An imminent tax increase facing law firms may have less of an effect than had first been believed. The tax changes were introduced by a clarification statement on accounting standards which have the effect of valuing work in progress (WIP) at selling price rather than cost.
According to George Bull of accountancy firm Baker Tilly, the “overwhelming” view to emerge from a meeting of the Association of Partnership Practitioners (APP) last Monday, was “not as alarmist” as expected. However, Bull accepted that the effect depended on the profile of the firm.
David Sedgwick, managing partner of Clarke Willmott, said that for a firm like his with a heavy litigation bias, the new tax could be “very significant”. Clarke Willmott carries around four months WIP at any time. “We’re also growing,” said Sedgwick, “which means our profit for tax purposes grows, but the cash to pay the tax lags behind. We’re already thinking of changing the way we pay out our profits at the end of the year, and we’ve already made cash collections the key criteria on which partners are assessed.”
John Goreing, finance director of Fladgate Fielder, was unconvinced that the effect of the changes would be minimal. “For a clarification statement, it’s far from clear,” said Goreing. “We’ll be writing to the Inland Revenue.”
Any firm that feels it is likely to be adversely affected has until 13 February to lobby the Inland Revenue.