UK legal firms planning major changes following pandemic, suggests MHA survey

More than two thirds of legal firms will review their business processes and well over half are planning a major change in strategy following the COVID-19 pandemic.

That’s according to a survey of more than 100 UK law firms of all sizes conducted by MHA, a UK-wide association of independent accountants and business advisors.

The survey, carried out during lockdown, showed that 85% of firms said the pandemic would have a ‘moderate’ or ‘major’ impact on fee income. Almost one in five (19%) of those surveyed have seen fees drop by more than 30%.

However, 59% of firms said they will use the opportunity to change their business strategy with a focus on better IT, review of specialisms, and improving profitability.

In a sign that firms are ready to embrace more agile working, 63% of firms surveyed said they found the transition to homeworking during the pandemic ‘easy’ or ‘very easy’, and 81% said they expect to allow staff to work part of the week from home in future.

Karen Hain, head of the Professional Practices team at MHA and Partner at MHA Moore and Smalley, said: “Like many other sectors, legal firms will be hit financially in the short term by the pandemic, however, there’s also a huge opportunity to use this as a catalyst for modernisation and achieving longer term financial stability.

“When it comes to business strategy, many firms have been telling us that the pandemic has encouraged them to take action to remove high-risk areas of work and to change their focus from increasing fee income to increasing profitability.

“There’s clearly a huge opportunity around staff recruitment and retention due to the agile working practices we’ve all become used to in a very short space of time. This may enable some firms to staff the business and attract new work without geographic restriction.”

Among the other key findings of the survey were:

  • 68% are reviewing their current premises requirements or considering smaller offices
  • 87% of firms have made use of the Coronavirus Job Retention Scheme (CJRS) and 31% accessed the Coronavirus Business Interruption Loan Scheme to date
  • 68% have deferred VAT payments and 31% have used the HMRC Time to Pay arrangement
  • 66% are changing their plans for investment in IT systems and procedures to allow more homeworking
  • 61% have changed their recruitment plans
  • 40% said they are changing their plans to focus on credit control and tightening up requests for advance payments on account from clients

Karen added: “This has been a big reset moment for the legal sector and there’s definitely opportunities for those firms who can move quickly to take advantage of new profitable business generated online or from non-traditional routes or regions. Those firms who are looking forwards, taking positive lessons from lockdown, and making decisions to change, based upon a modern IT infrastructure, will be those to profit not just survive.”

An infographic summarising the main findings of the MHA Legal Sector Covid-19 survey is available here.

Legal Sector COVID-19 Headline Survey Results – How does your practice compare?

MHA undertook a survey into the legal sector focusing on the impact of COVID-19, and how this is affecting law firms. The results report on 8 key areas including fee income, business strategy now and for the future, and working practices now and going forward.

We have summarised the results in an easy to read infographic which can be found here. The main headlines include:

  • 85% of firms said that COVID-19 has had a ‘moderate’ or ‘major’ impact on fee income
  • Once lockdown is lifted, 81% of firms expect staff to continue to work from home, with 50% stating that they expect staff to work up to 2 days a week from home going forward
  • The largest proportion of survey respondents (24%) furloughed between 21% and 30% of staff across their firms.
  • 82% of legal firms are reviewing their cash flow forecasts either daily or weekly.

We will be producing a more detailed report on the survey findings over the coming weeks. However to see the headline findings please click here.

However, if you have any questions in the meantime, or would like to discuss the results in more detail, please contact Karen Hain.

VAT treatment of property search fees charged by solicitors and conveyancers

HMRC have announced the formal withdrawal of the ‘postal concession’ with effect from 1 December 2020.

What is the postal concession?

The postal concession was agreed between HM Customs and Excise and the Law Society in 1991. It allowed conveyancing solicitors to treat property searches conducted by post as disbursements, so that VAT did not have to be charged by the solicitor to the buyer of the property.

Why has this changed?

In 2017, the law firm Brabners LLP lost a VAT case before the First-tier Tribunal that online search fees should be treated as disbursements. Following a consultation process, HMRC have justified the withdrawal of the postal concession on the grounds that postal and online searches need to be dealt with on a consistent basis. HMRC also feel that postal searches are largely obsolete and that the concession serves no useful purpose.

What next?

HMRC state that further guidance will be issued on the treatment of disbursements more generally, following withdrawal of the concession on 1 December 2020. Watch this space!

If you have any questions, please contact Jonathan Main on 07760 166802.

