Potential earlier payment of income tax for Members of law firms and the impact on firm cash flow and funding

Last week the Government issued a consultation regarding the timing of tax payments and collection by HMRC.

Please click here to view the document.

It is worth noting in the consultation document that Para 4.59 specifically asks for responses on large partnerships. Para 4.17 also makes it clear that the government wants earlier tax payment.

Whilst this is only a consultation document at this stage the general thrust of the consultation is to accelerate the collection of tax by HMRC. Law firms could be significantly affected in this process and it is highly likely over the next few years that the practice of law firms being able to pay their income tax for Members significantly in arrears of earning it will come to an end.

Whilst it is unlikely this change would happen quickly and without transitional arrangements it would ultimately affect the funding of law firms significantly; particularly those with 30 April financial year ends who at times may have up to 18 months to pay tax on some of their profits at present.

This then leads on to the need for firms to reconsider the impact this might have on partner capital account levels and debt on the balance sheet.

The consultation closes on 13 July 2021 and one might expect that we will see some decisions being made about this in November 2021.

Whilst appreciating this is not a great news story I felt it might be useful for firms to keep this in mind in the context of:-

Considering 2021 profit distributions
Use of any CBILS facilities currently available
Impact on partner capital modelling

At this stage we cannot really predict with any certainty the outcome from this process but the direction of travel indicates law firms will be paying income tax for Members earlier in the future.

If we can help with any queries on the subject generally please do get in touch.