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The Bar Standards Board (BSB) has submitted its application to regulate new business entities but stopped short of alternative business structures (ABSs). Is this a missed opportunity? Tony Williams, founder and principal of Jomati Consultants, and Toby Tallon, partner in the London office of Smith & Williamson, give us their thoughts.
What is the significance of the BSB applying to regulate new business entities?
Toby Tallon (TT): The BSB application on 27 June 2014 cites three criteria as its rationale for wanting to regulate new business entities:
• choice, and
• cost effectiveness
Up until now, barristers (unless they were employed as in-house counsel) could only practice as sole traders. Once entity regulation approval has been granted, barristers will have the same choices as other professionals to select the best structure in which to deliver their services. This may be to remain as a sole trader, but they will also have the choice of partnership, limited liability partnership (LLP) or a company. The advantages of such structures are that they could allow for a measure of limited liability and will also provide them with more flexibility in terms of their tax management.
Historically, barristers used to be taxed on their receipts. With the introduction of generally accepted accounting practice (GAAP) for barristers in the Finance Act 1998, they began to be taxed on their debtors and on their work in progress – so effectively on income they had not yet received. If a barrister takes advantage of the entity regulation changes to practice via a company, their profits will be taxed at the corporate tax rate of 20% or 21%. In addition, the company will effectively keep a tax reserve within the structure to pay the tax liability. However, additional tax may be due on amounts withdrawn from the company, depending on how and when the withdrawals are made.
Tony Williams (TW): This is an important development, although it is not quite as seismic as we may have hoped in that the BSB has stopped short of applying to regulate ABSs. However, it signifies recognition from the BSB that there are a range of entities that need to be accommodated in the grand order of things other than just the chambers model.
The BSB has been singularly unenthusiastic about the Legal Services Act 2007 (LSA 2007), and is still not wholeheartedly embracing it. In applying to regulate new business entities, the BSB is doing the minimum it could credibly do.
Why did the BSB stop short of ABSs?
TT: The BSB has been clear throughout its application that it prefers to remain, at least in the short term, a regulator of barristers and barrister activities. In its own words, the BSB is aiming to be a “niche regulator”, and as such it appears to have little interest in mission creep in the short term. It wants to “maintain its specialist focus on our distinct capabilities as a regulator”. However, in applying to regulate entities, the BSB recognises that there is a current commercial and regulatory need to move with the times. The BSB does not want to preclude regulating entities that undertake barrister activities and where other professional work is also undertaken. In other words, the BSB does not want to end up in a situation where it is no longer regulating an entity in which barrister activities constitute the predominant activities of that entity.
Under the current application, the BSB has indicated it intends to remain a regulator of barristers and does not intend to adopt a set of new rules such as those imposed by the Solicitors Regulation Authority (SRA) on its members – for example, it has stopped short of regulating the handling of client money.
It is clear that, for the moment, the BSB is testing the water. Once it has gained experience of regulating new structures and stress-testing them, it is likely to become more confident in pushing forward. It has not applied to regulate ABSs in its 27 June 2014 application, but intends to apply to regulate ABSs in the future and has drafted the new BSB handbook with this in mind.
TW: I don’t know the whole answer to this question, but I suspect it may be because it was all just too complicated. It is a shame that the BSB has stopped short of applying to regulate ABSs, and a missed opportunity, because it effectively forces barristers who want to operate in an ABS into the hands of the SRA. It is disappointing from a commercial point of view. Parts of the publicly-funded bar desperately need to devise new business structures, but an ABS regulated by the BSB is not available to them.
What services would a BSB-regulated entity be able to offer?
TT: The BSB’s policy objective is to continue to offer the services it provides currently. In its application it stated that “for the time being the BSB would normally only authorise an entity that undertakes solely legal work” and that “the BSB’s regime will be best suited to entities where the work is predominantly in the hands of individuals who are themselves subject to regulation as authorised persons”. Its starting point is the regulation of barrister activities. It will consider non-barrister type activities in the future, but if it considers that risks are too great, it will not authorise certain activities. Therefore, this is not an exercise in deregulating what barristers do, but rather of deregulating how they operate and the framework in which those activities are carried out.
TW: The key thing the BSB is looking at appears to be all aspects of litigation and the fact that new entities will potentially be able to apply for contracts from the Legal Aid Agency.
It is clear that more than a few barristers are looking for greater flexibility in how they operate, but it remains to be seen whether or not they will actually take advantage of this once it is a real possibility.
What does this mean for barristers? How will this affect the relationship between solicitors and barristers?
TT: An initial reaction from some barristers and chambers might be that this development does not actually change anything. There is no compulsion to change, but Smith & Williamson considers that barristers would be recommended to at least consider the new options available.
