UK: Professional Practices News. Confidence Takes A Nose Dive, Winter 2008/09

Last Updated: 13 January 2009
Article by Simon Mabey

Professional Practices Survey 2008/09 - Business Confidence Plummets

Simon Mabey analyses the trends and attitudes revealed in our 14th annual survey of professional practices.

This year, 126 professional practices, including lawyers, property consultants and patent agents, took part in our annual survey. The most striking finding is the fall in business confidence. Last year's results gave the first hint that confidence was starting to wane, but this trend is dramatically more marked this year. The service sector has been one of the success stories of the UK economy over the last few years, but with only a little over half of the firms surveyed saying they are confident about the next 12 months, we are undoubtedly entering a more difficult phase of the economic cycle. Moreover, the percentage of respondents who are not confident about the future soared to 42%, from just 11% in 2007/08.

Fig 1: Business outlook comparison for 2006/07, 2007/08 and 2008/09

Furthermore, we conducted our survey just before the period of market volatility which followed the collapse of a number of international banks and financial institutions. Therefore, our results could well under-represent the level of uncertainty prevalent across the sector.

The survey also explored business issues facing professional practices. Unsurprisingly, the economy is top of the agenda; almost four in five (77%) of respondents consider it a key issue.

According to the results, the second most important issue facing the sector relates to fee income. However, with only one in six (14%) citing this as an issue, it appears that concern about fee income is dwarfed by that about the economy. For the first time since this survey was started fourteen years ago, 'the management of a downturn' was mentioned – 6% feel this to be a concern.

Increased merger activity ahead

Despite unease about the sector's future, 60% of the respondents expect to see the level of merger activity increase. The equivalent figure last year was less than 44%.

It would seem, therefore, that while the economy has been booming, the anticipated level of merger activity has not materialised and, as the economy falls, consolidation is expected to increase. This suggests that some practices may look at defensive mergers in the year ahead.

Indeed, approximately one in five of our respondents admitted they were seeking a merger or acquisition at the time of the survey, of which about a third anticipated completion within the next three months. And, while half of these tie-ups are likely to add only 10% or less to revenue, a quarter may add as much as 50% to earnings. This appears to confirm that, as the economy deteriorates, we can expect to see further consolidation across the professions.

Firms take a risk when merging: in good times, merging two strong, complementary practices can build a 'super firm'; in bad times the opposite can occur. However, in the current market, the need to deal with underperformance may outweigh any potential problems of aligning cultures.

Team acquisitions still of interest

Interest in acquiring established teams from other practices appears to be even higher up the agenda than in 2007/08. More than 82% of firms admitted that they would consider this, whereas last year the figure was 77%. This trend appears to be most prevalent among law firms, where 84% said they would buy a team from another organisation. The equivalent figure for property firms is 73% and just 69% for patent agents. Not surprisingly, it is the larger practices which are most acquisitive.

Furthermore, just over half of firms (54%) have bought a team in the last two years, three-quarters of which have finalised the deal in the last year. Both London and provincial firms seem to be equally involved in such acquisitions.

When looking at practice areas that have changed hands, real estate is the most common, closely followed by litigation and company commercial. The major attraction of buying 'ready-made' teams appears to be profitability. Almost threequarters of those who acquired a team reported that it was profitable within two years, the majority of which were profitable within the first year of trading. However, acquisitions and mergers are also seen as an excellent means of developing specific sectors and growing the client base.

Most teams that changed hands comprised 5 fee earners or less, while only 10% had more than 20 fee earners.

Fig 2: Acquired team size (in terms of fee earners)

Looking east

Notwithstanding the decline in business confidence, our survey results reveal that the professional services market operates increasingly at a global level, with 81% of respondents providing international services. The most common route is via an associated firm or 'best friends' relationship. However, 41% of respondents who provide international services have a branch office overseas.

The results indicate, in particular, that there is a trend towards eastward expansion; respondents consider that the Middle East offers the most potential, with China and India following closely behind.

In contrast, lawyers and property specialists consider that the role of US firms in the UK has reached a plateau. 54% of participants do not envisage any further development in the role of US firms in the UK, while the remaining respondents are split equally between those who anticipate further growth and those who expect a decline in their role in the UK.

Fig 3: Overseas territories providing the greatest opportunities

Identifying the need for diversity

For the first time, we asked law firms about their diversity policies. Judging from our findings, steps are clearly being taken to introduce greater diversity among partners and staff, with the larger practices leading the way.

