Last year’s budget put fear into the hearts of legal professionals across the country, as the chancellor announced that research had already been commissioned into the prospect of extending IR35 laws to the private sector. This is stated as delayed until April 2020 (and only to large and medium sized businesses) to give all employers time to prepare.
Following the publication of the research in May, there had been rumblings that the chancellor was set to fully implement the legislation in the next budget, in an effort to crack down on tax avoidance and so-called ‘disguised employees’. Today's announcement does buy us time to consider contractors’ working agreements, as the firms using their services could be required to prove that the individuals concerned are rightly being treated as self-employed workers. My fear was this could also be extended to partners; remember the previous attack in 2014 on fixed share partners.
Still a wait and see, but at least a stay of execution to what I feared could be 'IR35 on steroids', and perhaps entirely for the vast majority of firms, given the apparent exemption of smaller business and the possible thresholds involved.
At a time of intense competition in the sector, law firms will be concerned at any obstacle to their ability to recruit talented people on flexible terms. I have no doubt many virtual law firms will have been watching closely also.
Clamping down on tax avoidance is rightly bound to be high on the chancellor’s to-do list, as he again emphasised. However, workers who are genuinely self-employed are not a hindrance to tax regimes and should not be regarded as such, but an important flexible tool for any business.
In other news that are immediately relevant to the legal sector:
The chancellor committing more expenditure on cyber-security is surely something to be welcomed by the legal sector well used to such attacks, so hopefully some intangible benefits there in due course, but law firms shouldn’t suddenly get complacent.
The chancellor talking about matching investment and longer-term funding along with not borrowing long-term to meet short-term expenditure should be something any business could relate to; law firms shouldn’t pay partners’ drawings out of long-term borrowing to find an analogy.
The 'temporary' increase in the annual investment allowance from £200,000 to £1m will be popular with the top-200 law firms which regularly spend those figures and more on IT; for all other law firms the £200,000 was plenty, thanks.
For those firms successfully managing succession issues internally this is not of interest, but those partners who are disposing of their practice will be pleased entrepreneurs' relief is retained. The qualifying period is extended to two years, but one year was far too short in any case, in my opinion.
Reforms on stamp duty land tax for first time buyers may help some residential conveyancing firms, but unlikely to see an immediate or significant boost in that area.
So whilst many tax rates, thresholds and reliefs are not adversely going to affect law firms, their partners or their staff, the one thing that is coming in next April that many law firms have not yet fully got to grips with is Making Tax Digital (MTD). If your firm is not prepared and fully set up well before next April, this will cause you problems. Take specialist advice as early as possible; your software provider and/or accountant will be able to help.
Peter Noyce is partner and legal sector specialist at accountancy firm Menzies LLP and author of Brighter Thinking For Law Firms.