Lawyer Monthly Magazine - August 2019 Edition

• Partnership accounts - intended for internal use. This will include detail of the individual partners, allowing them to see their capital position, profit shares, current accounts and tax reserves. Both of these are based on the same underlying financial information, but their structure, presentation and the information that they convey can be very different. Financial statements • Profit and loss account – shows the profit the firm has made in the year. • Balance sheet - shows the firm’s assets and liabilities, as well as its capital and equity at its balance sheet date (e.g. a single point in time). • Cash flow statement – shows how the firm has managed its cash. This statement is often overlooked, but it is very important. • Reconciliation of members’ interests – shows, in summary, the transactions with the members as a whole, including movements in capital, the profit for the year and drawings. • Notes to the accounts – other supporting information including the accounting policies and further information on items in the profit and loss account and balance sheet. Partnership accounts What a partnership accounts include will vary on a firm to firm basis. Some firms refer to these as the management accounts, but generally, they will best present the information about how the firm wants to manage the business, which may be by departments or divisions, or even individual partners. They may even apply a different approach to the recognition and disclosure of certain items that differs from the approach in the statutory financial statements. Importantly, they will also include the following information relating to each partner. • Current account - records profit share together with drawings paid and other personal expenses paid on behalf of the partner. The balance represents the amounts that the partner should expect to be paid out. Firms will have different policies on when this balance is paid. • Capital account – long-term investment in the firm. This may be a fixed amount or may increase with points. It is often financed by a personal loan from a bank. • Tax reserve – a record of tax charged against partners’ profits fewer tax payments to HMRC on behalf of the partner. The complexity will depend on year-end. Partnership tax Being promoted to a partner affects the way in which an individual is taxed. They are no longer an employee with a known salary and all the associated employee benefits. Instead, they are a self employed partner with a taxable profit share which may be different from their accounting profit share. As an employee, the firm would have paid the employer’s National Insurance (NI) on the salary paid. There is no similar payment due by the firm in respect of self employed partners. If the partner has not previously completed UK tax returns, they will need to do so going forward, with the filing deadline 31 January following the end of the tax year if the return is filed electronically. In addition, appropriate forms will need to be completed, advising HMRC that they have become a partner in the firm. An employee has their tax and NI deducted under PAYE each month. However, for a partner, 21 AUG 2019 | WWW.LAWYER-MONTHLY.COM Special Feature By Nicky Owen, Ryan Ketteringham & Phil Smithyes, Crowe “Becoming a partner within a law firm inevitably comes with increased responsibilities and pressures.”