What a difference a month can make. Herbert Smith’s decision to backtrack on changing the date of its financial year-end for tax purposes says a lot about the firm and its management. And it says even more about the pressures currently facing the UK legal market in general (see story).
Herbies stood to benefit to the tune of around £10m in deferred tax payments had it changed its financial year-end from 31 March to 30 April. Instead, the firm has plumped for changing its year for accounting purposes only.
At the grave risk of sounding like a tax adviser, a financial year ending on 31 March would be a 12-month period taxable in the year up to 5 April, the date the UK tax year ends. By contrast, an accounting year ending on 30 April 2009 would be assessed in 2009-10.
In other words, because law firms pay tax on a current year basis, the year of the accounting period for a tax year to 31 March is one year. If you change that to 30 April, it straddles two years. By making that change, Herbies would have got an entire year’s difference in its accounting treatment out of a one-month shift. “It would have given them a potentially significant cashflow advantage,” says Colin Ives of BDO Stoy Hayward.
The wider context for this story is clear. A year ago most UK firms were still enjoying the tail end of the biggest boom period they had ever known. Now the world looks very different indeed. And for most, 31 January next year will be a gloomy time as tax payments for partners, VAT liabilities and property costs coincide.
As Ives notes: “Funding for law firms will be stretched as never before.”
It will be a rare partnership that in the current climate is not seriously looking at any techniques that might help offset the impact of the downturn.
(Incidentally, this also includes those LLPs that are enthusiastically embracing their ability to treat classes of partner other than full equity as self-employed, and therefore pay less national insurance).
Herbies, you’re not alone.