Fault lines – tax, Brexit and what the general election means to City lawyers

After a relatively stable coalition government, Britain goes to the polls amid huge uncertainty, with the main parties far apart on key policies. Legal Business assesses the manifestos to identify the issues impacting the City and the profession.

‘You can follow all the polls but the money is a much more reliable guide,’ observes one Magic Circle partner. ‘At Ladbrokes you can get the odds on who’s going to be prime minister after the election, but this is not on 8 May but August. They think it will take that long to sort it all out.’

If looming political deadlock is on the horizon, this droll legal veteran has one practical response: he’s planning an election bet to hedge his mansion tax exposure.

This month the UK faces one of the closest and most unpredictable general elections since 1992 (and arguably the post-War period). It is the first election in which a hung parliament and a coalition government is viewed as a near certainty, triggering a range of issues for a nation constitutionally and historically geared to two-party politics.

As of mid-April, both the Conservatives and Labour were polling 34% each, while the Liberal Democrats (Lib Dems) were sitting on 9%, leaving no party likely to get the 326 seats required for an outright majority.

Such calculations, triggered by the 30-year evolution of the UK into a multi-party democracy, will deliver an election with far-reaching implications for business and society. And none is more far-reaching than the pledge by the Conservative Party to hold an in-or-out referendum on UK’s membership of the European Union (EU).

It is also the first election since 1983 in which the Labour Party has stood without actively courting the business community – a stance underlined by a number of tax policies targeting the rich.

As such the UK’s two main parties enter the election further apart on core policies and rhetoric than they have been for years. With Labour shifting to the left of the policy agenda, in a partial recantation of the Blair/Brown years, the Conservatives have abandoned much of the ‘Big Society’ message taken to voters in 2010, to shift rightwards.

Meanwhile, the agenda is being shaped by a wider group of actors following the Conservative/Lib Dem administration formed in 2010 in the first coalition since 1945. The subsequent rise of the Scottish National Party (SNP) and the Eurosceptic right-wing populist UK Independence Party (UKIP) is already having a material impact on policy and in the case of the SNP perhaps the formation of a working government.

Throw in a mooted collapse in Lib Dem support and the SNP set to sweep the board in Scotland, and this election is unprecedented in recent history.

With the UK economy currently outperforming its G7 peers, the prospect of a Labour-led coalition with less commitment to dealing with the nation’s still-huge deficit is unwelcome among City lawyers, though the profession is less tribal in its support of the Conservatives than some suppose.

Travers Smith managing partner David Patient says ‘it’s a poor time for the election’, in terms of uncertainty impacting on the economy, and others have similar views. ‘There is a real risk of having six to eight months while we rumble along, holding together some sort of fragile coalition,’ says one practice head at a global top ten firm. ‘Then, we will get back into the polls in the autumn, and in order to try and get a majority, people will move their positions. That is going to be the real scenario.’

‘It has demonstrably worked’

In over 20 interviews with senior lawyers for this article, there is widespread support – and admiration even – for the record of the coalition government. Gibson, Dunn & Crutcher City corporate chair Charlie Geffen sums up a common view: ‘The last five years have shown that a coalition government has demonstrably worked. Lots of people thought it wouldn’t survive two or three years. But it’s got things done and we have had a stable government that has been broadly economically successful in the last five years.’

Hogan Lovells chair Nicholas Cheffings picks up the theme: ‘It is easy to forget that people were quite worried about the prospect of a coalition and didn’t think it would last, and we had no recent experience of coalition government. It is quite remarkable how they have managed to work together and produce a degree of stability for the economy over a five-year period.’

Admiration for the coalition comes chiefly for the pragmatism it was seen to have sustained, thanks in part to the Lib Dems pushing the Conservatives back to the centre ground, but primarily in the government’s efforts to deal with a gaping deficit that opened up after the banking crisis.