56% of respondents said they have amended their diversity monitoring systems and introduced more flexible working practices. Furthermore, 43% have amended, or are reviewing, their recruitment policy.


One year after the Legal Services Act was introduced, interest in raising external finance continues to grow. Giles Murphy assesses the likely impact on the legal sector.

Following the introduction of the Legal Services Act (the Act), we used our annual professional practices survey to explore how the Act has affected firms' views on external finance.

Given that the Act enables law firms to join forces with other professionals, a resounding majority (82%) of respondents anticipate mergers between firms of different disciplines. This is slightly up on previous years, as the equivalent figure in 2007/08 was 77%, and in 2006/07 was 78%. In order to finance this, 73% expect that firms will need to raise external capital, whereas last year the equivalent figure was 66%.

The survey explored when this finance might be raised. 28% of respondents expect to seek external finance within the next two to five years. The proportion of respondents who thought it unlikely that they would raise external capital within the next two to five years has fallen since 2007/08.

We also explored how external finance will be raised. Although structured bank finance remains the most likely route, just over half the respondents looking to raise finance would consider the private equity/ venture capital route (52%), while 38% would consider a public listing.

While we expected initial interest in the opportunities that the Act created, this has scarcely changed over the last 12 months, despite the worsening economic conditions and the decline in equity values. This suggests there is a significant minority of the top 100 law firms which is actively pursuing the option of external equity funding.

However, the realisation that this is not a route simply for partners to sell out appears to be gaining some traction. The 'opportunity for partners to realise capital value in the business' has slipped from the third most important reason for wanting to raise capital to the fourth. The most important reason remains 'funding the long-term future development of the firm'.

The survey explored the amounts firms might wish to raise and while 34% would raise less than £5m, those wishing to raise up to £50m has increased from 5% in 2007/08 to 10% this year.

Fig 2: Amount firm would wish to raise, if seeking to raise capital in the next two to five years

Looking ahead

2009 will see the first aspects of the Act coming into force when non-lawyers will be able to become partners in solicitors' practices. However, it is the potential opportunity of obtaining external equity funding which has grabbed most of the headlines; our survey suggests that there is a core and not insignificant element of the legal market that is heading in this direction.

While the regulations allowing these structures may not be in place until 2011, there are already a number of firms making the necessary changes to their ownership, remuneration and governance procedures. Through various forms of convertible debt from non-banking organisations, firms are changing their business structures to be ready to take advantage of the regulations the moment they become operational.

All law firms (and other professional practices who may look to merge with or acquire law firms) should, therefore, consider how their business model could be adapted to take advantage of the proposed regulations. Alternatively, they should assess the risk of their competitors going down this route and prepare a defensive strategy accordingly.


In light of the recent financial crisis, Neil Cullum discusses risk and return in relation to cash deposits.

Generally, people are able to accept that their investments in stocks and shares might go down in value. They are even able to come to terms with the fact that their house might be worth less now than it was a year ago. However, they find it hard to believe that their cash might not be safe in the bank.

Since the rescue of Northern Rock, we have seen the near collapse of the international financial system. Governments have stepped in with everincreasing injections of liquidity, which has culminated in a co-ordinated approach to recapitalising the system. At last, the strategy appears to be working and interbank lending rates are starting to return to more 'normal' levels. However, we are unlikely to see inter-bank rates restored to the previous structure where, in effect, they contained no risk premium.

Playing it safe

As memories fade and official base rates come down, yield will resume its importance. But in the meantime, individuals are likely to favour a low risk position and to accept a lower rate of interest from institutions they regard as 'safe'.

Deposits in UK banks, with a limit of £50,000 for each individual in each bank, are protected by the Financial Services Compensation Scheme (FSCS). Alongside this statutory protection lies the Government's commitment to "do whatever it takes to stabilise the banking system; protect savers and the taxpayers; and support the wider economy".1 To a certain extent, therefore, savers ought to be reassured about a deposit with any major UK bank or building society. However, many will still wish either to diversify their risk widely or concentrate it in only the largest, most recognisable names.

Professional firms' client accounts with UK banks offer FSCS protection up to the statutory limits and remain suitable for transient, transactional funds. However, there is normally a requirement that these sums are held at a bank. For firm's money that is likely to be held in cash in the longer term but where access might be required at short notice, a money market fund could be an attractive option. Such funds diversify risk, by being invested with a wide range of banks. They offer easy access, transparent pricing, enhanced yields and, in some cases, an attractive tax treatment.

