Former KWM Europe partners face tax burden after bank rejections hold up process

Former King & Wood Mallesons (KWM) European and Middle East partners may be unable to claim tax loss relief on their July tax payment, after three banks declined to open an account for the firm’s partnership board to deal with the allocation of tax losses.

The collapsed business‘s managing partner Tim Bednall, now a partner in KWM’s Australia arm, emailed former partners yesterday (20 June) updating them on the process of calculating and allocating tax losses due to individuals at the time of the firm’s collapse.

The email, sent on behalf of the remaining members of the partnership board – Bednall, Ed Page (now a partner at DLA Piper) and Michael Cziesla (now at McDermott Will & Emery) – states that Barclays has now agreed to open an account to hold monies relating to the tax loss allocation process.

According to the email, Barclays – legacy SJ Berwin’s main lender at the time of its collapse – signed up after three banks declined to open an account for the company, set up by the board to administer the tax loss allocation process.

Reasons for the unnamed banks refusing to open the account are not stated; however, the email acknowledges that their decisions meant it took “an inordinately long time” to get to the next stage in the process.

As a result, Bednall states that he is sorry, but that “there is now no prospect of completing this process by the time the next UK bill is due in July”.

Before the failed firm’s total tax losses can be worked out, and therefore the allocations owed to individual partners, KWM Europe’s final accounts for 2015-16 and the period to 17 January 2017 have to be prepared by Deloitte.

Total tax losses for the business will also have to be negotiated with HM Revenue & Customs before individual allocations can take place, with the email anticipating that this will happen by the end of this year.

Some former partners have questioned whether Barclays could now try to exercise any right to set off any money allocated to them, after the bank contacted former partners earlier this year to demand repayment of capital loans from the lender.

Michelmores, the west country law firm retained to advise the board on the tax allocation process, has been asked to advise on this point.

Knights dispute resolution partner John Lord said: “The process of dealing with terminal loss relief claims is never easy.  The whole process will take several months to complete and will become elongated should HMRC push back on the numbers.

“Against that background, the former members may be under some creditor pressure. I have previously seen former members being pursued by the banks for repayment of loans, with the bank being unwilling to wait for the members to receive payment of their terminal loss relief claims.

“The longer the process for finalising the terminal loss relief claims, the less patient creditors become and this has led to some truly awful situations for former LLP members and their families.”

All partners who were members of the LLP when its deed was amended in November last year to ensure fair allocation of tax losses will benefit from the arrangement, along with five “anchor” partners who left after 30 April 2016.

Partners have been asked by the board to contribute £900 each to pay Deloitte for the preparation of accounts and calculation of losses. Bednall states that total costs are not expected to exceed £2,000 per partner, and that the amount is capped at £4,000.

KWM Europe chief financial officer Lenka Hennessey is project managing the allocation of tax loss relief. Hennessey was formerly head of group tax at the firm prior to its collapse.

Terminal losses are normally allocated to current and former partners to offset as a deduction in calculating net income for the partnership’s final tax year and the three years preceding it.

In the event of the collapse of an LLP, during its final period costs can be higher than revenues. The losses calculated from that can be allocated to partners to reduce tax on profits previously earned.