The context is worth considering. Public spending in the UK had remained restrained since the 1980s and the bulk of the last Labour administration. Institute for Fiscal Studies (IFS) analysis shows that government spending has fluctuated between 35% and 45% of national income over the second half of the 20th century, growing in real terms at 2.8% between 1948/49 and 1999/2000. After a period of fiscal discipline, the Labour government started to substantially increase public spending mid-way through its second term, notably in health and education, pushing spending to 40.6% of national income just before the crisis.

The banking crisis and recession turned a modest structural deficit into a gaping hole in public finances as tax revenues shrunk; by 2009/10 spending had ballooned to 47% of income and the UK was borrowing £153bn a year, a deficit of 10% of GDP, by any yardstick unsustainable in the long term. Though its public debt was relatively modest during the boom, the UK saw one of the sharpest deteriorations in public finances among western economies after the recession, thanks to a heavy tax take from the City and property taxes.

The coalition receives much credit from City lawyers for financial discipline, though the Conservatives campaigned in 2010 on a more dovish fiscal stance before adopting a harder line in government, typified by chancellor George Osborne’s famous (and largely inaccurate) declaration that there was ‘no plan b’ to austerity.

Having pledged to eradicate the deficit by the end of the current parliament, the government went on to considerably relax its targets in part due to the euro crisis and related regional recession that erupted at the end of 2010. Nevertheless, the IFS concludes that the government did preside over a substantial shake-up of public finances with departmental spending falling by 2.2% annually through the parliament (with health and schools budgets protected, this meant ‘unprotected’ departments saw 4.5% cuts yearly, while capital investment was slashed to some of the lowest levels seen in the post-War period). In-work benefits were substantially cut, though welfare spending overall is facing huge long-term challenges thanks to the cost of pensions for an ageing population; spending on pensioners is on course to have more than doubled in real terms between 1991 and 2018. The IFS forecasts that, on current spending plans, by 2018/19 public spending will be reduced to 37.8%, just above its share in 2001/02. Given that UK public net debt has rocketed from under 40% of GDP in 2003 to 80.4%, a total of £1.484trn, in March, considerable challenges remain.

One head of a leading City law firm sums up the consensus view: ‘Osborne has done a good job with the economy. He’s presented well and if you’ve heard him speak he has improved as he’s gone on. David Cameron has to be given some credit for taking a liberal stance on issues like gay marriage that you wouldn’t expect from a Conservative prime minister. [Deputy prime minister and Lib Dem leader] Nick Clegg has done a better job than he is given credit for.’

The government also wins plaudits for addressing the deficit primarily via cuts to public spending rather than tax rises – though the government did pursue some redistribution via cuts to tax allowances and the removal of Child Benefit for richer families.

Despite the UK losing its AAA-credit rating from Moody’s in February 2013 for the first time since 1978 and the state still borrowing more than £80bn annually, an annual deficit of 5% of national income, most City lawyers welcome the focus on deficit reduction.

The government also receives credit for the UK’s record on job creation – with unemployment falling to 5.6% or 1.84 million in the three months to February against 2.62 million in September 2011 – and for positioning the UK as pro-business, notably in the reduction in the top rate of income tax from 50% to 45%.

(The caveat to this robust picture on job creation and economic growth – forecast this year to hit 2.8% by the EY Item Club report – is that the UK has been plagued by poor productivity and weak income growth against comparable states since 2008, with household incomes 2% below 2010 levels, according to the IFS, once adjusted for inflation. Subdued wage growth, high imported inflation until the latter half of 2014 and a preponderance of low-paid jobs are further reasons that the economic recovery has been slow to deliver much of a feel-good boost to the government.)

‘On balance from a business point of view, they have done a good job,’ says Simon Levine, co-chief executive of DLA Piper. ‘Some of that growth would have happened anyway but you have to give some credit to the government. They haven’t put in place polices that have hurt and if you look around the world that hasn’t always been the case.’

‘If I think about it from my perspective, there were quite a lot of tax breaks for technology. Some of the government actually paid attention to the technology sector,’ adds Levine, citing the patent box, the 2013 tax incentive for companies to make money from their patents, as a welcome measure.