1 Chancellor of the Exchequer's statement to the House of Commons, 13 October 2008. uk/statement_chx_131008.htm


Scenario planning improves decision making and strategic thinking. Denis Burn describes the process.

Some people liken scenario planning to 'rehearsing the future'. Others talk about the 'entrepreneurial power of creative foresight'. In less flowery terms, scenario planning helps businesses to spot good opportunities and to make decisions that will be more resilient in uncertain times.

Scenario planning was pioneered by Shell in the 1960s but since then – a time of rapid change, increasing complexity and rising levels of uncertainty – the technique has been widely adopted.

Offering a number of benefits, it now underpins the plans and decisions of many businesses. Benefits include the following.

  • Decisions based on scenario planning are more resilient because cause and effect have been rehearsed.
  • The process builds effective teams. It is creative and enjoyable, it exposes and feeds on differences of opinion, it challenges assumptions, it shares learning and it shows where new opportunities lie.
  • Scenario planning helps a business become more sensitive to external developments; it becomes more observant and nimble. Scenarios are easy to communicate so that staff become more aware of the drivers of success and potential dangers. You are less likely to be ambushed by unexpected events (and better able to respond).

Set the scene

Scenario planning is more useful if it is structured around an important and far-reaching decision, or possibly a 'what if' event. For example, you may wish to consider the impact of the Legal Services Act or test an existing strategy against the emerging realities of the economic downturn and volatile energy costs.

With a specific question in mind, you can identify forces that will dictate the success or failure of your strategy. The most important and uncertain forces then become the foundations of different scenarios.

Develop the plot

Building detail into these scenarios allows you to consider how the future might unfold and how your strategy would stand up. This is a creative process: scenarios take the form of a narrative with characters – stories that link together complex interactions and possibilities.

The idea is not to make forecasts of what is most probable but to identify what is plausible. Scenarios are not an end in themselves but are a tool to improve strategic thinking and decision making.

This simple-sounding, linear process can, of course, become more complicated. With additional time, hard data and the views of people outside of the core group, you can add greatly to the insights and the value of the exercise.

Finally, a critical ingredient in the success of the exercise is the skill and experience of the facilitator.


Should savers with large pension funds elect to protect their assets? Paul Garwood discusses.

On 6 April 2006, the Government replaced eight separate tax regimes governing UK pensions with one. As a result, the majority of savers enjoyed greater flexibility. However, a small number were disadvantaged by the new rules and, in particular, by the statutory lifetime allowance (SLA).

The SLA is the limit an individual can accumulate in a pension fund without incurring a recovery charge. If this limit is exceeded, a tax charge of 55% of the excess is payable when taken as a lump sum; a charge of 25% of the excess is payable if it is used to provide additional taxable income. The SLA currently stands at £1.65m. It will increase to £1.75m in 2009/10 and £1.8m in 2010/11.

Fund protection

To make sure individuals with large pension funds accrued before 6 April 2006 were not penalised by the new regime, the Government devised two methods of protecting funds from the recovery charge – primary and enhanced protection.

Primary protection is available to individuals whose total funds were valued in excess of £1.5m on 5 April 2006. The individual is given a lifetime allowance enhancement factor (LAEF) according to the extent that his/her fund exceeded £1.5m. The LAEF is then used to calculate his/her personal lifetime allowance (PLA) on retirement. Funds in excess of the PLA are liable to a recovery charge. While primary protection does not provide complete protection from the recovery charge, the individual can continue to make pension contributions without losing this cover.

Enhanced protection provides full protection and is available irrespective of the value of the investor's funds on 5 April 2006. However, if pension contributions are made, or defined benefits accrue, after 5 April 2006, the protection cover is forfeited.

Those individuals whose funds will exceed the SLA should take advice on which form of protection, if any, would be best for them. Transitional protection elections must be made before the Government's deadline of 5 April 2009.

Taking stock

When assessing whether a pension is likely to exceed the SLA on retirement, it is essential to note the different valuation methods.

For instance, a pension already in payment on 5 April 2006 is multiplied by a factor of 25. An unvested defined benefit pension is given a notional fund value by multiplying it by 20 and then adding any tax-free cash at face value.

Income drawdown plans established before 6 April 2006 use the same factor of 25. However, this formula is applied to the maximum income available, rather than the income being drawn, so it can produce some unwelcome anomalies against the plan's actual fund value. For money purchase funds that were unvested on 5 April 2006, the fund value itself is tested against the SLA on a 1:1 basis.

The decision whether to elect for protection – or to retain no protection at all – is far from clear cut, particularly in light of the complicated valuation factors outlined above.


