Legal accounts controversy: Who should fund the broken justice system?
First, the government tried to go after the LLPs, but that failed. Now its eyes are on law firms’ client accounts under the narrative that it will be used to help the crumbling justice system, but lawyers are seeing it as just another tax raid.
Law firms earn substantial income from interest on client accounts, a revenue stream that significantly boosted profits during recent periods of high interest rates, with UK firms generating over £350m in 2024 alone, according to data from Taha & Co.
But now the Justice Secretary wants to take a proportion of this interest earned on lawyers’ client accounts in England and Wales and remit it to the government’s wallet. The Ministry of Justice (MoJ) expects this plan to raise over £100m per year.
Not surprisingly, the response to David Lammy’s plan has not been positive.
The MoJ’s reason is the broken criminal justice system, with a departmental spokesperson rehashing its lines on inheriting a crisis and, after years of underinvestment, the backlogs are causing another one.
“We’re exploring how interest earned on accounts – a tried and tested idea already operating in many countries around the world – could be invested to strengthen our justice system, making it fairer and more accessible for all,” the spokesperson added.
Helping fund crumbling system
The MoJ is not wrong; the crisis in the justice system is very worrying. The Crown Court backlog is nearly 80,000 cases, leading to years-long delays that have resulted in collapsed trials. All while courts are crumbling and staff shortages are getting larger.
The issues at the MoJ are clearly a focus for Lammy, and rightly so, but his plans are raising eyebrows. Back in December, he announced plans to scrap some jury trials to tackle the backlog, but this caused controversy amongst the legal community and the public.
But despite this worry, should the private sector be expected to help cover a particular area of public spending with what is starting to sound like an added tax on a sector that already contributes £38bn to the UK’s GDP?
James Quarmby, partner at Stephenson Harwood, said the government’s “justification is flimsy”. He states that “all sectors of society benefit from our legal system, and they are not being asked to pay,” so “why are lawyers and their clients being singled out?”
Others have pointed out the effects it will have on legal businesses, especially smaller firms.
Hywel Pegler, head of professional and business services at RSM UK, pointed out that firms that have historically generated large interest income from client accounts.
“To address this potential shortfall, firms may need to increase prices and reconsider their capital and banking arrangements. It could even lead to the closure of some high-street firms that are unable to sufficiently absorb the cost of these changes,” he explained.
However, the government points out that this is a tried-and-tested idea, with similar schemes operating successfully for decades in countries such as the United States, Canada, Australia, and France.
This comes after an aborted plan to target limited liability partnerships (LLPs) for tax, a move that would have affected law firms, but was dropped after the government faced criticism.
Francis Kendall, director at Kain Knight, noted the proposal’s over-interest is “particularly striking” given the government’s decision not to proceed with taxing LLPs, “having acknowledged the risk of placing additional strain on professional services firms”.
Raised eyebrows
On the flip side, non-lawyers may have been shocked to learn that law firms can benefit from client cash sitting in their accounts.
It is a legitimate practice. As Jarret Brown, head of compliance at Stokoe Partnership Solicitors, explained, “The SRA has long accepted that law firms are able to retain a marginal and fair difference on client account interest as part of the cost and risk of holding funds on trust, and it has never been treated as improper or surplus income.”
Ultimately, the government needs to fund the justice system. But after a scathing Public Accounts Committee (PAC) report on the MoJ earlier this month, which revealed the government was spending £4m annually on HMP Dartmoor, a ghost prison due to its dangerous radon levels, surely Lammy should start by looking at the department’s own finances before scrambling to levy extra tax on businesses.
Eyes on the Law is a weekly column by Maria Ward-Brennan focused on the legal sector.