The government also generally receives plaudits for achieving a pragmatic balance in regulating the City and bank balance sheets, though the move towards tougher enforcement was clearly evident in the closing years of Labour’s term. This qualified thumbs-up comes despite a tepid response to the ‘Twin Peaks’ shake up of regulation that saw the Financial Services Authority recast as the Financial Conduct Authority with the Bank of England taking over prudential regulation.

‘The government introduced some very good regulation that was needed,’ observes Herbert Smith Freehills senior partner James Palmer, who welcomed moves to strengthen accountability, prudential regulation and capital adequacy. Palmer nevertheless warns the senior manager regime introduced to bolster accountability remains problematic.

Education is generally regarded by neutral observers as a success for the government, in raising standards and increasing scrutiny in primary and secondary education and supporting an expansion of vocational training, though rising university student fees remain controversial.

Far less popular were the Conservatives’ attempts to clamp down on immigration, with the law firms backing the established City line that freedom of movement is a key part of the UK economy and demonstrates the UK’s place as an open nation.

As it was – attempts to drastically reduce net migration were also signally unsuccessful, mainly because of commitments to free movement within the EU. Figures from the Office for National Statistics’ show net migration estimated at 298,000 for the year ending September 2014, against 244,000 in June 2010.

In consequence, the three main parties enter the election with more restrictive policies on immigration, most obviously in the case of the Conservatives.

A reactive attempt to shake-up the NHS early on was widely seen as a cack-handed attempt to take on the hugely complex job of reforming the UK’s health service.

The government’s record on justice is another issue that loses support from the profession. The Ministry of Justice saw some of the sharpest cuts and undertook major cuts first to the budget for civil and then criminal legal aid. The latter reforms under Justice Secretary Chris Grayling were particularly controversial and the Ministry of Justice frequently faced credible criticism for pushing through reforms with inadequate debate and research.

Likewise, populist attacks on the Human Rights Act and the pledge to bring in a Bill of Rights in the next parliament are generally viewed with derision in the profession.

In addition, sharp rises in court fees this year have been poorly received by commercial litigators and were regarded as an own-goal at a time when the government was promoting the City as a dispute resolution centre with this year’s Global Law Forum, held to honour the 800-year anniversary of Magna Carta. Labour and the Lib Dems have signalled a willingness to review the court fee rises and reforms to limit judicial review, though there appears little chance of more funding for legal aid.

Catherine Dixon, chief executive at The Law Society, comments: ‘It can be a false economy to make cuts in some areas, such as legal aid for housing or welfare benefits advice. Such cuts simply pass the burden elsewhere to other departments, such as the Department of Work and Pensions, which ends up picking up the bill for the fall out.’

No prawn cocktails?

While the coalition government receives general support, the current Labour Party has done little to cultivate support from business, a contrast to the approach of Labour since Neil Kinnock presided over its so-called ‘prawn cocktail offensive’ to woo the City in the early 1990s.

‘There is a lot of anti-rich and anti-business rhetoric, which is making many City people feel very nervous about the outcome,’ says Ian Terry, disputes partner at Freshfields Bruckhaus Deringer.

‘It’s a very odd election,’ says one managing partner at an elite London firm. ‘The Labour Party has definitely moved to the left and I find that quite disturbing because it’s a populist agenda, which creates instability, and that is worrying for business confidence and investor environment.’

It is perhaps surprising that the City view of Shadow Chancellor Ed Balls is as an anti-business figure, given his background as an economic writer for The Financial Times and position as a right-hand man to Gordon Brown under the previous government, though there has been little during the campaign to dispel his more antagonistic image in the Labour opposition.

Labour leader Ed Miliband himself has generally polled poorly, though the consensus of political pundits is that he has campaigned more effectively than expected so far.

The party has moved to bolster its fiscal credentials by limiting new spending pledges and explicitly linking a series of revenue-generating policies aimed at business and the rich to what spending commitments it has made. (For example, an expansion of childcare for working parents is to be funded by an £800m increase in the banking levy, while an additional £2.5bn funding for the NHS is pledged to come from a ‘mansion tax’ on properties worth over £2m.)