Pambos Patsalides provides an update on the amended Solicitors' Accounts Rules.

The Solicitors' Accounts (Residual Client Account Balances) Amendment Rules 2008 revise the Solicitors' Accounts Rules (SAR) 1998 with effect from 14 July 2008.

The amended rules introduce a number of obligations, including returning surplus funds and reporting on retained funds. However, they also allow solicitors to be more lenient when dealing with small leftover balances.

Revised rules

Under new rule 15(3), solicitors are obliged to return client money promptly as soon as there is no longer reason to retain the funds.

New rule 15(4) requires solicitors to inform a client promptly of the amount of any funds retained at the end of a matter and explain why they have been retained.

If funds continue to be retained, the client must be informed in writing, on at least an annual basis, of the reason for the ongoing retention.

Under the old rules, tracing the rightful owners of numerous very small balances was inefficient. The amended rule 22 allows solicitors to withdraw leftover balances of £50 or less from client accounts without prior authorisation from the Solicitors' Regulation Authority (SRA). This is subject to them paying the balances to a charity and complying with the safeguards set out in a new rule 22(2A).

However, SRA authorisation is still required for amounts exceeding £50 or for those not to be paid to a charity.

New processes

The Guidelines for Accounting Procedures and Systems state that policies and systems should be established to ensure that firms comply fully with the rules. Solicitors wishing to deal with leftover balances of £50 or less, without prior SRA authorisation, will need to set up appropriate internal procedures and systems to ensure compliance with the new provisions of rule 22.

New paragraphs 4.6 and 4.7 of the guidelines state that policies and systems should be established for the timely closure of files, the prompt accounting for surplus balances and the reporting to clients when funds are retained.

The reporting accountant will be required to check the procedural side of the rule 22(2A) requirements for any accounting periods ending after 14 July 2008. Under rule 29, the reporting accountant is also required to report on any substantial departures from the guidelines.

Fee earners should become familiar with the rule changes as they will be best placed to ensure client monies are returned promptly and to inform the client of any monies retained and the reason for that retention. The obligation to write to all clients, on at least an annual basis, may be better dealt with on a firm-wide basis by the practice. Firms should ensure that client accounting systems and staff are kept up to date with the new rules and procedures.


Pam Sayers explains why you may wish to change your accounting date.

The majority of professional practices choose an accounting date early in the tax year, e.g. 30 April, in order to maximise the cash flow benefit of deferring, as long as possible, partners' tax payments on their share of the firm's taxable profits.

Thus, if a firm has a year-end of 30 April 2008, partners' tax payments (on this income) fall due on 31 January 2009, 31 July 2009 and 31 January 2010. The first payment is due 9 months after the end of the financial year; the second payment is due 15 months after the end of the financial year with any balance of tax payable 21 months after the end of the financial year. This means that partners will have overlap profits equating to approximately 11 months.

What if there is a decrease in profits?

An April year-end is beneficial when profits are increasing since the balance of tax does not become payable until 21 months after the end of the financial year. However, given that your firm may now be facing a decrease in profits, you should consider whether it is still beneficial to have an April accounting date. Generally, when profits are decreasing it can be advantageous to have an accounting date towards the end of a tax year, e.g. 31 March.

By changing an accounting date from April to, say, March, you will crystallise partners' overlap relief. Firms facing a decline in profits may, therefore, wish to review their anticipated profit for the current financial year and compare this with the overlap profits to identify if there is any merit in changing the firm's accounting date.

You should note that HMRC restricts the number of occasions that a firm can change its year-end.


Sharon Templeman offers top tips for your pre-year-end tax planning.

Make use of CGT

Taper relief and indexation allowance were abolished on 6 April 2008 and a flat rate of 18% Capital Gains Tax (CGT) now applies on all gains above the £9,600 annual exemption. You may wish to consider investing in assets which give rise to a CGT liability at 18% rather than income tax liability at 40%.

In the current year, capital losses are offset against capital gains and any excess capital losses can be carried forward indefinitely. So, in a case where one spouse is planning to sell an asset standing at a gain and the other is planning to sell an asset standing at a loss, think about transferring shares between spouses prior to disposal to make use of unused capital losses or annual exemptions. Note that anti-avoidance provisions apply in relation to 'bed and spousing' and 'bed and ISAing'; there is also a targeted anti-avoidance provision that applies to capital losses.

Protect your pension

The current statutory lifetime allowance (SLA) for pension funds is £1.65m. If your pension funds exceed the SLA, you have until 5 April 2009 to apply for protection against a penal tax charge of 55% (see Paul Garwood's article).