2019 Updated SRA Accounts Rules – “your questions answered by the SRA”

On 28 May 2020, the SRA held a webinar regarding the 2019 updated SRA Accounts Rules. As the rules have now been implemented for 6 months, the webinar covered common queries the SRA has been receiving in respect of them; and compliance issues they have been seen occurring in recent months. These are discussed in turn below.

Given the times we find ourselves in there were also points discussed relevant to the implications of the COVID-19 pandemic on a firm’s compliance with the Accounts Rules.

1.Common queries received by the SRA in respect of the new Accounts Rules:

1.1 Requirement to prepare reconciliations where the firm operates a client’s own bank account (Rule 10)

Guidance in respect of this was initially released by the SRA in October 2019, and states that where the firm does not obtain sufficient details to prepare these (i.e. transactions performed by the client), then reconciliations are not required to be performed. The SRA would expect as a minimum that a central register be maintained by the firm of all such accounts operated by themselves, and a list of transactions performed by the firm through those accounts. The SRA have stated that the Rules may be amended to reflect this but failing this more detailed guidance will be release in due course.

Please view our previous blog on SRA Accounts Rules – clarification of the new rules on operation of a clients own account.

1.2 When a firm is permitted to transfer money from the firm’s client to office bank account, in respect of costs and disbursements (Rule 2.1(d) / Rule 4.3)

As with the above, the SRA clarified their meaning of these rules to an extent in October 2019, specifically in respect of Rule 4.3. This rule states that a “written notification of costs” must be given to the client or paying party prior to the client to office bank account transfer being made. It suggests that an invoice has to be raised prior to the transfer of any funds, even for disbursements. However, the SRA clarified that a third party’s invoice would be sufficient as the written notification of costs, even though not addressed to the client. Similarly, if the client had been informed in writing in advance of the disbursements that would be charged on their matter (e.g. in the client care letter), this was equally deemed acceptable.

Under Rule 2.1(d), disbursements become office money when they are ‘incurred’, which is open to interpretation on when this has occurred. In some instances, the disbursement can be seen to have been incurred prior to the firm having to fund the payment of it (i.e. anticipated disbursement). In this instance, the SRA are satisfied that the firm can transfer these funds from the client to office bank account, provided that there are sufficient controls in place to ring-fence these funds, to ensure the overarching aim of the rules – that being that client money is kept safe – is maintained. Over the coming months the SRA will be issuing more guidance.

Our previous publication on the SRA Accounts Rules – Clarification of the new rules for disbursement payments can be found here.

1.3 Requirement for client money to be available on demand (Rule 2.4)

In respect of the above, the SRA have received queries regarding the money being “available on demand”. Clarifying this point, the SRA gave the example that if a client requested the termination of an engagement on a Friday afternoon, where a sizeable amount is held in the client bank account. In this situation, the SRA would not deem it a breach of the rule if the funds were not released until the following week, if there were valid reasons for the delay occurring.

2. Common compliance issues occurring:

2.1 Use of client accounts to provide banking facilities (Rule 3.3)

Under new Rule 3.3, transactions occurring through the client bank account must be in respect of the firm’s delivery of its “regulated services” in respect of the appropriate clients. This is a minor variation of the wording of the old Rules which stated “underlying transaction” rather than regulated service, although the SRA feel this is a significant change. Once the service the firm is engaged to provide has been completed, then the firm has no requirement to hold on to any funds for its client and those funds should therefore be returned promptly, under Rule 2.5.

2.2 Insufficient controls in place to prevent cyber-crime

Although not a specific rule, as reporting accountants are now required to review the firm on a risk-based approach, this is a significant area of control weakness. Given the times we find ourselves in, with a vast increase in remote working, there is an even greater reliance on electronic communication. As such, an upturn in cyber-crime has occurred. Firms are reminded of the requirement to have sufficient internal controls in place to deter cyber- attack. The SRA suggested that controls might include regular changes of employee passwords and ensuring there are sufficient review and authorisation procedures in place regarding withdrawals from a client bank account. It is also vital that staff are properly trained to ensure they are aware of the risks and common methods that their cyber-security can be breached.

Furthermore, where issues have occurred in respect of the above, which have led to funds being misappropriated from the client bank account, the SRA have reminded firms that they must:

  • Replace any shortfall within the client bank account immediately (Rule 6.1).
  • Communicate with insurers so they can assist the firm; both in respect of funding the replacement of the monies and to assist with any internal control improvements.
  • Communicate with the SRA as the firm has a duty to report such matters.