The party has pursued several other headline-grabbing tax measures, including the heavily trailed re-instatement of the 50% band of income tax for earnings over £150,000.

More of a surprise to the City was the announcement last month that Labour would phase out the controversial foreign domiciliaries regime allowing those classed as residents outside the UK to avoid tax on foreign earnings – a status that incurs a £30,000 annual fee after seven years to retain the tax privileges.

Unsurprisingly, this policy is unpopular with many commercial lawyers and the wider wealth advisory community, who argue it will deter the mobile rich from working in the UK and generating substantial UK tax in favour of other centres.

Ashley Crossley, who chairs Baker & McKenzie’s Europe and Middle East wealth management practice, says: ‘The Labour announcement could have a huge impact on the London property market, professional service firms and London’s economy as a whole. The engine room of the UK economy has just had someone light a fire in it. Frankfurt and Paris must be rubbing their hands with glee.’

Critics also argue the reforms would be unlikely to generate much or any income, citing figures that non-doms paid over £8bn in income tax and National Insurance in 2012/13. Official figures show there were 114,800 individuals recorded as non-doms in their self-assessment tax forms that year, though less than half (46,700) were taxed on a ‘remittance basis’, exempting their foreign earnings. That year only 5,100 paid the annual charge generating £226m, as many non-doms are mobile workers who have been in the UK for less than seven years. As such, the measure is unlikely to generate much revenue and may be a net loss.

Nevertheless, the regime remains unusually generous by international standards and many criticise its ability to allow residents born and bred in the UK to claim the status on the basis of their parent’s birth. It is also true that changes to non-dom status have typically been met with melodramatic claims that have proved wide of the mark, as happened when Labour introduced the annual levy in 2008. The current government has tightened the rules, including increasing the levy for longer-term residents.

Richard Ward, London co-managing partner of Debevoise & Plimpton, and chair of UK tax, adds: ‘There are a lot of non-doms who work in the City and the non-dom status is, as it stands, too broad. It is not fair at the moment and the idea that having a burial plot overseas grants you non-dom status is a stretch.’

A pragmatic view from tax specialists is the non-dom regime could be reformed to iron out idiosyncrasies and unequal treatment while protecting the UK’s attraction to mobile, high-skilled workers, while a total abolition looks more like a political gesture than effective tax policy. The key issue will be how long Labour would allow for ‘temporary’ residence before full tax is liable, with current indications that it would be somewhere between two and four years.

Of the three headline measures, the mansion tax would likely generate the most revenue, probably annually in the region of £1bn, while the income tax increases and a total abolition of the non-dom regime are potentially counter-productive from a tax and economic perspective. Arguably, the combination of all three policies bears some economic risk, though given the sustained squeeze on living standards since the banking crisis, it is an understandable electoral tactic.

While there is no doubt that City advisers are uncomfortable with a Labour Party making fewer concessions to business and the rich than normal, others view such policies as symptomatic of parties appealing to the electorate and core votes rather than a sign the party is anti-business.

Levine comments: ‘This version of the Labour Party hasn’t spent much time courting the City but it is not that obvious to me that this will have a dramatic impact. Once you get into government you become engaged with business because you have to.’

Indeed, while there are some concerns about a populist slant to Labour policy, there are also some concerns about Labour relaxing austerity measures. Labour’s fiscal plans are less stringent than the Conservatives’ and Lib Dems’, with a pledge to cut the deficit every year and national debt falling ‘as soon as possible’ in the next parliament. The party pledges that departmental spending will fall ‘outside of a few protected areas’. Overall, the two main parties appeared to have moved closer on fiscal policy.

Of concern to deal lawyers will be Labour’s pledge to reform takeover laws to weaken the hand of short-term investors in favour of institutional investors and strengthening public interest tests.

The move is a revival of the ‘Cadbury’s Law’ reforms mooted in the 2010 election amid fears that the UK’s liberal takeover regime was seeing British companies tipped into takeover due to the actions of hot money funds seeking a short-term profit.

