Economic crime levy “could impact law firm structures”

Money laundering: Levy should be tax deductible

Some law firms may have to make structural changes to ameliorate the impact of the government’s economic crime levy, solicitors have warned.

The Law Society and City of London Law Society also reiterated their in-principle opposition to the levy, although the decision has now been made to press ahead with it.

They issued a joint response to the technical consultation issued by the Treasury last month on the detail of the levy, in the wake of the decision to take it forward but exempt small businesses from having to pay.

The levy will be a fixed fee based on turnover. The final figures have yet to be finalised, so the Treasury has only indicated the range of figures it is considering: businesses with a turnover of between £10.2m and £36m will pay between £5,000 and £15,000; those with a turnover of £36m to £1bn between £30,000 and £50,000, and bigger companies between £150,000 and £250,000.

The joint response noted how wide the middle band was, “meaning that the cost of the levy as a percentage of turnover will be much greater for firms towards the lower end of that band”.

They added: “This, in effect, makes it a regressive tax, raising the question of whether this is a fair and proportionate approach.”

The draft legislation provides an entity that “carries on a regulated business at any point during the levy year” will have to pay the levy.

“These provisions mean that an entity that has significant revenues may be subject to the levy (potentially at a high level) by virtue of even a small amount of regulated activity.

“This is a potential concern for law firms that operate through multiple entities. Such firms will have to put processes and checks in place to monitor and control where regulated activities take place and may even need to make structural changes to their businesses.”

The response suggested a de minimis provision to prevent an entity being caught by the levy only because of regulated activities that were not material in the context of the entity’s whole business in the levy year.

The law societies also questioned the impact on groups of the levy being imposed on an entity-by-entity basis and recommended allowing a group to elect to pay a single levy “at a higher level than would otherwise be the case for the largest entity in the group”.

They opposed too the provision that levy payments would not be deductible for income or corporation tax purposes.

“The levy will represent a cost that firms must pay to continue in business. As such, it will be a cost of the trade and we consider that it should be deductible in computing the taxable profits of a trade.

“Non-deductibility also creates an unlevel playing field between profitable partnerships/LLPs, on the one hand, and equivalent companies, on the other, because partners would typically pay tax at a higher marginal rate than companies.”

In continuing their opposition to the levy, the societies argued that it was “particularly inappropriate to impose a levy on the legal sector to fund a regime which does not work effectively for solicitors”.

They explained: “The anti-money laundering system has been designed to work for financial institutions but is not well-equipped to meet the needs of solicitors.

“Whatever happens in relation to the levy, it is imperative that the voice of the sector is given greater weight in the design of relevant policies, procedures and systems in relation to financial crime generally.”

They also called for the suspicious activity report regime to be “significantly improved” through minimising the submission of low-value reports, and for progress on both Companies House reform and the long-delayed legislation to improve the visibility of beneficial ownership, “both of which would help in the fight against money laundering”.

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