An actual tax bombshell gives lawyers a chance to give something back

In a shocking breach of Whitehall protocol, the most interesting measure in Alistair Darling's Budget was not widely trailed: the rise in the top rate of income tax to 50%. Such was the confusion this unheralded bombshell caused, it took most media organisations a good couple of hours yesterday to get around to leading their coverage off the only measure that was going to have much relevance for business.

And it will have particular relevance for commercial lawyers, since the way the profession structures its earnings means it is already a higher tax contributor proportionately than many domestic industries. With the UK top 50 alone generating in the region of £4bn of profit in 2007-08, two thirds of it in the UK, the rises in tax and related cuts in personal allowances and tax relief on pensions means that from 2010 legal professionals will be contributing hundreds of millions of pounds in extra tax annually, at a time when tax receipts from the City are collapsing. And, unlike most companies, law firms have little scope to manipulate their earnings to cut taxes to mitigate these measures.

It will be interesting to see if the profession seizes on its rising tax burden to demand a stronger public voice, though I doubt it. Perhaps if partners want to take a philosophical view - and many were yesterday - they can view it as paying back the bankers for all those years they helped boost law firm profits, as the lawyers will be helping to pay for cleaning up the mess in banking.

On paper the measures should also give a boost to the prospects for alternative business structures under the Legal Services Act, as the attraction of converting remuneration into lower-taxed capital gains has grown considerably.

There has also been talk that international law firms will seek to shift more operations outside of the UK, though most lawyers are sceptical that the tax rises alone will have much impact. What it will fuel is the wider debate about the future of London as a business centre. The cynics and tax advisers fret that taxing the most mobile labour undermines the City's international drawing power. There is something to this. If good politics is the art of the possible, nowhere is this more true than tax policy; it's been widely established that penal tax rates lower collection rates - the challenge is getting the balance right. The logical move would have been to have extended the already floated 45% income tax rate to earnings over £75,000 or £100,000. Going hardest at the most mobile end of the tax base is risky for a country so dependent on attracting workers to the City.

Set against that, the still relatively generous tax treatment for non-doms will limit the damage, all large Western economies will have to raise tax rates over the next decade and an incoming Conservative administration will likely smooth the rough edges of Darling's recently-discovered re-distributionary zeal.

As such, the long-time risk to the City's position won't come from Europe or even the US - it will come if financial centres in strategically-important emerging economies manage to grind through the global recession without needing major tax hikes. After a pause for breath this year, expect more law firm investment in Asia in 2010 and more mind-numbing lobbying for deregulation from India.

Click here for full details of the Budget, including comprehensive market reaction from a selection of senior lawyers.