But even allowing for the self interest of M&A lawyers, such reforms get little support on technical grounds from corporate lawyers, who argue hedge funds can only get hold of stock if long-only funds are sellers and that such reforms can easily cause distortions with unintended consequences by turning ownership on a small proportion of shares. Comments Palmer: ‘No one who ever examines [this measure] in any depth ever supports it and yet it keeps coming back.’

A mixed bag

The Conservatives enter the election with a relatively light slate of business-focused policies, though the government has pledged to raise the 40p tax threshold so that no-one earning less than £50,000 pays it, and cap overall welfare spending, which will lower the amount of benefits that any household can receive from £26,000 to £23,000. This is matched by a plan to raise the personal tax-free allowance to £12,500 and an increase in the inheritance tax threshold to £1m by 2017.

The Conservatives aim to run a budget surplus by 2018 with a further £30bn to be cut in public spending.

Figures from accountants Baker Tilly show London’s higher-earning partners will be significantly impacted by Labour’s tax increases. A partner earning £1m would pay £500,590 in income tax and national insurance (NI) – £42,060 more than the 2015/16 tax regime.

Under the Conservatives’ election commitments, the same individual would pay £457,081 annually – a saving of almost £1,500 against the current tax liability and £43,509 cheaper than under Labour. A partner earning £500,000 would pay £18,509 more in income tax (NI) under Labour’s policies than the Conservatives.

Constitutional issues bear a large part in the main manifestos, reflecting the debate over Scots membership of the UK and the EU, with the Conservatives pledging to cut the number of MPs to 600 and limit the voting rights of non-English MPs on English legislation.

There are other signs of devolution gaining mainstream appeal, with Labour pledging to hand over £30bn of resources and power to local authorities.

Infrastructure is likely to play a more significant part in this parliament with a growing debate about speeding up investment after capital expenditure was slashed after the last election.

The Conservatives have pledged £100bn in investment in the UK’s infrastructure while big decisions on airport capacity and high-speed rail loom. Labour, meanwhile, has pledged to create an independent National Infrastructure Commission to produce recommendations on supporting long-term investment.

Both parties have swung increasingly in favour of vocational training, marking a renewed focus not seen for decades, with both making pledges to considerably expand the number of apprenticeships, and raise the minimum wage from £6.70 an hour currently to £8 by 2020; while Labour plans to ban ‘exploitative’ zero hour contracts.

But some City veterans think that neither party is delivering on growth. ‘What you really want are policies that encourage economic growth and I’m not sure I hear these policies coming through clearly from anybody,’ says Linklaters finance partner David Ereira.

As usual the NHS remains a major issue in the election, with the Conservatives pledging to put in an additional £8bn in annual funding by the end of the next parliament, against a current pledge of £2.5bn from Labour. The NHS had its budget protected from cuts but is being stretched by an ageing population, though the Conservatives’ room to move on health was limited by an aborted attempt to restructure the health service early in the parliament without much sign of long-term planning.

Once again, housing will be a big issue with the prolonged downturn doing little to deal with housing shortages and a lack of affordable housing in the South East. Annual house building at 140,000 is currently at historically low levels and is well short of the 250,000 projection many believe the UK needs to meet demand.

Such concerns have even extended to well-heeled City lawyers, with many partners reporting concerns that associates and support staff struggle to find affordable housing in London.

In terms of the housing market, Labour offer to have 200,000 homes built a year by 2020 but the Conservatives have made one of their key pledges with extension of the right-to-buy scheme to housing association tenants in England. The move recalls the Thatcher era policies, but has been matched by a policy that local authorities will be required to replace sold housing stock.

Nevertheless, the sense remains that housing policy – along with demographic changes and strains on the welfare budget thanks to a soaring pension bill – remain two long-term issues that UK governments have consistently failed to grapple with.

The big issue

While there are considerable differences between the two main parties on policies impacting the City, such points are entirely overshadowed by one issue: the question of the UK’s status inside the EU.

The issue has loomed large in domestic politics since the UK government signed the Maastricht Treaty in 1991, triggering a commitment to push through substantial EU integration and pooling of sovereignty and aggravating a factional dispute within the Conservative Party.