This development brings a much greater level of flexibility for barristers, and offers a different structure in which to offer their services and in which they can innovate. Once entity regulation has been approved, the BSB will be able to regulate barristers practising within a number of different entities. Indeed, barristers could work on some briefs in one structure and others in another. For example, a large joint case with other barristers could be structured via a special purpose vehicle (company or partnership or LLP), to assist in the coordination of expenses, income division of profits and potentially more effective tax management. This is clearly an attractive arrangement, and aptly reflects the commercial realities that barristers currently face.
The BSB’s application for entity regulation does not of itself alter the current dynamics and tensions between solicitors and barristers. Certainly, at the extreme, a joining of the professions is not considered within the scope of the BSB application. The current process of referral between the two professions should continue as normal. It is possible that further down the line, once ABSs become more familiar, whether regulated by the BSB (as is intended in the future) or by the SRA (as is currently possible and as some sets have made use of already), there may be greater integration between barristers and solicitors. As a result of such integration there might be a more comprehensive offering of services, but for now, the status quo is maintained.
When the BSB is able to regulate ABSs (as it intends), we could expect to see greater innovation. For example, barristers could enter into a structure with their non-lawyer spouse or a multi-disciplinary practice (MDP) regulated by the BSB could also become feasible. The former may in particular be an attractive route for barristers to consider.
TW: The changes that barristers have undergone have been evolutionary rather than revolutionary – the bar is morphing slowly from being a purely referral profession to one that is accessible to the public and other types of businesses, such as accountancy firms etc. The BSB’s application to regulate new entities should give them the structure and encouragement to go even further in this.
The likelihood of a change in the relationship between solicitors and barristers has caused the latter some angst – some barristers are clear that they have no desire to compete with law firms. But the changes are likely to create a more realistic commercial position for the bar. Law firms have been squeezing barristers for a while now, taking on more of the advisory work hitherto done by the bar, and really the relationship needs to be a two-way process, not as one-sided as it has become. There will be a period of experimentation where the relationship changes a bit, but we may see an evening out of the current situation. Of course, it will all come down to client access and who can provide the better proposition for the end client, but I believe the bar can create a compelling position.
How will this fit in to the broader regulatory landscape?
TT: In the short term, this is a reaction to LSA 2007 and the drastic cuts to legal aid for the criminal and family bar. The BSB application states that the added choices will ‘ensure that the legal profession can respond to the needs of clients, and, in particular, the demand for affordable litigation and advocacy services’.
The SRA can and already does regulate barristers and chambers, and other regulators, including the Institute of Chartered Accountants in England and Wales (ICAEW) have also expressed an interest in doing so. This is largely the result of the provisions of LSA 2007. In opening the door to MDPs, regulators were left to work out how they could ensure they could still be involved with the regulation of their profession where crossover between professions within one business structure existed. As such, regulators have been asked to take a view on the part of the business that does not directly relate to their specialism. As a result, it is not unrealistic to envisage that in the future we may end up with a scenario as in the deregulated energy sector, where, for example, British Gas provides electricity. Similarly, we could expect to see barristers being regulated by the ICAEW and accountants regulated by the BSB.
There is a broad parallel here to the Big Bang deregulation of the City that occurred in 1986, which had a drastic impact on how firms in the financial markets structured themselves. Perhaps a closer parallel still is the Limited Liability Partnership Act 2000. Typically, it took some time for the changes to bed in, but it soon became normal practice for both solicitors and accountancy firms to switch to operating as LLPs.
Barristers are in one of the few professions that has undergone comparatively little dramatic regulatory change, so it could be viewed as only a matter of time before a regulatory change such as this occurred. In Smith & Williamson’s view, more choice is good news for barristers. If a professional consultant selling their time wanted to establish themselves in business, they would be free to set up a sole practitioner/partnership/LLP/company or hybrid structure. Provided the risks can be managed, why should barristers be prevented from having such choices available to them too?
TW: Greater movement and adoption of elements of the LSA 2007 is required by the BSB, which is currently far behind the curve compared to other regulators, but this is likely to be a marathon rather than a sprint. The changes are necessary and long overdue. Some barristers, however, see this as the end of civilisation, while others consider it a massive waste of an opportunity to embrace the level of change they believe to be necessary to remain relevant.
Toby Tallon is a chartered tax adviser and chartered accountant. He is partner in the London office of Smith & Williamson, one of the largest firms of accountants in the UK.
Tony Williams is the founder and principal of the legal profession’s leading UK-based management consultancy, Jomati Consultants.
Interviewed by Jane Crinnion.
First published on Lexis®PSL.
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