There are storms coming. Management and executive committees in sets of chambers across England and Wales will be aware of the challenges and potential opportunities posed by legislative changes, possible regulatory changes and ever-growing commercial pressures.
To see the whole picture is possible only with hindsight and anticipating and planning for the unexpected is difficult. But neverthless there is time to start preparing for the changes ahead and to examine the strength and suitability of the structure of chambers and how prepared they are for the future.
Here we examine what are the possible business structures a chambers might adopt and what are the pros and cons of these structures.
Reviewing the existing structure
Reviewing the structure of your chambers is a valuable means of assessing whether a business plan is on track and whether contingency plans can withstand potential pressures.
For example, it is important that the structure allows for efficient processes and enables you to monitor and ‘squeeze’ working capital. It should also allow for growth, in terms of attracting new talent and new business while also providing the flexibility to allow the chambers to exploit a particular growth area. Similarly, the business structure should afford stability, both in terms of governance and oversight as well as enabling the chambers to ring-fence liabilities, monitor and minimise risks and tax liabilities, not to mention providing for mechanisms to help identify and resolve problems.
The right structure for a set of chambers does not mean continuing with the one it inherited, although that can be an important factor. It also depends on the chambers’ Constitution as well as the outlook and agreement of its members. Elaborate structures do not necessarily lead to efficient clerking or a thriving practice. Similarly, sets of chambers across the Bar will have distinctive plans and challenges requiring different structures. In the same way, operational efficiency is crucial to a successful and thriving chambers, but changing a business structure will have minor impact on such matters.
Governance, risk and tax are the key issues that should be addressed when considering chambers’ existing or proposed structure. In considering governance, a balance needs to be struck between the efficient control and direction of the chambers on the one hand and the independence and collegiate atmosphere of its members on the other. In terms of risk, barristers will no doubt be acutely aware of the dangers of litigation, but they must identify and try to manage all areas of risk. And given that the highest marginal rates of tax on barristers’ taxable income have reached 52%, reviewing a structure’s tax efficiency is essential.
Structures to consider
As sole practitioners, barristers keep the income they earn (with the exception of chambers that operate purse-sharing arrangements), though they rely on clerks to collect their income.
However, when it comes to costs, barristers are mutually reliant on their fellow members of chambers. Chambers are set up in different ways to share these costs, the most common arrangements being:
- based around the Head(s) of Chambers;
- an unincorporated structure;
- an unincorporated structure with a Trade Protection Association (TPA) arrangement;
- an unincorporated structure and a service company; and
- an unincorporated association with other special purpose companies.
Head of Chambers
Costs, contracts and the structure itself can be based around the Head(s) of Chambers. Costs are then shared on an agreed formula. This allows for a straightforward structure, with the Head(s) of Chambers in practice being able, and hopefully willing, to rely on the executive/management committees, senior clerks and administrators.
However, a drawback of this structure is that governance can be difficult unless present and future members of the chambers agree on all matters. Similarly, it is not the most tax efficient arrangement and neither does it address issues of commercial risk, especially if all contracts are directly with the Head(s) of Chambers.
Alternatively, chambers can use an unincorporated association which may carry out the central functions of chambers and share such costs with the members. This allows for more participation and spreads risk amongst the members.
Governance could be addressed by introducing a chambers’ Constitution. Ideally this should strike the right balance between allowing members of chambers a voice and prescribing the majority required to adopt any new resolutions. The act of formalising unwritten rules in chambers and setting out an agreed basis on which issues can be raised and decisions made can help chambers respond to events. It could also be used as an opportunity to allow wider members of the chambers to feel more engaged. However, tax efficiency and, to some extent, commercial risk remain unaddressed.
Unincorporated association with TPA
Greater tax efficiency can be achieved when an unincorporated association signs up to a Trade Protection Association (TPA) with H M Revenue & Customs (HMRC).
As a result, the full proportion of tax disallowable expenditure, for example, entertaining and capital expenditure, is taxed on the unincorporated association at corporation tax rates (now between 20% and 26%).
The individual members obtain a full tax deduction for the charges they pay to chambers, thus potentially mitigating tax at rates of up to 52%.
Unincorporated structure and service company
Another way for the unincorporated association to obtain greater tax efficiency is to use a service company, set up as a bolt-on entity. All expenditure could then run through the company which would recharge costs to the unincorporated association.
As with a TPA arrangement, disallowable expenditure is taxed on the company at lower corporation tax rates, rather than on the barristers personally at rates of tax of up to 52%. Furthermore any working capital retained to fund the business could come from income taxed at lower corporation tax rates. Potential risks such as employment contracts, equipment contracts and the property lease could be put through the service company. By holding these contracts in a limited liability entity, a measure of protection could be obtained from potential claims or litigious action that could befall any business.
Ownership and structure of the service company are important governance issues to consider. What will the Articles of Association allow in the way of activities of the company and its distribution policy? What combination of directors would provide the right mix of stability and participation from members and clerks?
It is also important to consider if the company would be limited by guarantee or by shares. If shares are issued, who should own them? Some or all members of chambers and senior clerks could each own a share, but the treatment for new joiners and leavers must be agreed.
Operating as a Limited Liability Partnership can also be a useful way to address constitutional issues as well as minimising other liabilities. However, it should also be recognised that service companies bring certain administrative, VAT and reporting issues which would have to considered against potential benefits.
Unincorporated association with other special purpose companies
Using other special purpose entities can help the chambers meet other objectives, for instance, securing better purchasing power, or separating different business, cost or revenue streams.
If a chambers is moving to new premises, it could consider holding ownership of the lease in either a company or trust. The makeup of the company or trust will depend on the desires of those wishing to contribute to the purchase of the property, either from their own funds or their pensions. This can be an effective method for legal, governance and tax purposes; however, there are many other issues to consider which are best dealt with in advance via the company’s Articles or trust’s Deed (depending on which vehicle is used).
In response to the funding issues affecting the criminal and family bars, the Bar Council has developed a blueprint for a Procure co (which can be used now) and a Supply co (which requires regulatory change before use). These entities, which have been described at length in other articles, could be bolted onto an existing structure.
Time will tell
When issued with a weather warning it is prudent to review contingency plans and check that your structure is as robust as possible. This would seem good advice for chambers too. How well chambers weather the changes and possible storms ahead only time will tell.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Geoff Everett, Tax Director, and Toby Tallon, Senior Tax Manager, both of Smith & Williamson, the accountancy and investment management group. www.smith.williamson.co.uk