Such tensions were further exacerbated when the euro crisis burst into the open in late 2010 along with a nationalist reaction in many EU countries angered at austerity measures. This dynamic has been amplified in the UK thanks to the popularity of the anti-EU party UKIP stoking fears among Conservatives that the party will be badly hit by tactical voting on 7 May.

Cameron’s pledge in January 2013 to hold an in/out referendum in the event of a Conservative-led government is unpopular with the business lobby and the City of London, which benefits hugely from access to the EU market, though this attitude is more prevalent at large companies and financial services.

This attitude certainly extends to City lawyers, with several citing Maastricht commitments and the EU’s resulting moves to force mutual recognition of professional qualifications as underwriting the rise of London as a global finance hub and effectively triggering the globalisation of the legal profession.

Concerns over the EU pledge are hard to overstate with virtually all lawyers interviewed for this article concerned about the uncertainty hanging over the UK and the City in the event of a Conservative win.

A 2014 report by Clifford Chance (CC) for the lobby group TheCityUK concluded a UK exit would be highly uncertain and loaded with risks in any of the five potential exit strategies identified (see box, page 48).

The critics of the EU referendum argue that the UK would be unlikely to gain favourable access to the EU market without being bound by many of the rules of the grouping, a dynamic currently facing Norway and Switzerland.

Negotiating comparable trade status as Norway and Switzerland would also be a highly uncertain process in which the UK would be unable to count on goodwill from the EU. Invoking article 50 of the Treaty of the European Union would also trigger a two-year deadline until the exit, limiting room to negotiate and is complex as no state has ever left the EU.

‘What you are really grappling with if you have a vote [to leave the EU] on that day is that nothing changes,’ says CC’s head of UK public policy Phillip Souta. ‘You just enter a second period of uncertainty.

‘The tactics around [negotiating an exit and access to the EU market] will really be a challenge. If they want, the other EU countries can make life extremely, extremely difficult. If you think of it in terms of a contract – of the options, what we have at the moment gives us the best protection to our rights.’

With half of all UK exports going to the EU, this process has substantial implications for the UK but in particular for financial services and the City given London’s role as Europe’s top finance hub. The 2010 launch of the European Supervisory Authorities, the three oversight finance regulators created to bolster standards after the banking crisis, has also raised the stakes in terms of policing the City.

The argument of commercial lawyers is that the UK will lose its considerable ability to shape regulation in the region while being increasingly subject to such strictures… or largely blocked from the market on exit.

There are also huge concerns that the UK will lose its wider influence and ability to benefit from EU trade deals while most lawyers are dismissive of claims that an EU exit would lead to a great reduction in red tape as the UK has often pushed through regulation as prescriptive to the EU independently.

Assessing the impact on the UK’s legal framework attracts varying views with some lawyers citing huge impact on legislation impacting competition, employment, energy, financial regulation and product liability. Not all lawyers see the impact as so dramatic, however, as many instruments are reflected in domestic law, though an exit could trigger a series of investor/state claims and related litigation.

While the Conservatives would campaign to remain in the EU – and the polls currently suggest they would likely, if not decisively, succeed – many point to last year’s Scottish independence referendum as evidence that such ballots can be highly unpredictable and often fail to resolve the issue they are supposed to settle. (It would also cause intense pressure for a fresh vote on Scottish independence.)

The consensus view from veteran lawyers not prone to tribal or knee-jerk pronouncements is that London would remain a key finance centre in an exit but would be undermined and forced to quickly reposition itself.

‘The City would be somewhat diminished [outside the EU], though I’m a big believer in the strength of the English language,’ says Slaughter and May senior partner Chris Saul. ‘One great thing about this nation is it is very pragmatic. There is a tremendous spirit of “get on with it” here but it sure would be better not to have to try.’

Allen & Overy senior partner David Morley strikes a similar tone: ‘The City would survive one way or another. We would have to reinvent ourselves but it feels like a major own goal. The sooner the better we get it over with as it lifts the uncertainty. Clients are really concerned about it.’

