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The UK’s leading banks are struggling to cope with the demand for new loans from fixed-share partners (FSPs) in the run-up to tax law changes on 6 April.
HM Revenue & Customs
Industry sources suggest that up to 8,000 individuals are looking to borrow money from UK banks in an attempt to inject new capital into their firms ahead of the year-end deadline.
The round of fresh funds is aimed at ensuring that FSPs maintain their self-employed status and continue paying their own national insurance contributions, rather than see the bill pass over to their firms.
The moves come as new anti tax-avoidance rules are set to be introduced by HM Revenue & Customs (HMRC) in less than two months (17 December 2013).
HMRC’s proposals mean that FSPs may become employees unless they fail one of the Revenue’s three tests of employee status, the most likely of which appears to be Condition C, which states a partner is self-employed if he or she contributes 25 per cent or more of their annual income as capital to the firm.
Barclays is understood to have had around 3,000 new loan applications while the demand at Royal Bank of Scotland (RBS), another of the primary providers of funds to the legal market, is likely to be similar.
Sources familiar with both HMRC’s changes and the banks suggested that the short time frame means putting in place new funding for all the partners who are currently seeking it will be hard to achieve.
“I haven’t heard a single firm say ‘yes, we’ll just pay the extra tax’,” said one source. “As far as I can see they’re all looking to fail condition C, which means stumping up more money via a capital call. But from the banks’ point of view, because of the fixed date of the change, there is a certain physical impossibility to it.”
The source suggested that the banks were “set up for a steady drip feed” of a few hundred new loan applications around this time, not 8,000.
“It means that the changes firms are looking to make are also subject to the banks being able to cope and process them,” added the source.
However Tom Wood, head of professional services industry at Barclays, denied there would be any problem meeting demand.
“We have the scale to deal with this significant spike in partner loan applications,” said Wood. “Lending is what we’re here to do. As long as the firm is financially stable, with a clear strategy and we’re satisfied with what the funds are being used for then there shouldn’t be an issue.”
HMRC’s tax changes were first trailed in December last year. Since the start of this calendar year a growing number of UK firms including Trowers & Hamlins (10 February 2014) and TLT (10 February 2014) have confirmed that they are consulting with their FSPs about their response, with an injection of new capital looking to be the most likely route.
This week further guidance on the issue is expected from HMRC (13 February 2014).