Professional practices
The professional practices sector has experienced an unprecedented period of turbulence and many firms have had to cope with a drop in turnover putting pressure on profitability. Firms have responded by reviewing costs and their operating structure which has resulted in many firms reducing not just staff but also partner numbers over the last 18 months.
Certain firms such as those involved in the property market have suffered the most and in particular the recession has seen the demise of several law firms involved in conveyancing and numerous estate agents along with redundancies at many of the household names in the property market. The changes to Stamp Duty Land Tax exempting property purchases for first time buyers up to £250,000 may help some of these firms. However very few firms have been immune to the impact of the recession and maintaining profitability has meant that managing a firm’s cost base has been key.
While banks still regard the professional practices sector as being good business they are now demanding more and better information from firms so that they can monitor their progress and those renegotiating facilities have found rates increasing, security being demanded and arrangement fees significantly higher than in the past. Many firms have had to rebuild their balance sheets in the same way as the banks have been forced to, resulting in capital calls for partners, reducing drawings and partners leaving more money in the business.
The recession has thrust finance professionals to the front in ensuring stability within the businesses. For some the recession has meant that they have for the first time been empowered to grasp the nettle of work in progress and debtors and they have made real progress in reducing their lock up. The accountants’ maxim that cash is king has proved to be true.
Many firms have found the Business Payment Support Service invaluable in spreading their tax payments at a time when the business has been under pressure. However while this facility will continue many are finding that HMRC are demanding more information before agreeing to fresh arrangements. Many firms have had to take account of the new 50% tax rate and revise their tax provisioning policies to ensure that sufficient cash is retained from partners to make higher tax payments in the future. Additionally from 2011 the increase in employers’ National Insurance Contributions promises to add to the pressure on employment costs.
The future for many is still uncertain and the legal market in particular faces new challenges with external ownership and investment in legal firms promised for 2011. Consolidation within the legal sector is likely to accelerate due to the existing financial pressures and the challenges from new players in the market looking to bring the skills and disciplines associated with the unregulated corporate market. However, some firms see the changes as a major opportunity to expand their offering and grow at the expense of others.
Those firms who went into the recession strongest and those who reacted first in restructuring their businesses are the most likely to be the major benefactors of any recovery.
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At the time of last year’s Budget we highlighted the importance of professional services firms to the UK economy and welcomed the Treasury’s recognition of the contribution the sector makes: taken as a whole the professional practices sector is a major employer and has the greatest sector specific output. Almost one year later and following a significant downturn in the recession what are the prospects for professional practices?
The outlook for the year ahead is brightening slightly but the pervading sense is still pretty gloomy. Few professional service firms are predicting large increases in trading activity or a swift return to the level of profitability enjoyed in recent years. Increasing employment costs through the introduction of the new 50% top tax rate for those earning in excess of £150,000 and national insurance rises to come in 2011/12 will increase the pressure on a sector that relies on individuals of high ability who command commensurately high rewards.
Additionally, the withdrawal of personal allowances for those earning in excess of £100,000 and the restriction of higher rate tax relief on pension contributions for those earning in excess of £150,000, mean that professional practices will be amongst the hardest hit as the government looks to raise as much revenue as possible to help close the deficit.
In detail
Tax rates
The Chancellor announced that there would be no change to the rate of capital gains tax, corporation tax or VAT and that previously announced increases to income tax and national insurance would proceed.
Entrepreneurs’ relief lifetime allowance doubled
The doubling of the lifetime limit for entrepreneurs’ relief will provide a welcome long-term advantage to owners who have developed their business to the point of sale. The potential value of the relief to an individual is now £160,000 but is still a long way behind the full 10% rate available under taper relief.
Additional taxes on top earners confirmed
Three measures that will increase the income tax burden on the highest earners are 50% income tax on incomes over £150,000; no personal allowances for people with incomes over £100,000 and the withdrawal of higher rate income tax relief for pension contributions once income exceeds.
Annual investment allowances doubled
The amount of capital expenditure by businesses that will qualify for relief is being doubled to £100,000 p.a. from April. This will mostly benefit smaller businesses, who can now obtain a tax deduction for all of their qualifying spend each year, as they seldom spend more than the new limit.
Overhaul of penalty regime for late VAT returns
Currently there is a separate penalty regime for the late filing of VAT returns, this is known as the Default Surcharge Regime. Following consultation, this system of penalties will be replaced by separate penalties for late filing and/or late payment.