City law and accountancy firms could face cash flow challenges due to a confirmed government shake-up of HMRC’s self-assessment regime. Chancellor John Healey announced plans to introduce more timely payments for income tax self-assessment (ITSA) from April 2029 as part of the Budget.
The new system will replace the current twice-yearly payment schedule with 'regular' payments. The government states that ITSA taxpayers, numbering around 12 million and contributing £48 billion in income tax revenue in 2024-2025, are a vital part of the UK economy. Limited liability partnerships (LLPs) and equity partners in professional services are among the larger users of ITSA.
Chancellor Healey indicated the aim is to ensure tax is paid closer to real-time, potentially reducing late payments or tax debt. However, industry experts have raised concerns. Nimesh Shah, chief executive of Blick Rothenberg, noted that while the government's objective is to collect tax sooner, it could significantly impact investment, profit management, and distribution for LLPs. David Portman, partner at Lubbock Fine, added that more regular tax payments would hit cash flow at a time when professional service firms are already facing economic pressures, including increased staff costs and national insurance.
Adam Craggs, tax partner at RPC, highlighted that this change could alter how professional partnerships manage cash, partner remuneration, drawings, capital, and financial performance. Sue Robinson, principal at Ryan Tax, explained that firms currently set aside money for partners' personal tax bills, and more frequent payments may necessitate releasing these reserves sooner and reviewing working capital retention. The Law Society has also responded to a government consultation on the plans, stating it does not believe the change is justified.
With an average lock-up period of 134 days for British law firms in 2026, the upcoming tax change may require a renewed focus on early invoicing and collection. Firms with slower billing or collection processes are expected to feel the pressure most. Industry figures have warned that some LLPs might need to use credit facilities, extend overdrafts, or take out working capital loans if tax becomes due before clients are billed. The cost of servicing such debt could affect firms' bottom lines, particularly if interest rates rise as economists anticipate. Further guidance from HMRC on the changes is expected in 2027, as the definition of 'regular' payment is yet to be provided.