The UK government would seize a significant chunk of interest generated on pooled client accounts
Law firm owners and solicitors in the UK have signed an open letter calling for UK prime minister Andy Burnham to ditch the implementation of the interest on lawyers’ client accounts (ILCA) scheme, which would enable the government to take a significant chunk of the interest generated on pooled client accounts.
Jade Gani, co-founder of the SME & Boutique Law Firm Alliance, penned the letter addressed to Burnham. She outlined that the scheme would enable the government to seize 75 percent of the interest “while having consulted on taking 90 percent or even 100 percent, together with 50 percent of the interest generated on individual client accounts.”
She noted that the ILCA scheme has been labelled a “stealth tax.”
“Government proposes compulsorily to appropriate a substantial proportion of a financial return generated on client money, not as part of the ordinary taxation system, but through a bespoke scheme applying specifically to users and providers of legal service,” Gani wrote in the letter. “Yet fundamental questions remain unanswered as to the legal character of that payment. Is it a tax, a levy, a sequestration of client money, or something else? What is the statutory basis for it, and what safeguards ordinarily associated with the imposition of taxation will apply?”
She pointed out that law firms were the ones that opened and maintained client accounts, in addition to handling banking and accounting and ledgers and reconciliations. Law firms also recruited finance professionals, invested in specialist systems, ran payment controls, trained staff, subjected themselves to audit and regulatory assessment, and complied with frameworks protecting client funds.
“Against that background, the description of retained client-account interest as effectively ‘unearned’ income is deeply objectionable. If government and regulators regard the holding of client money as an activity carrying sufficient risk to justify extensive controls, oversight and compliance costs, they cannot credibly pretend that the economic return generated through that same infrastructure appears from nowhere,” Gani wrote in the letter.
She added that the scheme would disproportionately affect SME, boutique, high-street, rural and owner managed firms.
“Government’s own consultation acknowledges that smaller providers typically operate on smaller profit margins and that the scheme may impose additional administrative costs. The Law Society has gone further, warning that firms will close, fees will rise and clients will be affected if the proposal proceeds,” Gani wrote.
She asserted that the scheme would reduce diversity in the legal profession given that a significant percentage of partners from Black, Asian or minority ethnic backgrounds work at smaller firms.
“The justice system is a fundamental public service. Its chronic funding problems cannot fairly or sustainably be addressed by identifying income connected with one heavily regulated group of private businesses and simply diverting it to government,” Gani wrote in the letter.
She urged the UK government to drop the ILCA scheme as it currently was and sought confirmation that ILCA measures would not be effected in the midst of an unresolved consultation process.
The open letter has received over 100 signatures to date.
