Bakers City head Alex Chadwick argues that law firms are increasingly primed to take core tax work off Big Four rivals
As the international tax framework becomes subject to increased scrutiny and legal change, the demand for strategic global advice has never been stronger. In the UK, law firms have traditionally played second fiddle to the Big Four accountants when advising on tax. Today, however, law firms with the right infrastructure are incredibly well positioned to take more of a leading role in the tax affairs of their clients. This is down to a combination of greater regulation of audit services, tougher restrictions on the provision by accounting firms of non-audit services, such as tax, valuation and legal services and deregulation of the legal profession.
Rule changes
When it comes to advising the largest clients, the most significant regulatory constraint comes in the shape of mandatory firm rotation for audit work, which is being introduced in the UK and the EU following a major review led by former EU Commissioner Michel Barnier. This requires EU public interest entities (including EU-listed companies and unlisted credit and insurance institutions) to change their auditor every ten years or so. Audit firms will also be subject to increased restrictions on the provision of non-audit services to EU public interest entities’ audit clients.
These changes will significantly destabilise the relationship many of the large accounting firms have with their clients because if there is an audit rotation, then the tax work will typically have to rotate as well. As the Big Four refocus their relationships to avoid conflicts of interest, there will be more opportunities for other firms to take on the strategic tax work and more of an appetite on the part of clients to look beyond the Big Four for such services. We have already seen this happen, with the mid-tier accountancy firms looking to take advantage of opportunities to grow their share of the audit and wider professional services market. Law firms can also benefit, thanks in part to loosening regulations affecting legal services and an increased readiness of clients to seek different providers and different approaches to their tax planning.
In the UK, the introduction of alternative business structures (ABS) for law firms is also having an effect on the level of tax-planning expertise firms can offer. The Solicitors Regulation Authority started issuing ABS licences in 2012. Since then, the fact that non-lawyers can take a stake in the business offers clear advantages for law firms seeking to attract and recruit high-level, non-legal personnel. This is especially the case for tax. Now law firms can offer experienced tax practitioners an attractive, partner-level alternative to working at the Big Four.
New roles
This movement in senior personnel is especially beneficial to clients. Traditionally, when it came to tax advice in the UK, clients might have used law firms as either a second pair of eyes; to play a role on a third-party transaction; on structured finance deals; or to provide a legal opinion. Now they can receive more proactive tax-planning advice, backed up by senior economists, accountants and tax specialists, on top of all the legal services crucial to a major corporate project. It is these added services, such as employment, regulatory and IP, which the accountancy firms are themselves trying to develop as they build their legal practices.
Now law firms can offer experienced tax practitioners an attractive, partner-level alternative to working at the Big Four.
Law firms already have these in place, and clients are recognising that the depth of specialisation that accountancy firms offer across different areas of tax is not necessarily appropriate for all of their strategic matters. Law firms can be more fleet-of-foot and bring a more beneficial and wider range of experience to bear, even if (and sometimes because) their tax departments are more streamlined.
Changes to regulations outside of the UK and EU are also working in favour of the law firms. Inevitably, variances in local regulations will have an effect on what can and cannot be done and some key markets remain closed to lawyers. India, for example, does not permit foreign law firms, whereas the accountants have full access. Nevertheless, other important jurisdictions are loosening their rules. One of the more significant developments has been in the US where, in December 2015, the New York Bar ethics committee concluded that attorneys admitted to practise in New York were permitted to share legal fees with lawyers in other member firms of an international law firm in which ‘non-lawyers have a financial interest or managerial authority’. This change is of huge benefit to international law firms with non-lawyers in the partnership.
None of these regulatory changes will completely undermine the dominance that the Big Four accountants enjoy. They do, however, allow greater inroads into the tax services market, particularly in the UK where law firms previously had very limited access. The typical view is that it is the accountancy firms that are encroaching on the legal market rather than the other way round. While this might be true in some areas, recent developments have shown that when it comes to strategic international tax advice, the direction of travel does not all have to be one way.
Alex Chadwick is London managing partner of Baker & McKenzie.