A different country

It is a modern myth that elections and governments change little in an age of globalisation. A neutral observer would only have to take the briefest glance at the last 30 years of British and European politics – marked by Maastricht, privatisation, the euro, the Iraq War, Scots devolution, a wave of investment in public services and austerity – to know the truism just isn’t true.

That conclusion is all the more apparent in the 2015 election, in which a rapidly shifting dynamic heralded by the debate over the Scots union and EU membership is changing the way politics is conducted. Before the 1990s, there had been little upheaval in the UK’s constitutional arrangements at a practical level. Since then reform has come thick and fast, so fast that there has often been little time for politicians and the public to digest the changes.

This election breaks other supposed tenets of British politics in that a government regarded to have delivered economic competence and broadly successful governance looks unlikely to secure a majority against an opposition party fielding a front bench well short of its strongest post-War line-ups.

UKIP pledges to complete the Conservatives’ promise on lowering migration by ending ‘immigration for unskilled jobs for a five-year period to re-balance the UK’s work economy’, and ‘introducing an Australian-style points-based immigration system to assess all potential migrants to Britain’, as stated in UKIP’s manifesto. This has won them, according to recent poll statistics, 13% of the national vote.

In comparison, the SNP, with its concentrated support in Scotland, will have far more power, even though the SNP manifesto steers very closely to Labour, limiting their room for bargaining.

Such a dynamic is rapidly rewriting the rules of British politics and ushering in a period of uncertainty, perhaps with major impacts on business or investment. While a number of lawyers interviewed for this article desired another Conservative/Lib Dem coalition with an EU referendum ruled out, that outcome seems unlikely. The biggest fear is a Labour/SNP coalition.

One senior lawyer at a US firm comments: ‘A SNP and Labour coalition will have no moderating influence. This coalition has had the moderating influence of the Lib Dems to bring it back to the centre. A left-wing Labour Party supported by a more left-wing SNP, takes you off in a wilder direction, in the same way as the unlikely event of a Conservative/UKIP coalition, which would be as unattractive as a Labour/SNP coalition. It may be no mad thing to have a moderator (Lib Dem) to pull things back to the centre.’

The Conservative Party’s problems have been in part presentational – while governing with the Lib Dems on generally pragmatic and progressive terms, and presiding over more redistribution of wealth than commonly supposed, the party’s senior figures have been too easy to caricature as friends of the rich.

For a government that many would say improved on a difficult situation it inherited and performed better than many administrations that had less pressing problems, it is a strange position to be in.

While politicians are often derided in the modern age, the IFS concluded that public spending has consistently improved over the last 20 years and continues to become more sophisticated.

With the old political model breaking down, the UK’s first-past-the-post electoral system – a power concentrating mechanism that is supposed to deliver stable majorities – will come under intense scrutiny, as will the state of the UK. The unthinkable in politics is rapidly becoming possible and perhaps even likely.

The potential impact of this much-changed landscape can be in seen in the Conservative Party under pressure offering an EU referendum, a decision that certainly carries huge uncertainty, major risks and an unclear dividend.

So high are the stakes that this policy alone arguably is enough to mean an economically coherent agenda from the Conservatives could be potentially outweighed by one policy taken under intense political pressure. Quibbling about non-doms or a mansion tax damaging UK plc looks trivial against a debate on EU membership.

While this is a Labour Party without the obvious range of talents or presentational skills of its mid-1990s vintage or the same appeal to centrists, judged on its election promises it has proved more pragmatic on the platform it has taken to the country than the image of a party lurching to the left.

Currently UK law firms are benefiting from the best conditions seen since the boom – with robust levels of transactional activity and disputes work. While in theory an election so wildly unpredictable should impact on commercial activity, it appears the very uncertainty and the dramas business has been through with the banking and euro crisis have kicked any impact on business confidence down the road.

But the impact can’t be deferred forever. Come 8 May – or possibly a few weeks after – we’ll get the first indication of what that the new kind of Britain looks like. The profession – like the country – is disorientated, disengaged and may soon be scrabbling to keep up. LB

jaishree.kalia@legalease.co.uk; alex.novarese@legalease.co.uk