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UK law firms to struggle under higher tax burden in 2012/13

26 March 2012

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By Manju Manglani, Editor (@ManjuManglani)

UK law firms will be facing greater financial difficulties from April 2012 as a result of a 75 per cent reduction in tax relief for capital expenditure, combined with a 50 per cent income tax on partners.

Although the latest government budget has indicated that the highest rate of income tax will be cut to 45 per cent and the personal allowance will increase by a further £1,100 to £9,205, these will not take effect until April 2013.

In the coming financial year, UK firms will be forced to struggle with a £25,000 annual investment allowance, down from £100,000 currently.

Comments Philip White, chief executive of Syscap: “It is too early to remove this incentive to invest. Law firms in particular are still braving the downturn after a big reduction in demand from corporate clients.”

Combined with the additional costs of compliance with the Solicitors Regulation Authority’s new outcomes-focused regulation, the higher rate of income tax on partners and the continuing economic downturn, and firms will face a very difficult year ahead.

Firms that seek incorporation may however obtain some relief. From April 2012, the main rate of corporation tax will fall by two per cent to 24 per cent. This rate will drop further to 23 per cent in April 2013 and to 22 per cent in April 2014.

Another option to offset the cost of investments is leasing rather than purchasing high-value equipment.

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