Denton Wilde Sapte could save much of the estimated £10m cost of closing its Asian network by offsetting it against a one-off tax hike that UK law firms face in January 2005.
Due to a change to the way the Inland Revenue will tax work in progress (WIP), law firms will face a huge one-off increase in the 2004-05 financial year.
Because 30 per cent of Dentons’ WIP is older than three months, more than the average for City firms, it could be hit hard by the Inland Revenue’s decision to switch WIP tax calculations from a cost basis to a real basis.
In a worst case scenario, Dentons faces costs of £10m to shut down Asia, although it could be much less.
Redundancy costs are certain as the firm will let all lawyers in the region go, regardless of whether or not whole offices are transferred to other law firms. However, if the firm can sell off whole offices, as the management still hopes, it will save significant property costs by transferring leases. If successful, virtually all of the loss could be offset against increased tax on WIP.
Given that Dentons’ Asian network is understood to have cost the firm around £17m since the Denton Hall-Wilde Sapte merger in 1999, the decision to close it down this year looks like a good one.
Partners at the firm are increasingly confident about the international goals set by the recent strategic review. The Russian and Central Asian practice, which the firm decided to keep on for strategic reasons, is understood to be losing the firm just £80,000 a year.
Dentons now intends to bolster its European network by building up Paris with lateral hires. In Germany, the firm is sticking to a best friends strategy, although it is increasingly working with Hengeler Mueller and former Denton International partner Heuking Kühn.