The impact of HM Revenue & Customs’ decision to overhaul the way salaried partners are taxed is being felt across the City as a number of leading firms confirm they are reviewing their arrangements, although some of the largest Legal Business 100 firms have come out to categorically deny the changes will have any effect at all.
Firms including Herbert Smith Freehills, Ashurst, TLT, DWF, Weightmans, and Trowers & Hamlins have all confirmed to Legal Business that they are reviewing their partner remuneration arrangements in anticipation of the new rules, which will mean partners with under 25% of their salary attached to profits will be regarded as having a ‘disguised salary’ and treated as employees by tax authorities in a move expected to add thousands of pounds onto firms’ tax bills.
In response to the overhaul, which HMRC stated at the end of February will come into effect in April 2014 despite protests from the industry, Hogan Lovells is understood to be currently considering the changes but no final decisions had been made at the time of going to press, while Herbert Smith Freehills said it is ‘looking into how [the changes] will impact us’.
While top 15 LB100 firm Ashurst says it will ‘not ask for any additional capital’ it is ‘reviewing the structure of remuneration packages’, according to a spokesperson, and at Simmons & Simmons, which has 85 non-equity partners, a spokesperson added: ‘[The firm] eagerly awaits further guidance that was due to be issued, which will assist in assessing whether changes to the remuneration or capital structure are required.’
Of the Magic Circle firms, Linklaters and Slaughter and May have very few non-equity partners – 28 and four respectively according to figures provided for the Global 100 – and both firms said they expect no real impact from the latest measures.
Allen & Overy, which has 85 non-equity partners, told Legal Business that it expects the proposals to have ‘no significant impact on us as all our partners share in the profits of the firm’.
Partners with under 25% of their salary attached to profits will be regarded as having a ‘disguised salary’.
Magic Circle rival Freshfields Bruckhaus Deringer, which had only 29 non-equity partners at the last tally, stated that none will be affected by the changes, although it declined to say why.
With 166, Clifford Chance has by far the most non-equity partners of the Magic Circle firms, but was the only one to decline to comment on its plans.
Of the firms that have announced substantive changes so far, TLT has requested that each of its 60 fixed-share partners contribute £20,000, a move that will boost its funds by a minimum of £1.2m. ‘We will put in place external funding for fixed-share partners if needed, to support any capital contribution,’ a spokesperson for the firm said.
National firms Trowers & Hamlins and Weightmans are both expected to require fixed-share partners to inject capital following a consultation.
Norton Rose Fulbright, CMS Cameron McKenna, Dentons and Macfarlanes all refused to comment.