A firm way forward? The rules on barristers' incorporation

The coronavirus pandemic has caused upheaval for many businesses – and traditional chambers have also been shaken. They, like many others, realise that they  don’t need office space for barristers to sit in – just meeting rooms to meet confidentially with clients. This focuses the services that chambers provide for barristers on marketing, delivering potential clients (clerking) and assistance with billing and debtor collection (finance back office). This potential increase in flexibility could, in the future. change the way chambers and barristers interact, allowing barristers themselves to conduct their business through different structures.

Alternative Business Structures

Since April 2015, barristers have been able to incorporate, gaining the advantages of trading as a limited company rather than as sole traders. And, as of more recently, Bar Standards Board (BSB) licensed bodies, also referred to as Alternative Business Structures (ABS), allow some non-lawyers to have a financial stake in a law firm.

There can be tax advantages for a barrister to consider incorporating. All the profits of the practice will be taxed at 19 per cent (at present – going up to 25 per cent over £50k profits in 2023), rather than possibly 40, 45 or even effectively 60 per cent (the marginal tax rate for a barrister earning a little over £100,000 in a tax year).

Any of the profit the barrister needs to spend in the year will then be subject to additional tax when it is drawn, but as long as there is a significant amount of profit that is not immediately needed, it is very tax efficient to leave this in the company – and then only pay 19 per cent corporation tax. The barrister can then choose when to withdraw the additional profit, timing it to suit both when it is really needed – and when it will suffer the least tax.

How does it work?

When a barrister (or a group of barristers) wishes to incorporate, it will be necessary to obtain the approval of chambers. The chambers constitution will probably need to be changed to allow the new company to be recognised as a member of chambers.

There will be a cut-off date when fees are no longer earned by the individual barrister, but by the new company instead. The implications on Income Tax liabilities will need to be considered carefully. There will also be implications for VAT, with the old fees being reflected in the individual VAT return – and the new ones being reflected in the company VAT return.

The new company will need to be registered properly with the Bar Standards Board, and meet all its obligations to HM Revenue & Customs. A good, flexible, service contract will need to be drawn up between the company and the barrister. Banking arrangements will probably need to be changed, as all fees and costs must now go through the company bank account rather than the barrister’s personal account. This can be quite complex and easily lead to costly mistakes, unless a good accounting and bookkeeping firm is retained.

Engaging a firm that fully understands barristers’ practices and can provide specialist outsourced bookkeeping services, as well as accounting and tax advice tailored to the profession, is an essential element of setting up a BSB authorised or licensed body. It is very important for the practice to budget at the outset for sufficient rewards to pay the costs of running the business, including bookkeeping costs, and leave enough reserves to ensure the barristers and other professionals in the business receive appropriate salaries and dividends.

Beavis Morgan is an accounting, tax and business advisory firm providing this required specialist knowledge and experience, having worked with solicitors and barristers for many years, assisting sole practitioners, through to large London-based firms and chambers. Our services are tailored according to your specific requirements and objectives, always seeking opportunities to enhance wealth accumulation and succession planning, and ultimately reduce your tax bill. For more information on this topic and to find out how Beavis Morgan can assist you and your business, contact Beavis Morgan Client Partners Matthew Burge or Paul Ashton.

Matthew Burge and Paul Ashton are Client Partners with Beavis Morgan, providing accountancy, tax, and business services: beavismorgan.com