More than a quarter of South West law firms are at risk of going out of business over the next year as they face the combined challenges of the impact of the recession and the introduction of far-reaching reforms.
The warning comes from R3, the trade body for insolvency professionals, which estimates that more than 140 law firms in the region could fail – 27.7% of the total, higher than the UK average of 24%.
The Legal Services Act – better known as Tesco Law – allows non-lawyers to invest in and own legal businesses, effectively opening the market to supermarkets to enter the market by offering low-cost services such as house conveyancing, wills and simple contracts. This will hit small high street firms hard, according to R3, as they will no longer be able to compete on price for these ‘bread and butter’ services.
R3 vice -chair for the South West and Wales, Ross Connock, said: “Traditionally a firm would practice a range of different areas of law. With the introduction of Tesco law, new specialist firms will begin to emerge and they will be difficult for high street firms to compete with, partly because small practices cannot afford the level of branding and marketing that these new firms will be able to take advantage of.
“It is also unlikely that they will have the resources or the technology to compete with these alternative business structures.
Partners in smaller firms also face the challenge of finding the funds by the end of this month to make their second tax payment of the year.
Unlike limited companies, Limited Liability Partnership (LLPs), partnerships and sole practitioners – which make up the bulk of law firms – are not directly assessed for tax on the business’ profits but usually arrange to settle individual partners’ liabilities. They usually build up a tax reserve to pay this – but with pressure on cashflow many will have difficulty in meeting the bill.
Mr Connock added: “This requires very careful planning and steps should be taken to apply for a reduction of payments on account if earnings are expected to reduce over the coming year. This time of year is known to put real cashflow pressure on firms and more often than not we see a spike in banks being asked to fund taxation liabilities.
“Law firms are operating in a challenging environment and the marketplace seems to be getting tougher and tougher. We would urge any firms that are worried about their financial future, to seek professional restructuring advice before it is too late.
“The legal services sector is a very crowded market and so firms that are not competitive are unlikely to thrive. Careful planning and management of taxes can help give businesses an edge and make this time of year less daunting.”
