Since April 2015 barristers have been able to incorporate, gaining the advantages of trading as a limited company rather than as sole traders. The company must be owned by lawyers, but not necessarily barristers. Even this restriction is due to change shortly to allow non-lawyers also to be shareholders of the soon to be recognised Alternative Business Structures (also referred to as BSB licensed bodies). Watch this space!
There can be significant tax advantages for a barrister to consider incorporating. All the profits of the practice will be taxed at 20 per cent, rather than possibly 40, 45 or even effectively 60 per cent (which is 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 20 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.
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 can be recognised as a member of Chambers.
Jane Walshe Limited took advantage of the change in rules early on, becoming recognised as a Bar Standards Board Regulated Entity (now called BSB authorised body) in July 2015. The barrister, Jane Walshe, owns all the shares in her company. The advice she has given on the Bar Standards Board website to any barristers considering setting up a BSB authorised body is to get a good accountant who understands limited companies as well as barrister practices, and who can complete both the personal and company tax returns.
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.
Retaining a firm that fully understands barrister 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.