A new tax compliance landscape for legal practices

We have recently seen a noticeable shift in HMRC’s approach to tax compliance enquiries involving professional services firms, including law firms. While tax enquiries are nothing new, what is changing is the depth of analysis undertaken long before HMRC ever sets foot on a business’s premises.

Increasingly, HMRC is drawing information together from multiple sources to build a broader picture of risk. Rather than examining individual tax issues in isolation, enquiries are becoming more focused on the systems, controls and governance frameworks that sit behind them.

For law firms, this means scrutiny can extend beyond the accuracy of tax returns and into the way partner arrangements, workforce practices and financial controls are managed and documented.

Areas likely to attract greater scrutiny

We are seeing particular focus on how firms structure and manage their workforce. This includes the application of the LLP salaried member rules, employment status determinations, partner remuneration arrangements and the treatment of consultants and contractors.

Rather than simply reviewing technical tax positions, HMRC is increasingly looking at the decision-making process behind them. Firms may be asked to demonstrate not only what conclusions were reached, but why they were reached and what governance was applied.

This reflects a broader trend towards assessing whether compliance is embedded within the business, rather than simply addressed when required.

What to expect from an HMRC enquiry

Perhaps the most significant operational change is the amount of preparation undertaken by HMRC before an enquiry begins.

We are now increasingly seeing HMRC arrive with a detailed understanding of a firm’s structure and perceived areas of risk. By the time the first meeting takes place, investigators may already have reviewed historic filings, analysed payroll and VAT information, and formed preliminary conclusions.

As a result, enquiries are becoming more focused from the outset and can progress much more quickly than in the past.

What does this mean for law firms?

This changing compliance landscape highlights the importance of regularly reviewing governance arrangements and ensuring key decisions are supported by appropriate documentation.

In particular, firms should consider whether they can clearly evidence:

• the rationale behind partner and employment status decisions
• the governance process supporting remuneration and workforce arrangements
• the effectiveness of financial and compliance controls

Those that can demonstrate strong governance and a proactive approach to compliance are typically in a far stronger position when responding to enquiries.

Review your compliance framework

HMRC's evolving approach is a reminder that compliance is no longer assessed solely through the lens of tax. Increasingly, it is viewed as a reflection of the wider governance, controls and decision-making processes operating throughout a firm.

You might also wish to consider having an appropriate level of tax enquiry insurance in place, which can cover the costs of professional fees.