A solicitor in the UK earned a national average salary of £35,393, as of May 2017, according to pay research specialists Pay Scale.
Nevertheless, there are considerable regional variations and salaries increase considerable for solicitors with many years of experience or those who are working in specialist areas, such as corporate law, commercial law, complex litigation, legal document review or banking.
Whatever your salary as a solicitor, though, the one certainty in life is your liability to pay income tax. The partnerships that typically underlie the structure of a legal firm that is not a limited liability company mean that partners pay tax on the profits made by the firm.
Although this means the firm does not pay corporation tax, the firm still needs to register the business with HM Revenue & Customs (HMRC) and to register for VAT if sales of your legal services exceed £85,000 a year.
In other words, general taxation issues and the payment of VAT liabilities are likely to present major challenges to any legal practice.
Managing those tax liabilities is likely to assume an ever-more important role in a legal services market that has been described by management consultants Price Waterhouse Coopers (PwC) as increasingly competitive.
The tax challenges
There are two principal tax challenges facing the typical partnership making up the average firm of solicitors:
Self Assessment
- this is the system used by HM Customs & Revenue for calculating the income tax due from the business run by the firm of solicitors;
- it requires detailed information on the income of the business and the individual solicitors comprising the partnership;
- equally detailed information is required about the costs and allowable expenses in running the firm;
- a Self Assessment return needs to be made annually;
VAT
- if the firm is earning more than £85,000 a year, it also needs to register for VAT;
- VAT returns must be made and paid every three months.
There are stiff penalties and interest charges added to late returns of both Self Assessment forms and VAT records.
Funding tax liabilities
It is not only the administrative cost of maintaining detailed and scrupulous records for tax purposes that weighs heavily on any firm of solicitors, but also the need to fund regular payments of both income tax and VAT.
The former needs to be paid every year and the latter every three months, thus posing a significant challenge for the management of the firm’s cashflow.
To manage those cashflow requirements, many firms of solicitors may look to borrowing – and this may take one of two forms:
Secured loans
- borrowing may be secured against the assets of the business or of individual partners;
- these tend to be longer-term and represent an ongoing commitment to repayments of both capital and the interest which accumulates over that extended period of time – an amount of interest that may be considerable;
Unsecured loans
- effective cashflow management with respect to tax and VAT liabilities, however, may also be achieved through the type of unsecured, fixed rate practice loan in which we specialise here at Professions Loans;
- these are for typically much shorter terms (as short a period as three months, but extending to up to 12 months if need be);
- this not only makes for a shorter-term commitment for the repayment of the loan, but also fewer years during which the total interest accumulates;
- the interest rate is fixed and the monthly repayment is the same amount each month, making budgeting simpler and more straight forward;
- The size of any such loan of course depends on your particular needs, and may be tailored to suit your precise requirements – in any sum, from just a few thousand pounds, right up to £1 million or more.
Making the most of your working capital
An unsecured loan for solicitors may help to manage your tax and VAT liabilities – with the added benefit of being able to spread the payments evenly throughout the year – but the additional working capital it brings may also provide the funding for other ways of developing and improving the commercial success of your firm of solicitors.
Such a loan might be used, for example, for the acquisition of and relocation to new offices, for improving or extending your existing premises, or for launching your acquisition of a rival firm.
The injection of additional working capital might also be used to seize the opportunities presented by new technology and information systems.
Finally, an unsecured fixed rate practice loan may also ensure the funding of the essential professional indemnity insurance needed by every solicitor working in your firm, as required by the Law Society as your protection and indemnity against professional negligence claims.