A new tax on law firms?

In April 2015, criminal court charges were introduced to be paid by all guilty defendants. The magistrate imposing the charge has no discretion over the amount to be charged and the charge is higher where a defendant pleads not guilty and is then found to be guilty. The charge has proved to be extremely unpopular and it has been argued that the way the charge operates puts pressure on defendants to plead guilty. It is also difficult to recover the charge from defendants who do not have the money. The charge was expected to raise between £65 million and £90 million a year but it has been estimated that only £300,000 has been collected to date.

The Justice Minister, Michael Gove MP has been exploring alternative ways to fund the court system. In June he gave a speech where he is quoted as saying “it is clear to me that it is fairer to ask our most successful legal professionals to contribute a little more rather than taking more in tax from someone on the minimum wage. I want to work with leaders in the profession to examine what the fairest way forward might be. But I cannot accept that the status quo is defensible.”

Since then, there has been no news on what the government might be proposing. However last week it was reported in The Times that one of the options being considered could see the controversial court charges scrapped and replaced with a tax on the turnover of the top 100 law firms, in effect, a ‘solicitor’s levy’.

Although nothing has yet been proposed, The Times quoted that a 1% levy on the top 100 law firms would raise approximately £190 million – more than double what the courts’ charge would raise.

Of course, the government has a ready-made template for a new charge – the banker’s levy – which has been a feature of the UK’s tax system since 2010. The bank levy is an annual tax on the total value of the banks’ equity and liabilities and is currently 0.21%. Although the levy is reducing to 0.18% next year, a new surcharge based on the profitability of banks will be introduced from 1 January 2016. The new surcharge will apply to banking profits in excess of £25 million and will be charged at a rate of 8%.

However, charging a levy on certain industry sectors seen to have the broadest shoulders is a worrying development and leaves open the possibility of special levies on other ‘unpopular’ activities.

In addition, the government has to consider whether it is fair to impose a levy on private companies to fund what is a public service. Media reports suggest that this proposal to charge a levy on law firms has been widely criticised with many arguing that it is simply targeting successful law firms.

Until more details are published outlining how any tax charge on law firms might work it is difficult to predict the effect. Perhaps the Chancellor’s Autumn Statement on 25 November 2015 will provide the information required. We will of course provide any updates in our usual Autumn Statement summary.

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