3. Implications of COVID-19 on Accounts Rules compliance:

The SRA have published a list of Q&As in respect of common areas that the current situation may impact upon compliance with the Accounts Rules, which are accessible through the link below.

The most significant is in respect of the prompt banking of client funds (Rule 2.3), which may be delayed from the norm due to the firm’s branch office being closed due to lockdown. In such instances, the delayed banking is not a breach of the Rule provided the funds are stored securely until such a time that they can be banked.

https://www.sra.org.uk/sra/news/coronavirus-qa/

For further information on the above, or any aspects of the new SRA Accounts Rules, please do not hesitate to contact Sam Evans or any member of the Professional Practices team on 01772 821021.

Help for solicitors following the Covid-19 outbreak

The Government has announced a package of support for businesses ranging from supporting SMEs with payroll costs to the creation of temporary loan schemes.

We have created a Coronavirus hub on our website which is updated regularly with guidance and advice as this ever-changing picture evolves.

Law firm specific guidance

The Law Society has provided a lot of guidance for firms, covering mostly practical advice relating to performance of legal services.

The SRA has also produced some guidance notes, which are more relevant to client account concerns:

https://www.sra.org.uk/sra/news/coronavirus-qa/

https://www.sra.org.uk/sra/news/coronavirus-update/

Of particular note is the SRA’s response to the delay of banking client funds:

Our accounts rules set out that you should promptly pay client money into your firm’s client account. If you are delayed in paying in any cheques because of the impact of the coronavirus on your firm or your bank, we would expect you to keep your client updated as to the position. You should document any decisions you make, and we will take these mitigating factors into consideration if we were to receive any complaint. You may also want to look at other banking options so you can continue to effectively deal with your client’s money, such as requesting electronic payments where these are possible.”

Another area to consider is the processing and approval of online payments from the client bank account. In some firms, a paper payment slip is required to be signed by a fee earner to authorise payments prior to them being processed, which clearly cannot occur whilst working from home. Rule 5.2 of the SRA Accounts Rules only required that withdrawals are “appropriately authorised”, therefore not requiring that a physical signature is required. In this circumstance, the fee earner can authorise a payment via an email. It is recommended to remind fee earners of their responsibility to adopt the same scrutiny of authorising a payment, for instance checking enough funds are held on the client ledger. Rule 5.2 also expects “supervision” of the withdrawal, which in a work from home scenario ought to include checking that the withdrawal has been processed correctly.

Following this, the actual payment from the bank should still be actioned by the appropriate persons as per the firm’s internal procedures. It is recommended that there are contingency plans in place, to cover for where members of staff in this process are unavailable. This may therefore be a good opportunity to review the procedures and consider if there are enough people in each stage of the process. Where there is not, and a further appropriate person is identified for a stage of the payment process, an additional login would need to be set up with the bank. The use of one login for numerous individuals is not recommended.

VAT payments

The Government has announced also that they will support businesses by deferring Valued Added Tax (VAT) payments for 3 months. Our factsheet provides a summary of the key facts to be aware of.

You may wish to consider deferring your next VAT return payment (only applicable to returns filed on or after 20/03/2020 and before 30/06/2020) to assist with cash flow.

Should you wish to defer payment and you currently pay your VAT via direct debit you will need to cancel this direct debit otherwise the payment will be taken automatically in the usual way by HMRC.

Please note that submission of the VAT return by the normal deadline is still required by HMRC even if you chose to defer payment.

Filing Deadlines

For limited companies and limited liability partnerships, Companies House have announced that businesses can apply for a 3 months extension to the filing deadlines for their statutory accounts, where meeting the initial one is now no longer possible.

For the SRA Accounts Rules accountant’s report, although there is no set extension period as above, the SRA have stated that they will be pragmatic regarding requests for additional time to complete the accountant’s report longer than the standard 6 months deadline from the period end date.

ACAS HR guidance

The ACAS website has some useful HR information on how to deal with the current situation. One particular area of concern is this page which is specific advice for employers and employees: 

https://www.acas.org.uk/coronavirus/if-the-employer-needs-to-close-the-workplace

Financial support for the self-employed and partners in small law firms

The Chancellor, Rishi Sunak, announced last week a package of support to help the self-employed, which also covers partners.  We set out a summary of the measures here.

As a business we are taking our social responsibility very seriously and we are working seamlessly from home. We are fully contactable via the usual telephone numbers.  If you have any questions about any of the above please do not hesitate to contact a member of the Professional Practices team on 01772 821021.

