A traditional view of a firm’s tax lawyers is that they should be treated like your best china – wrapped up, put away and only brought out on rare occasions. They simply provide a support function that enables the other units in the firm to operate. This view has long been the lot of the tax team in many firms, but it represents a lost opportunity to maximise the value that tax lawyers can deliver, both in terms of fees and in winning new and better clients.
For a long time, the medium and larger firms have realised that a tax function is necessary in order to be able to undertake any transaction, other than the most basic. In the absence of a tax presence it has been necessary to rely on advice provided by the client’s accountant in relation to structuring or even the drafting of relatively simple tax warranties. This can result in delay and misunderstanding. An accountant might not always be aware of issues that the proposal raises from a drafting, legal or practical perspective. Meanwhile, the law firm is wondering how much the accountant is being paid for all this.
Major law firms have included tax within their practices for many years and most middle-tier practices now have some form of tax provision. Even so, as an area of practice, tax law, while by no means in its infancy, is going through something of a teenage phase. In a world where there is constant pressure on all firms to compete for fees and clients, it is rare for a firm to be able to allow its tax team the time to develop and mature to be anything more than a transaction support function. The type of tax work involved in order to get the average deal completed in an efficient manner could be described fairly as commodity-type work – it is functional, necessary and often not particularly rewarding, either in terms of fees or from a job satisfaction point of view, for the tax lawyer undertaking it.
Law firms have realised that tax has a unique ability to sell itself to clients. When a cash benefit can be objectively demonstrated to a client, it is hard to see why any client would not take a tax-efficient strategy seriously and instruct a firm that can deliver that kind of value. At a time when it is becoming increasingly difficult for many law firms to differentiate their offerings, the ability to deliver a quantifiable financial benefit is akin to a form of alchemy when it comes to selling a firm’s expertise to clients.
Having been retained for tax advice, it often becomes much easier to convince a client to retain the rest of the same organisation to provide the corporate, property, employment and finance advice necessary to implement the tax strategy in the most efficient and effective manner. When the advice that you give adds to the return on investment rather than dilutes it, the real – and more importantly the perceived – value being offered to the client is a powerful selling tool. Firms that cannot devise the right tax strategy for a client’s needs will find it much harder to pitch against rivals which can.
In order to achieve this tax idyll within a firm, it is necessary for a number of things to happen. First, the tax team must be able and ambitious enough to deliver robust, deliverable tax solutions to clients and targets of the firm.
Your tax lawyers must be included from the outset of your pitch for transactions. This allows the value that can be offered in the transaction to be used to attract work to the firm. Even if the work is already won, it is vital to begin with firm foundations from a tax perspective, or alternatively to make the client aware of the tax implications of achieving its commercial goal early in the proceedings. It is at the upfront planning and structuring stage of a transaction where the opportunity to maximise the contribution that your tax team can make to a client (and the contribution that the client can make to your fee income) is at its absolute highest. If this early opportunity is missed, one runs the risk of less latitude for reworking a transaction in a practical and pragmatic way. It is often late involvement in transactions that can result in the tax team being viewed as always finding problems rather than solutions. This is because the parameters within which it can work at this late stage are extremely limited.
The qualitative aspects that early involvement provides in terms of the job satisfaction and retention of tax practitioners should not be underestimated. For many, it is this more complex and involved work that provides the greatest degree of satisfaction, and if that work happens to throw up some interesting technical issues to be cogitated over, all the better. If a firm has aspirations to retain a profitable, client-delivering, value-adding tax team, it will need to make sure that the team is fully motivated. If the tax team is happy merely to fulfil a role as support lawyers, it will never have the drive to deliver clients. If it does not, put simply, the firm will always support a necessary, but uncomfortable, overhead.
The ability to generate an identifiable and quantifiable saving of tax through strategies and structures provided and implemented also produces an ability to consider alternative ways of charging for the work undertaken. While the implementation of a proposal may be profitable were the work charged for on a time-cost basis, this can pale into insignificance when compared with a charging structure where the fee is based on tax actually saved. Clients understand this basis of charging (many major accountants have been using this structure for years) and often appreciate the degree of co-investment that arises if a firm is happy to base its fee on the advice it has given that has proved to be effective.
One area of practice that is often included within the remit of the tax unit is the provision of employee benefits. The design, implementation and rollout of an employee share scheme or other incentive arrangement is generally a self-contained and discreet project. In considering candidates to provide advice on this type of work, a client might feel better able to put the work to tender and move away from its usual legal services provider or accountant, on the basis that this is outside the ongoing relationship with any incumbent lawyers.
The implementation of employee incentive arrangements involves board-level contact with many of the key functions within a target client, as a project of this type will often involve an extended senior team, usually including the finance director, head of HR and head of legal. This provides the opportunity to generate senior contacts within the client’s organisation and potentially to engineer introductions to other practice areas and personnel within your firm, thus opening doors to prospective clients that might historically have been shut. Employee incentive arrangements also possess the capacity to remunerate directly the decisionmakers within a client’s organisation when the arrangements are rolled out, in particular share incentive or other arrangements for senior management.
Unsurprisingly, this often results in those people being rather well disposed to the implementation team.
A full-function tax capacity has the ability not only to enable the rest of the firm to conclude transactions on behalf of clients in a tax-efficient manner, but also has the capacity to generate fees and client wins. It is in this secondary area that the potential contribution of a firm’s tax lawyers might be overlooked, but the area is one that most firms should be looking to exploit.
Kate Schmit is a corporate tax solicitor at Hammonds