Firms using service companies to limit impact of income tax hikes

A number of law firms are considering putting profits into new business structures to mitigate the effects of increased income tax levels for partners.

City accountants have recently experienced an increase in demand from law firms looking at setting up subsidiary service companies or introducing new ownership structures to the LLP.

Both models allow firms to bypass the maximum 50% individual income tax rate for a portion of their profits in favour of 28% corporate tax rate.

An increasing number of law firms are considering establishing service companies alongside their main business through which they can re-route some profits, according to research by accountants Smith & Williamson.

The responses gathered from more than 100 law firms show 32% of respondents have completed or are in the process of setting up a service company, while 33% are considering it.

A further 11% of respondents have introduced or are in the process of bringing in a corporate member, whereby a limited company becomes a 'member' of the LLP and retains its own share of the firm profits. A third of respondent law firms are now considering this new model following the introduction of higher personal tax levels in April this year.

However, accountants have warned that the structures do not fit all firms since they add a significant complexity to the firm organisation in terms of regulatory implications, as well as additional auditing and accounting costs.

Smith & Williamson tax director Pam Sayers commented: "While it can significantly mitigate the effect of the higher tax rates, anti-avoidance legislation means that partnerships need to be wary of implications before taking decisions."

Simmons & Simmons managing partner Mark Dawkins (pictured) commenting: "As a firm we have stayed rather conservative when it comes to tax structures. Previously the hassle was not worth the benefits, but the 50% tax rate means that we have to look at our options."

George Bull, head of Baker Tilly's professional practice group, commented: "There are two main drivers behind the introduction of a corporate member or service company to an LLP – the higher tax rates, as well as the need to reduce reliance on bank finance which is no longer easily available."