January 2012.

New Year, new tax ratesThe tax year 2010/11 will see several tax changes which will affect many firms and partners, leading to potentially severe cashflow issues in January 2012.

First of all, partners with an income in excess of £100,000 will have their personal allowance abated by £1 for every £2 of additional income. Secondly, the 50% rate for those earning over £150,000 a year (which came into effect on 6 April 2010) will make a noticeable dent in many partners’ post-tax incomes.

To take one example, a partner earning £450,000 will have to pay an additional 10% tax on income over £150,000. This results in an additional £30,000 tax being payable, to which the loss of his personal allowance at 50% (that is, £3,238) must be added. This means a total increase in tax liability to £33,238.

Taking into account the effects of Class 4 national insurance contributions, the partner will need to have an additional profit share of £67,832 just to stand still in terms of profit after tax (that is, an increase of 15% in this example). Although some firms have reported an increase of at least this level in profits per equity partner, many have not. Bear in mind that this affects all partners – not just equity partners.

Adding to the potential cashflow problem is the fact that interim tax payments (which come before the year-end reconciliation and are intended to spread the tax burden across the year) are calculated by reference to the previous year's tax liability.

So, 2009/10 earnings, still affected by the recession, are likely to be lower than those of 2010/11. This means comparatively low tax liabilities for 2009/10 and, hence, low interim payments on account for 2010/11. Thus, at 31 January 2012, firms will have to be prepared to make up the difference. Additionally, the first interim installment for 2011/12 is due on the same date – and this is calculated as 50% of the high 2010/11 bill.

The combination of these two tax payments may be a nasty shock to firms and their bank balances.

Law firms really do need to be looking now at extending their cashflow forecasts through to 31 January 2012 to identify if they are likely to have a funding gap. It is never too early to identify if extra external funding will be required.

Louis Baker is head of the professional practices group at Crowe Clark Whitehill