Treasury rejects SRA and Law Society pleas over economic crime levy

Levy: Small firms exempt

The government has rejected a call from the Solicitors Regulation Authority (SRA) that small law firms should have to pay its new economic crime levy.

It has also decided against the Law Society’s recommendation that the new levy, which will be paid by businesses subject to the Money Laundering Regulations, should be based on the number of suspicious activity reports (SARs) they make and not on revenue.

But the Treasury has delayed the first payment of the levy, giving firms more breathing space to recover from the pandemic.

The £100m the Treasury intends to raise from the levy will be used to supplement public funding for anti-money laundering (AML) activities.

In its response to last summer’s Treasury consultation, which proposed exempting small businesses, the SRA said: “The risk that small firms pose should be reflected in their contribution to the economic crime levy. For these reasons we do not believe that small firms should be exempt from paying the levy.”

However, in announcing the outcome of the consultation last week, The Treasury said small entities – i.e. all regulated entities with UK revenue below £10.2m, or 86,000 businesses – would be exempt.

Though views were split on the issue, it explained: “Whilst this does come at a cost of greater solidarity, this policy decision will reduce the overall compliance burden of the levy on industry. It will also make the levy more cost efficient to collect.”

This means the levy will be paid by 4,000 medium, large and very large entities.

“This will help ensure those entities that are exposed to the greatest levels of money laundering risk, due to the large volume of activity they undertake in the financial and economic system, pay their fair share.”

The Treasury has decided to charge a flat fee based on UK revenue, rather than a percentage, “as this offers greater cost-efficiency, certainty and predictability for all involved”.

The Law Society said basing the levy on income would be “especially harmful to the profession”, as revenue did not equate to risk, whereas using the number of SARs from the previous year “would be simple, cheaper and fairer”.

The Treasury said it was the legal sector that championed this idea but decided that it “could disincentivise reporting and penalise good compliance practice”.

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.

Initially the government intended for the first set of levy payments to be made in the financial year 2022/23.

“Many consultation responses made representations that this should be delayed, considering the economic impact of the Covid-19 pandemic,” the response recorded.

“Further, it has become clear that more time is needed to finalise the legislation for the levy and set up the necessary collection infrastructure.”

The government has decided that AML-regulated entities will first be charged the levy in the year to 31 March 2023 but the first payment will only be due in the following year.

It will be collected from law firms by HM Revenue & Customs rather than the legal regulators, which made clear that they did not want the role.

The Treasury received 119 responses to the consultation, including 20 law firms and various legal bodies and regulators.

It has now published draft legislation and is running a short technical consultation on it until 15 October.

Law Society president I Stephanie Boyce said law firms already dedicated “substantial resources” to comply with its AML obligations.

“The levy effectively represents a tax on the provision of legal services, undermining the competitiveness of a key British industry, at a time when the sector should be championed.

“Imposing a levy based on a firm’s revenue, is an arbitrary measure, and means there is no link between the amount a business is required to pay and the extent of the risk it brings into the system.”

She also criticised the breadth of the bands, given that the smallest in each band has to pay as much as the largest.

“This seems a very blunt instrument to use and we would have thought a more refined approach would be better.”

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