Alternative business structures (ABSs) and tax liabilities mean that over 2,000 law firms are at risk of failure in the next 12 months, according to business recovery specialists.
Using data from company information firm Bureau van Dijk, the Association of Business Recovery Professionals – better known as R3 – estimated that 29% of firms are at risk, higher than the wider business average of 21.8%.
R3 president Lee Manning, a partner at Deloitte, said that while ABSs may make legal services easier to access, they pose “a threat to the legal services market as we know it, particularly for small high street firms”.
He continued: “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 the high street 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 ABSs.”
He added that by the end of this month, partners will have to make their second tax payment for the year, and ideally their firm will have maintained a tax reserve fund to settle the partners’ liabilities – “but this is not always the case”.
He said: “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 cash flow pressure on firms and more often than not we see a spike in banks being asked to fund taxation liabilities.
“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.”
Mr Manning urged firms that are worried about their financial future to seek professional restructuring advice “before it is too late”.