Law firms delve into accounting and consultancy services

Since the liberalisation of the legal services market, law firms have feared competition from the “march of the accountants” as consultancy firms have pushed eagerly into the legal market.

The 2011 Legal Services Act was aimed at allowing non-law firm entrants such as accountants to offer legal services, while law firms could take investment from third parties.

The big four accountancy and consulting firms have moved quickly. PwC has pledged to build up its legal services division while EY Law has hired partners from Freshfields and Addleshaw Goddard. Law firms are fighting back by hiring accountants and bolstering their expertise in areas such as tax that traditionally have been dominated by accountants.

The global financial crisis and squeeze on public finances have increased the focus on tax and the level of public controversy as to whether big business is paying its fair share.

A decade ago, law firms’ tax practices often acted as corporate support functions in big merger or takeover deals. The big four would devise new tax structures while law firms would legally implement them. Today, law firms advise not just on law but also on financial and economic aspects of tax planning in an increasingly complex and cross-border world.

Tax lawyers were helped by a landmark ruling in 2013 by the Supreme Court, which refused to extend legal professional privilege to accountants offering tax advice. Legal professional privilege is the confidentiality of communications between a lawyer and a client; many accountants consider it gives the legal profession an unfair advantage.

Law firms have also been hiring non-lawyer tax professionals. At Baker & McKenzie’s corporate tax practice for example, non-lawyers account for half of the team’s fee earners. Its hiring of Mark Bevington, a former partner at Ernst & Young, illustrates the competition with the big accountancy firms, as does the promotion to partner of non-lawyers.

Pinsent Masons has also formed a tax team of lawyers and accountants. In 2000, senior tax litigators James Bullock and Jason Collins launched the UK’s first dedicated tax litigation practice. The firm has also set up a tax investigations practice in a further move on to accountancy firms’ turf. Now about 30 per cent of the firm’s tax fee earners are non-lawyers with a background in accounting or HM Revenue & Customs policy.

One recent hire is Heather Self, a former senior policy adviser at HMRC and group tax director at Scottish Power. She says law firms are picking up work as more tax disputes go to court. “The interaction between tax and areas of law is now better recognised. Tax is more law than accounting in many ways,” she says.

“Tax disputes are becoming more complex and litigation might be considered at an earlier stage than if the client had been advised in an accountancy firm. Law firms can also draw on additional expertise [internally], such as competition lawyers, when advising on state aid and its tax treatment.”

Spain-based Garrigues is another law firm that has increased its complement of other professionals, including economists or financial analysts, to work alongside its lawyers.

The interaction between tax and areas of law is now better recognised

Beyond these defensive moves to stave off competition, some firms have used the liberalisation of the legal market to innovate and have exploited their expertise to create new offerings. One example is Bird & Bird’s partnership with ASE Consulting, a management consultancy, that has created Baseline, which offers IT transformational programmes.

Other more specialised law firms have enhanced their expertise. Wiggin, which has traditionally focused on media law, has developed non-legal media-focused businesses such as Cirkus. This is a subscription television service with partners such as content consultancy Content & Co and ITV offering British programmes to Scandinavia. Wiggin has also combined with technology business Incopro to help clients protect trademarks and intellectual property.

In some cases, such as new boutique law firms, the innovation has come from firms structuring themselves differently. Traditional firms have a large number of salaried lawyers and a small elite of equity partners who share profits. However, some smaller, boutique firms are rethinking this business model.

A prime example is Signature Litigation, a London-based firm set up by lawyers in 2012. Graham Huntley, a founding partner, has 30 years’ experience in commercial litigation.

Clients have included the family of the late Badri Patarkatsishvili, a Georgian billionaire, who were embroiled in a $1.8bn High Court battle with Russian aluminium tycoon Vasily Anisimov in a case that was settled before trial.

Signature has set up a profit-sharing scheme for all members of the practice. It has also outsourced some back-office functions, which Mr Huntley says enables lawyers to devote time to practising law rather than other ancillary activities. Adopting the same administrative structure as a traditional law firm would also result in a poor cash flow model for a boutique law firm, he says.

“If you are in a large law firm, some of your time is spent on areas like maintaining client files or billing, rather than practising law,” Mr Huntley adds.