Law firms could be driven to the wall if urgent clarifications of their taxation position are not made this autumn, Law Society President Edward Nally warned last week.

Writing to Ian Mackintosh, chairman of the Accounting Standards Board, Mr Nally urgently demanded clarification of an amendment to one of the board’s financial reporting standards, FRS5, issued earlier this year.


It affects the way revenue is shown in business accounts, and could mean that law firms will have to include the projected profits of equity partners in their work-in-progress calculations - something they do not currently do.


Accountants differ in opinion over the effect of the reporting standard.


Mr Nally said: ‘The uncertainty as to the correct interpretation of the application note is extremely unsatisfactory, particularly as the advice solicitors’ firms receive will very much depend on the opinions of the accountants, which could lead to some firms receiving a much larger tax hit than others.’


He added: ‘There is a real concern that any substantial tax hit not mitigated by some form of spreading relief - allowing payment over a number of years, for example - could cause cash flow difficulties for many law firms, large and small, and ultimately lead to those firms’ demise.’


More than 80 lawyers attended a protest meeting in London earlier this year to consolidate opposition to the new standard (see [2004] Gazette, 29 January, 4).


Michael Hardwick, a partner at City firm Linklaters and chairman of the Law Society’s tax law committee, who attended that meeting, said: ‘I think it’s a good thing Edward Nally has written to the board. For the last few months there has been uncertainty over the effects of the reporting standard. Some say that it will make no difference, but others say it will [make a difference].


‘When different accountants are saying different things, it is difficult to get an idea of the problem. So the first step needed is for some authoritative guidance as to the effects.’