Get in shape for tax reforms

The Revenue's £25 million publicity campaign for the self-assessment tax regime is an important reminder for legal firms, says Cyril Dixon.

THE MAN in the bowler hat has something to offer lawyers. The taxman caricature who fronts the Inland Revenue's television advertising is bearing a self-assessment message which appears to have been missed thus far.

Less than 10 months before the beginning of the first tax year to which self-assessment will apply, there is evidence that many partnerships are nowhere near prepared for the change.

Last week, The Lawyer's joint survey with accounting firm Coopers & Lybrand suggested that 33 per cent of firms had at least two years' tax computations outstanding. A further 10 per cent said they had three or more years' figures outstanding.

The survey results are all the more surprising because it was conducted among the leading 1,000 law firms. Even the top operators, it seems, have some catching up to do.

Denise Catterall, tax partner at Coopers, says: “Some of these figures are surprising. They show that some firms are unprepared for the new rules.”

With a change as radical as self-assessment, the disruption which will ensue if firms have a backlog of tax returns to complete defies description. They will be scrambling to finalise calculations under the old system while trying to get to grips with the new one.

As if that was not enough, financial penalties will automatically be imposed on those who are late. “People are going to have to be much more up to date,” says Christopher Norfolk, chair of the Law Society's revenue law committee.

And, strictly speaking, individual partners will be liable because self-assessment gives them the job of calculating and submitting tax returns instead of the firm.

Another important figure to emerge from the research is that 80 per cent of practices store tax due on partners' income as a source of working capital until the date at which it must be paid over to the Inland Revenue. Under self-assessment, the time lag between the end of the tax year and the payment deadline will be cut significantly, reducing a valuable source of working capital.

Also, because partners will have legal control over the unpaid tax, they may prefer using it for their own temporary investment purposes. If such working capital is drained in this way, strapped firms may be forced to delve into their reserves, increase their overdraft, or ask partners to supply funds to solve cash-flow problems.

Given the impact of self-assessment, and the fact that the changes were first mooted two years ago, it is surprising to find law firms still lagging behind in preparation.

Catterall says: “There hasn't been any great pressure from the Inland Revenue. Also, when these new rules were suggested, 1996/97 was a very long way away.”

Norfolk points to the fact that the first tax deadline will not be until January 1998. “We are still a couple of years off this happening,” he says. “We can't wait for the last minute, but that is clearly causing people not to be gearing up.”

However, the clock is now ticking away, and the coming year has to see a flurry of activity to remove any lingering inertia. Tax law sources predict conferences, seminars, papers and feature articles on the impact of self assessment.

Catterall says: “I don't think firms will continue to ignore this potential problem. I think they will start to take things more seriously.” Norfolk adds: “As long as firms know how they are going to respond, they will fare well.”