Starting April 2027, every law firm structured as a limited company or LLP will be mandated to disclose full profit and loss figures, according to recent changes confirmed by Companies House. The reforms are part of the Economic Crime and Corporate Transparency Act, aiming to curb fraud and boost corporate transparency.

A Companies House circular released this week outlined that all companies must submit their annual accounts digitally, including profit and loss details. Small companies, those generating between £1 million and £10.2 million in annual turnover, will also need to file a directors’ report. These updates mark the end of 'abridged' accounts, a format that previously allowed companies to withhold detailed financials. The shift is designed to make financial filings more understandable and reduce opportunities for financial misrepresentation. Approximately 75% of law firms operate as companies or LLPs and will be affected by these changes. In contrast, sole traders and traditional partnerships will remain exempt from filing with Companies House.

Experts predict this new level of transparency may be unwelcome for firms accustomed to operating discreetly. Under current rules, some firms have presented strong balance sheets using inflated valuations of work in progress (WIP). The introduction of profit and loss reporting will shift focus to whether firms are genuinely profitable. The effects of increased transparency are already visible in law firms listed on the stock market, where regular financial disclosures are required.

“Some law firms appear ‘bigger and better’ from a PR perspective than perhaps their results actually show, which has been the case frankly for some that have floated,” said Peter Noyce, a partner at accountancy firm Menzies. “Secrecy will be removed, as will firms’ reliance on interest received. Clients and key staff may choose a firm that trades profitably from its core legal business rather than its interest returns.” Noyce also noted potential challenges in staff retention. If firms are revealed to be less successful than expected, employees may reconsider their loyalty. On the other hand, if high profits are made public, staff may demand higher compensation. 

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Source: John Hyde, The Law Society Gazette