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Killing the Golden Goose...

In Category: Thoughts
Published: 26/10/2015

The British Government, regardless of political stripe has, over the last 40 years presided over the collapse of British manufacturing, mining and car production. Over more recent years they have imposed swingeing taxes on the energy and banking sectors. A services-based economy remains.

The Government, with the ironically named Access to Justice Act 1999 denied access to justice for millions through the withdrawal of legal aid for almost all forms of civil redress. In civil cases the argument was that legally-aided claimants were “state-funded Rottweilers” able to bring unmeritorious claims with impunity and that the Act would mean that claims with merit would be taken on by solicitors under Conditional Fee Agreements and those lacking merit would not be brought representing huge savings to court time and to the insurance sector. Solicitors would benefit from the uplift in costs allowed under CFAs. Those of us who have been around long enough will remember that once the profession had made this adjustment HMRC announced that it would now charge VAT on Work In Progress; meaning that firms had to stump up VAT on fees that had not been recovered and which may never be.

Of course the Government was not finished – with a few bursts of hyperbole about “fat cat lawyers” and claims of “milking the system” a fixed costs regime was brought in, meaning that in most cases a contested civil claim would have to be run for a few hundred pounds, this regime is a nonsense – it is impossible to do an adequate job never mind make a profit. Professional negligence cases multiply but because it falls on the solicitor’s professional indemnity insurance and the profession can always stand higher premiums this is not the Government’s problem. Firms across the country collapsed in consequence and are continuing to do so. In the criminal legal sector – both barristers and solicitors have been driven to strike action by the reduction in legal aid rates and many firms and chambers have again been driven to close.

Michael Gove is now taking aim at “City Law”; A sector that not only helped sustain the UK during the recession but was, in large part, responsible for the speed with which we came out of recession. Not content with deterring litigants from issuing in the UK with initial court issue fees of up to £20,000 his new wheeze is to charge a super-tax on this part of the profession of 1% of turnover. This can only make sense to a former journalist - now MP who has no understanding of business and believes that headlines suggesting that someone in the UK is making a profit represent an ill which must be immediately cured through taxation.

We live in a world in which legal services and legal careers are increasingly mobile and sensitive to local taxation. At Cogence Search we are specialist London based Legal Recruiters and move lawyers globally and in almost all such moves the relative tax rates between the current and new jurisdictions form a significant part of the negotiation process and, in many instances, are a barrier to a successful move. The commercial legal profession is under more fee pressure than at any time in the past – rates and margins are being squeezed to an unprecedented degree. This tax cannot be passed on to clients and any attempt to do so will simply cause such clients to, for example, move their listing to a different exchange, host their corporate headquarters in a friendlier jurisdiction or litigate in a country which can afford to provide a judicial resolution to a dispute without first demanding a prohibitive fee.

Our legal services sector thrives because of its reputation for technical excellence and fairness: Gove’s predecessor as justice secretary, Chris Grayling, introduced the notion of charging members of the public up to £1,200 for the pleasure of being prosecuted a step which is clearly harmful to that reputation. Gove was reputedly brought into this role to oversee the Government’s plans to abolish the Human Rights Act; civil and criminal justice are now truly only for the wealthy so he is more than half-way there already. With exactly the same commitment to ministerial double-speak that led to the naming of the Access to Justice Act 1999 Mr Gove introduced this new levy in a speech in which he said “The belief in the rule of law, and the commitment to its traditions, which enables this country to succeed so handsomely in providing legal services, is rooted in a fundamental commitment to equality for all before the law”.

The legal sector as a whole and principally “City Law” generates billions for the economy through the provision of legal services to UK and international corporates and individuals. The collection and remittance of VAT, corporate taxation and personal income taxes from this sector alone amounts to a significant proportion of our GDP. If Mr Gove’s figures are correct and the “Top 100” generate £20 Billion then the treasury will (subject to set off and to services provided overseas) receive up to £4 Billion from VAT alone.

This is not a prayer in aid of the wealthy but rather one for restraint: the government is entitled to tax profit and income and it does so at very substantial rates. Neither the City nor the country can afford to have the legal services sector go into significant decline and a levy of this type will inevitably cause the sector to be less competitive and attractive to its clients and so will cost the country far more in lost revenue and taxation than it could ever generate. 

Written by Mark Husband

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