Partners squeezed by tax liabilities

Partners at a quarter of the top 100 firms may face a drawings 'holiday' of at least a month this year, and demands from banks for security over their personal assets as the economic downturn continues to bite, legal experts said this week.

They said that as many as ten mid-sized firms could go bankrupt if the economic situation does not improve.

Many partnerships pay tax on their profits two years in arrears, so that tax due to the Inland Revenue at the end of this month was incurred on profits made during the economic boom.

Some firms ring-fenced the money two years ago; however, others distributed it to the partners.

Top London-based legal consultant Alan Hodgart told the Gazette that a number of firms will find it difficult to preserve cash flow this year, and 'possibly up to 25% of the top 100 firms will have to take a drawings holiday for a month or so to enable the firms to pay their way'.

Partnership expert Ronnie Fox, senior partner of City firm Fox Williams, endorsed 'the general drift' of what Mr Hodgart said, 'because I see it when I talk to partners'.

Mr Fox said: 'Profits have fallen, so by the time the tax comes to be paid there is less cash around.

It's therefore more of a strain for firms to pay that tax to the Revenue.

Secondly, because many firms are experiencing profits lower than anticipated, partners will have overdrawn, and the remedy is to reduce drawings or ask partners to increase their borrowings from the bank.'

But Mr Hodgart warned that banks are tightening up on law firms' overdrafts.

He said: 'Banks are now starting to ask for security over partners' assets.

Typically, this will involve taking a charge over the partners' individual assets.'

Peter Saunders, a partner in the professional practice group of accountancy firm Deloittes, which audits the accounts of many law firms, said: 'I would say that now banks are more up front and it wouldn't surprise me if there was some growing nervousness.'

Mr Hodgart said independent of the tax issue, there are a number of mid-sized firms - with fewer than 250 fee-earners - that are 'really struggling'.

He added: 'I've seen some accounts of law firms that would make you go white.

'I think up to ten firms could fail to come out of this recession.

It's much grimmer than the last one.'

By Jeremy Fleming