By Legal Futures Associate Recovery First
As we approach the much-anticipated Autumn Budget on October 30, 2024, Prime Minister Keir Starmer has set the tone for what he describes as a “painful” economic roadmap. In a recent speech outside Number 10, Starmer issued a stark warning that “those with the broadest shoulders should bear the heavier burden,” signalling potential tax increases that could significantly impact various sectors, including the legal industry.
The Autumn Budget: What’s on the horizon?
Starmer’s speech has left many in the legal sector bracing for potential changes that could reshape the legal landscape. Although the Prime Minister reaffirmed Labour’s commitment not to increase income tax, VAT or National Insurance, he hinted at other avenues for raising revenue—most notably targeting capital gains tax, corporation tax, and inheritance tax.
How the possible tax changes could impact the legal industry
Capital Gains Tax (CGT):
Starmer’s government is reportedly considering aligning CGT rates with income tax rates. This move could potentially raise an estimated £16.7 billion annually. For law firms advising on asset sales, property transactions, or business disposals, this could lead to a surge in client enquiries as individuals and businesses look to pre-emptively manage their tax liabilities. However, it may also deter transactions, reducing the volume of conveyancing and corporate work.
Corporation Tax (CT):
Though Starmer did not explicitly confirm an increase in corporation tax, his refusal to rule it out has fuelled speculation. Currently set at 25%, any further increase could place additional strain on law firms, particularly smaller practices already struggling with rising operational costs
An increase in CT could also impact corporate clients, leading to tighter budgets for legal services and potentially delaying planned business expansions or mergers.
Inheritance Tax (IHT):
Starmer’s government is also considering closing inheritance tax loopholes, such as the business and agricultural property reliefs. These changes could drive a wave of estate planning activity as clients rush to safeguard their wealth under the current rules.
For law firms specialising in wills, trusts, and probate, this could mean an uptick in advisory work, but also more complex legal challenges as clients navigate the new landscape.
A period of economic tightening for law firms
In his speech, Starmer was clear: “We will do the hard work to root out 14 years of rot, reverse a decade of decline, and fix the foundations.” This approach suggests a commitment to structural economic reforms, which could have far-reaching implications for businesses and individuals alike.
For the legal sector, these reforms may mean adapting to a period of economic tightening, where traditional revenue streams could be impacted by changes in tax policy and client behaviour.
However, this also presents an opportunity for firms to position themselves as trusted advisers in a time of uncertainty, helping clients though these challenges with confidence.
Now is the time for law firms to reassess their strategies, optimise their operations, and ensure they have the financial resilience to adapt to whatever the Autumn Budget may bring
How Recovery First can support law firms through the transition
Exiting a less profitable legal market
The legal services industry has faced many challenges over the past decade. It is unsurprising that some law firms will make the strategic decision to exit specific practice areas to allow them to focus on more profitable markets.
With the help of Recovery First, you can ensure a smooth, compliant exit from any market, placing files with the most suitable firms from our panel of solicitors.
If you decide to exit an unprofitable or less profitable market, you will be required to transfer your existing files to an alternative firm of solicitors. Using the Recovery First method will ensure you recover the maximum value locked in your work in progress, thus helping to improve cash flow when you need it most.
Mergers and acquisitions
It has become clear in recent years that larger firms have more power to compete in such a competitive legal market. Due to this, the number of mergers and acquisitions in recent years has increased substantially. In some circumstances, the merging or acquiring firm may not wish to continue in a specific legal market. If this is the case, Recovery First can assist firms in leaving an unsuitable market and placing files with a suitable firm on our panel.
Solvent closure of a firm
Unfortunately, not all firms will survive the issues caused by the upcoming budget changes. Some will be required to close their firms due to insolvency or cash flow issues. If you are considering the closure of your firm, it is important that you seek professional advice and assistance as early as possible to avoid a distressed situation.
The formal insolvency process for solicitors can be a lengthy one, and will require liaison and input from the Solicitors Regulation Authority (SRA), as well as insolvency lawyers and insolvency practitioners.
Quite often, we are approached by firms facing insolvency; we can assist by effecting introductions to appropriate experts, with a proven track record of working with law firms.
If necessary, we will work closely with the insolvency team to complete a structured and compliant run-off of files. We will aim to recover 100% of the firm’s recoverable WIP by distributing the files to our panel of solicitors. We have anecdotal evidence of projects where the outcome has exceeded 100% of the recorded WIP value.
Law firm sales
Changes to capital gains tax are likely to have an impact on those considering selling their law firm. Firms considering a sale will need to engage in more detailed tax planning and possibly explore alternative strategies, such as phased exits, restructuring, or using other tax reliefs to minimise the impact of higher capital gains tax.
Recovery First can play a crucial role in helping firms maximise the value of their exit strategy.
We can assist firms in recovering the maximum value from their Work in Progress (WIP) before a sale, helping to boost cash flow and overall sale value. Moreover, we provide comprehensive support in planning and executing a strategic exit, ensuring that all aspects, including tax implications, are considered and managed effectively.
Contact Recovery First today
For those that want to get ahead of the curve and make changes before the Budget’s threatened tax rises, with no lengthy due diligence required, Recovery First can work quickly to achieve full value (less our fees) or your recoverable work in progress. Contact us today to find out how we may be able to help you.
Feel free to get in touch today via email (david.johnstone@recoveryfirst.co.uk), telephone (0845 056 1258) or contact Sally Dunscombe at sally.dunscombe@recoveryfirst.co.uk or 01357 440140.
