Every law firm that operates as a limited company or LLP will be required to reveal profit and loss figures from 2027, as part of government efforts to combat fraud.
A Companies House circular this week confirmed that changes to filing rules will be introduced from April 2027 through the Economic Crime and Corporate Transparency Act.
All companies will need to file their annual accounts digitally, and provide profit and loss numbers. Small companies – defined as those with between £1m and £10.2m of annual turnover – will also have to file a directors’ report.
The changes usher in a new regime of openness about financial performance for companies that could previously file ‘abridged’ accounts. That option will be removed as the government tries to make filing requirements easier to understand, reduce fraud and improve transparency.
About 75% of all law firms are incorporated as companies or LLPs. Sole traders and traditional partnerships do not file accounts at Companies House.
Experts say the requirement to publish a P&L is likely to prove unwelcome for practices that are presently able to operate more discreetly. Current reporting requirements have allowed certain firms to record healthy balance sheets based on vastly inflated estimates of work in progress. The new requirement will focus attention on whether these firms are actually making money from outstanding WIP.
The impact of greater transparency has already been manifested in the small number of firms that have listed on the stock market and been obliged to publish regular updates about their financial performance.
Peter Noyce, a partner at accountancy firm Menzies, said the changes will affect client acquisition and recruitment. ‘Some law firms appear “bigger and better” from a PR perspective than perhaps their results actually show, which has been the case frankly for some that have floated,’ he said. ‘Secrecy will be removed, as will firms’ reliance on interest received. Clients and key staff may choose a firm that trades profitably from its core legal business rather than its interest returns.’
Staff retention may also be affected, he suggested, if people see that their firm is not as successful as it had appeared. Conversely, disclosure of high profits may prompt workers to push for bigger pay rises.
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