Reports Legal in the Times
4 August 2021

Reports Legal featured in the Times

Dominic Carman


Editor Reports Legal

Last week, I wrote a Reports Legal article examining whether the Chancellor, Rishi Sunak, might be contemplating a windfall tax on City law firms and the practical difficulties that he would face in implementing it – click here to read the article.

Today, the Times published a lengthy response to my article with comment from David Lammy, Labour’s shadow justice secretary, and Baroness Kennedy QC, among others. Please see below.

To read the original article in full, see: https://www.thetimes.co.uk/article/law-firms-brace-for-battle-over-rumours-of-sunak-windfall-tax-kkvd735lf


Law firms brace for battle over rumours of Sunak windfall tax

With partners earning £2 million, there are fears the chancellor may come knocking

Jonathan Ames, Legal Editor

Wednesday August 04 2021, 3.00pm, The Times

Parents who badger their children to go into the law or medicine may soon start considering dropping the latter from the conversation. The reason is simple: apart, perhaps, from becoming a cosmetic surgeon to the stars, the City’s legal firms are where the cash is.

The figures are eye-watering. In recent weeks three “magic circle” firms have produced striking financial statements: Freshfields Bruckhaus Deringer, the Anglo-German outfit, revealed that it paid its full equity partners £1.91 million each, on average; Allen & Overy and Clifford Chance were not far behind, paying their equity partners £1.9 million and £1.85 million, respectively.

Linklaters, the fourth member of the elite group, has yet to report its results and pay scales. Slaughter and May, the fifth, is not required to divulge official figures because the firm is not a limited liability partnership. However, it is estimated that the all-equity partnership at the firm has an average pay of about £2.9 million.

With so much cash sloshing around the partnership tables of City law firms, despite 18 months of the worst public health emergency for a century, it’s little wonder that solicitors are in the frame for a possible windfall tax. Over recent weeks there have been mutterings that Rishi Sunak may dust off an idea mooted five years ago by Michael Gove during his brief stint as justice secretary and lord chancellor.

Despite not being a lawyer, Gove was well-liked by the great and the good of the City legal profession, but they reacted with dismay when he suggested that a 1 per cent levy could be imposed on the revenues of the large commercial practices to help to prop up an ailing legal aid system. Senior and managing partners squealed — behind closed doors — that a bespoke levy would not be fair. Now they may have cause to squeal again as the idea is resurrected.

“Is a levy on law firms a runner?” Dominic Carman, a legal profession observer and editor of the Reports Legal blog, asked. “Despite the conclusion reached by Michael Gove in 2016 that it was not, we are now in a very different world.”

It is thought that Gove was dissuaded in 2016 partially by an orchestrated lobbying campaign by City law firms, which argued that they did not deserve special adverse tax treatment. However, Carman said: “In the post-Covid world of 2021 and beyond, the Treasury will need to raise revenues wherever it can without harming businesses or ordinary individual taxpayers. If the political will exists to drive through a revenue levy on the top law firms, then it could be done.

“Ultimately, it is a matter of politics and pragmatism. Millionaire lawyers increasing their wealth during a time of widespread hardship while many public sector workers and small businesses continue to struggle does not paint a picture of a country where the government is actively pursuing a levelling-up agenda.”

For two decades, those at legal aid street level have bemoaned the gradual demise of the system that began with cuts under Tony Blair’s Labour government and continued under subsequent coalition and Conservative administrations — but don’t assume that they would embrace the idea of a City law firm levy.

Nicola Mackintosh, a solicitor and joint chairwoman of the Legal Aid Practitioners Group, thinks that the idea is “flawed”, arguing that “in a civilised society it is the responsibility of the state to provide an effective justice system and to uphold the rule of law.

“Reliance on a levy on City law firms or the lottery might attract headlines, but it passes the buck. It is the government’s responsibility to fund a proper system of justice that works when everyone needs it.”

That view was echoed by Sue James, chief executive of the Legal Action Group, a campaign organisation, who said: “The crisis in legal aid is due to the underfunding of the system over many years, but I don’t see it as the responsibility of the legal profession to fix it.

“Access to justice is a social right and one that is being denied to a large proportion of the population in England and Wales. A radical review needs to happen, rather than tinkering with the edges.”

Opposition politicians also seem wary of rattling the City cage. David Lammy, a barrister and Labour’s shadow justice secretary, said that “profitable City firms should be encouraged to give back to society by offering pro bono services to support those who cannot afford legal advice and can’t access or aren’t eligible for legal aid”.

He added that “it would be wrong of the government to try to dodge responsibility for its chronic underfunding of the legal aid system by pinning responsibility on City firms to fill the gap”.

Even Baroness Kennedy of The Shaws, QC, Labour’s firebrand in the Lords, opposes the idea of a one-off levy. Instead, she argues that City law firms “should just be taxed more. Access to justice is fundamental to the rule of law and should sit alongside the NHS as the measure of British values.”

Ironically, it seems that if the chancellor wants to be even more radical in an attempt to reinvest in legal aid by making pips squeak in the City, he is likely to have support from a Labour peer.


The top firms by numbers:

Allen & Overy

Revenue: up by 5 per cent to £1.77 billion.

Profit: £822 million, up by 19 per cent.

Average partner pay: £1.9 million

 

Clifford Chance

Revenue: flat at £1.803 billion.

Profit: up 8 per cent to £716 million.

Average partner pay: £1.85 million

 

Freshfields Bruckhaus Deringer

Revenue: up by 5 per cent to £1.59 billion.

Profit: undisclosed. 

Average partner pay: £1.91 million.

 

Herbert Smith Freehills

Revenue: up by 5 per cent to £1.038 billion (breaking the £1 billion barrier for the first time).

Profit: £367 million. 

Average partner pay: up by 28 per cent to nearly £1.1 million.

 

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