The maximum contribution on which tax relief is available is £225,000.

Don't forget you can use stakeholder pensions for non-earning spouses/ children.

Open tax-efficient savings accounts

You may wish to consider tax-free investments through National Savings products and Individual Savings Accounts (ISAs). The annual £7,200 ISA subscription can either be 100% stocks and shares, or split with up to 50% in cash. A cash ISA can also be opened for children aged between 16 and 18 years.

Enterprise Investment Schemes offer 20% income tax relief on up to £500,000 of investment, inheritance tax (IHT) protection after two years and unlimited CGT deferral.

Venture Capital Trusts (VCT) provide 30% income tax relief and no CGT on sale. Note there is a five-year time limit i.e. a minimum holding period for a VCT to be exempt from CGT.

Remember that government bonds are free from CGT.

Shelter your wealth

The nil-rate band for IHT is currently £312,000. Make sure that your will is up to date and tax efficient and that your life assurance policy is written in trust to mitigate IHT.

Consider making gifts to use the annual exemption of £3,000 which can be carried forward one year. Small gifts of up to £250 and gifts on marriage are also exempt from IHT. Gifts which are normal expenditure out of income are also IHT-exempt provided they are regular, out of income (not capital) and do not affect the donor's standard of living, e.g. payment of school fees by grandparents.

Consider investing in IHT-free assets such as those which qualify for business or agricultural property relief after two years.

Consider your tax situation, if non-UK domiciled

2008/09 is the first year non-UK domiciled individuals need to decide whether to claim the remittance basis – i.e. continue to be taxed on their overseas income only to the extent that it is remitted to the UK – and pay the £30,000 charge on 31 January 2010. When making your decision, consider:

  • the maths
  • interaction with double tax treaties
  • pre-5 April 2009 planning
  • existing offshore structures.

Couples could review the ownership of their assets to prevent them both being subject to the charge.

Other tax tips

  • Claim higher-rate tax relief on charitable donations; remember that CGT relief is available and non-cash gifts can also qualify.
  • Decide whether an election is necessary as spouses can have only one main residence for CGT relief (noting a twoyear time limit).
  • Don't forget to claim the £250 child trust fund.
  • Gift assets that have fallen in value in order to mitigate the CGT and IHT liability.
  • Assess whether elections in respect of pension funds are still valid.
  • Offset any trading losses arising as a result of reduction in profits against other or prior year income.
  • Decide whether it is appropriate to reduce tax payments on account.


Some professional firms may struggle to meet the entire partners' tax payment in January 2009, warns Pam Sayers.

Many firms retain tax from partners' drawings and prepare tax provisions on a prudent basis. However, particularly in the current economic climate, some firms may need to use these funds to meet working capital requirements; thus, there may be insufficient funds to meet part or all of the partners' tax payments falling due on 31 January 2009.

Firms in this situation will need to consider whether they (a) extend their overdraft facility to meet the January tax payments or (b) enter into negotiations with HM Revenue & Customs (HMRC) to agree to a payment plan by spreading the tax payments due over a number of months.

If you decide on the second option, note that it is unlikely that HMRC will accept a spreading period of more than six months since the next tax payment will be due on 31 July 2009.

Professional practices should identify as soon as possible, on both a best and worst case scenario, the total estimated tax payment falling due. The exact tax payment may not be known for certain until late January 2009 when all the partners' 2008 tax returns have been finalised and the tax liabilities computed.

As soon as you have made the estimate, notify the Inspector of Taxes handling the partnership's tax affairs that you wish to seek an agreement to spread the January 2009 tax payment. In our experience, HMRC is more likely to agree to a spreading if you notify as early as possible, especially as there are specific procedures to follow with both the firm's Inspector of Taxes and the HMRC Debt Management team.

While there will be an interest charge on any late payment of tax, the surcharge of 5% on the balance of 2007/08 can be waived if firms enter into a formal agreement with HMRC to spread the January 2009 tax payment.

According to the Pre-Budget Report, the gateway into 'Time To Pay' for selfemployed individuals (including partners) is the 'Business Payments Support Service', complete with Helpline. A partnership will be regarded as transparent for this purpose. It has been advised that, even if HMRC agrees to have a conversation about a partnership's trading difficulties with the internal or external accountant, it will still be necessary to put in place individual direct debits for the partners themselves. HMRC has also outlined that if, for example, the senior partner has personal cash available, then he/she will not qualify for the scheme, even if the firm itself is struggling.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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