England: Rise in corporation tax could reverse the trend of lawyers setting up limited companies

Traditional partnerships are on the decline as figures show that most law firms have adopted limited company structures for tax purposes, The temperature reports.

Research by the Solicitors Regulation Authority (SRA) indicates that 53% of businesses south of the border are limited liability companies, an increase of around 90% over the past decade.

A change in corporation tax could, however, reverse this trend.

An SRA report attributes the change in preferred commercial vehicles to a reduction in corporation tax, which fell from 24% in 2012 to 19% in 2017.

In addition, the tax rate on dividends paid to shareholders of limited liability companies was lower than that imposed on the profits of limited liability partnerships or members of traditional partnerships.

Data shows that 52.6% of law firms are incorporated. This group is followed by sole practitioners at 18.5 percent. LLPs represent 15.3% of firms and traditional partnerships 13.2%.

The report states that shareholders of law firms in public limited companies had “benefited from a significant tax advantage in recent years”, which had “enabled them to benefit from a greater share of the profits of their law firm than the partners of traditional partnerships or LLPs”.

Report authors Hazlewoods, an accountancy firm, noted that tax benefits for law firms were due to end next April, with the UK planning to raise corporation tax to 25% for companies whose profits exceed £250,000.

Luisa D. Fuller