This image has an empty alt attribute; its file name is Coronovirus-main-image-2-1-1024x325.jpg

MHA Legal Benchmarking Annual Report 2020 Video

The 8th annual legal benchmarking report is out, considering 2019 results from across the country. Professional Practices Partner and Head of MHA’s Professional Practices group, Karen Hain, picks up on some of the key points to take away from the 2020 Legal Benchmarking report.

Legal Benchmarking Annual Report 2020

We are delighted to launch the 2020 MHA Legal Benchmarking Report.

Now in its eighth year, the latest report reveals that the sector is investing in its future skills needs, fee earning potential and the retaining of key talent.

Some of the report highlights:

  • The majority of firms experienced growth in income
  • There is a real profitability divide between the largest and some of the smallest firms
  • Succession planning and skills retention are at the heart of increases in the number of fee earning staff and partners
  • Some smaller firms reverse a four-year increase in lock up levels
  • New funding streams and favourable economic facilities are reducing the call on partners to contribute personal funding into their practices

This report draws insight from legal practices across the UK and focuses on some of the pertinent issues and trends in income, profitability, employment costs and lock up.

You will be able to use this analysis to compare your own firm’s performance and identify areas where you could improve efficiencies, along with the key actions to apply.

This year, Howden UK Group Limited has also provided technical advice on the PII critical issues when considering a merger or acquisition.

SRA Accounts Rules – clarification of the new rules on operation of a clients own account

Ahead of the 25 November 2019 introduction of the new rules, the SRA have released in October 2019 additional documents on their website clarifying aspects of the new rules.

Operation of a client’s own account

New Rule 10.1 suggests that 5-weekly reconciliations should be performed for all instances where the firm operates a client’s own account as a signatory; one such example being as a Deputy in a Court of Protection matter.

The SRA has now stated that where ledgers are not maintained for a client’s own account and will not have access to monthly bank statements, the firm will not be regarded as in breach of the above Rule provided that the firm has sufficient internal controls in place to ensure that such matters are adequately recorded and ensuring that client monies are not at risk.

The SRA has provided examples of records which should be maintained, which are:

  • central register of the client’s own accounts that you operate,
  • separate record of the transactions carried out by you or on your behalf in respect of the client’s own account, and
  • record of your bills and other notification of costs relating to that client’s matter

In the above scenario, the guidance from the SRA follows the path the Rules have headed with less emphasis being placed on the detailed Rules themselves, and more on the internal controls the firm has in place to ensure compliance with the Rules. These controls will therefore increasingly be checked by your reporting accountant as part of your annual SRA Accounts Rules compliance review.

Should you have any questions regarding the above, or any aspects of the new SRA Accounts Rules, please do not hesitate to contact Sam Evans or any member of the Professional Practice team on 01772 821021.

Link:

https://www.sra.org.uk/solicitors/guidance/ethics-guidance/clients-own-account/

SRA Accounts Rules – Clarification of the new rules for disbursement payments

Ahead of the 25 November 2019 introduction of the new rules, the SRA held their annual Compliance Officers Conference on 30 October 2019.

Disbursements

New rule 2.1(d) gives one definition of client money as money held or received by the firm “in respect of your fees and any unpaid disbursements if held or received prior to delivery of a bill for the same.”  New Rule 4.3 further states that the client must be given a bill of costs, or other written notification of costs prior to the transfer of funds being made from the client to office account.

This suggested that a bill would have to be issued in advance of monies being transferred from the client to office bank accounts, even solely in respect of a disbursement. This would be a significant change from the current rules.

However, at the Conference it was stated that a Guidance Note would be published by the SRA clarifying their stance on the above. Some background was however given to their position during the Conference which suggested the following:

  • Disbursements become office money under Rule 2.1(d) once they have been incurred. Per the SRA, this would be when third party providing the service states it has been completed, either by raising an invoice or other methods of correspondence.
  • In respect of “written notification of costs”, the SRA would also determine that the above correspondence from the third party would be adequate, even though it is not addressed to the client.

This means, that in the SRA’s words, “firms acting as they are now should remain compliant once the new Rules have been introduced.”

For further information on the above, or any aspects of the new SRA Accounts Rules, please do not hesitate to contact Sam Evans or any member of the Professional Practices team on 01772 821021.

Below is also a link to the SRA webpage regarding the Compliance Officer Conference, which has videos of some of the speaker’s presentation and copies of their slides, which may prove useful to review in advance of 25 November.

Links:https://www.sra.org.uk/sra/news/events/on-demand-events/colp-cofa-2019/