Former Dewey partners gear up for tax bill battle

Former partners of Dewey & LeBoeuf’s London base are attempting to minimise their financial blow from the US firm’s collapse by using its 2012 losses to slash their tax bill.

Some ex-members of the US firm’s UK LLP have consulted with accountants to establish whether they can use the loss produced by the City business in 2012 to offset against their taxable income and gain terminal loss relief from HMRC.

The repayment can be claimed by individuals who make a terminal loss on a discontinued trade by offsetting the loss made in the part of 2012 running up to the collapse against their income going back three years.

Equity partners’ allocation of any loss made by the firm in the five months to its 28 May administration is first offset against income from that part-year and, if there is any loss left, against the earlier years going back year-by-year to 2009.

HMRC then provides a refund of overpaid tax or discounts the amount from outstanding tax bills.

It is thought that partners are eligible for the relief if they remained at the US firm until 1 January 2012, the start of Dewey’s final financial year. However, partners who left before then may be eligible for other benefits such as sideways loss relief.

The same issue caused tension among former Halliwells partners when the Manchester firm collapsed in 2010, with members only eligible for terminal loss relief if they were at the firm on 1 May 2010, roughly two months before it filed for administration. Unlike Dewey, which followed a calendar year financial cycle, Halliwells’ financial year-end was 31 April.

Separately, it is understood that some ex-partners may be able to make tax savings by offsetting the capital loss made from partner capital being tied up in the defunct LLP against other capital gains made independently of the firm. However, it is unclear whether the circumstances make them eligible for this deduction.

The issue of tax payments is particularly sensitive for Dewey partners, many of whom were taxed on their target compensation for the 2011 financial year – the amount they would have received if the firm had hit budget – despite their actual earnings being much lower.

Ex-partners are attempting to minimise losses in the context of this, with members also at risk of losing the 36 per cent of target compensation they left in the firm each year as capital.

A former Dewey partner commented: “Partners have lost all their capital, barring a miracle.”

A City tax consultant said: “When a firm goes bust like that, you need to determine whether partners will get that capital back. They may very well have had losses in the final year so they could be looking at terminal loss relief.”

HMRC declined to comment on the Dewey case.