Tax policy to incentivise mediation
I have often wondered, when sending my clients their legal bills, how on earth they can afford my services? In short, how can they afford access to justice? The cost charged for the work carried out will look imposing enough. But the killer touch is when VAT at 20% is added to the bill. A stiff bill becomes a….really large bill. This is important because most legal aid for family work has now been kicked into touch. “Access to justice” is no longer a slightly dry form of words bandied around by academics or politicians. It is real and it affects us all because it you can’t afford to pay for it, you ain’t getting it.
When providing costs estimates to clients at a first consultation the figure arrived at will be discussed and agreed. A client will be encouraged to help themselves as much as possible, or use my online platform for document production: anything to keep the cost down. So an estimate is arrived at and the client thinks: OK, I’d rather not be using my money to pay legal bills but I need the help and I can live with that likely cost. Then comes the point when you have to add in VAT at 20%. The client’s face always drops. (Mine would in their position). Adding in VAT at 20% has just broken the bank. There is access to justice – you just have to clear the VAT hurdle first.
This post was first created as a draft over a year ago and then put in mothballs. I’ve brushed off the cobwebs and published it now, prompted by an article in The Law Society Gazette about Belgian lawyers resisting the imposition of VAT on their bills. Not the sexiest of links I’ve stuck in a post but try to bear with me.
The problem with VAT
The imposition of VAT on legal services does not create a level playing field. Because:
- If a VAT registered company needs legal services (and think of the millions spent by large corporates every year on their legal needs) they can reclaim the VAT they have paid out so it is cost neutral for them. Sweet. So spend all you like, lads, on that latest merger.
- If you are an individual you pay 20% VAT on top of your legal bills and can’t reclaim it from anyone. Harsh. So you can’t afford to get legal advice on access to your kids or financial agreements to keep a roof over your head, after all.
- Some of my clients are individuals and don’t pay a penny of VAT on their bills. (No way!) Yes way. Because they live abroad in non-EU member states and therefore don’t have to pay VAT on legal services even though the legal services are being conducted in the UK. Fortunate for some.
I mean, I understand there has been (still is) a recession: the government needs these tax receipts. But access to justice should mean something: the government has taken the axe to civil legal aid and promoted mediation. Unfortunately, the government’s championing of mediation was a fig leaf to distract from the legal aid cuts. The catastrophic fall in mediation referrals is testament to the fact that the presentation of mediation as a panacea in family law work was political window-dressing rather than well-considered, appropriately resourced social policy.
If the government is serious about the promotion of mediation, and is equally serious about preserving access to justice, then I have a suggestion by which it can redeem itself, ever so slightly. My suggestion focuses on family law.
The solution
We all know that a blanket tax, like VAT, penalises the less well-off. We also know that the government keeps banging on about mediation whilst doing nothing (in resource or policy terms) to promote its take-up. Talking of policy, they really need to catch up with the fact that there are other options available to keep people out of the courts as well, such as collaborative law and family arbitration. We know, despite the political window dressing, that the withdrawal of civil legal aid has directly and adversely impacted upon many individuals’ rights of access to justice – they can’t afford it – full stop.
So, here is my suggestion to help the government climb halfway out of the hole of its own making.
- Spend a few quid telling the public that legal aid is still available for mediation (on a means tested basis);
- Permit mediators and lawyer/mediators to reduce the rate of VAT on their services to 5%;
- Permit collaborative lawyers to reduce the rate of VAT on their services to 10%. Family consultants and financial neutrals assisting the parties in the collaborative process be allowed to do the same.
- Impose a reduced rate of VAT at 15% on legal advice offered outside mediation or collaborative law. This would apply to family arbitration, and work conducted under the pre-action protocol (attempting via solicitor-led negotiation to resolve matters without recourse to court proceedings).
- Impose 20% VAT on legal services from the moment one of the parties issues contested legal proceedings. An application for a consent order (so not really contested) would attract VAT at the rate of 5% if it follows on from mediation and 10% if it arises following the collaborative process.
In my humble opinion, I think this is a win/win scenario. The lawyers don’t get a penny extra, so the Daily Mail won’t get its knickers in a twist. It will make legal services (access to justice) more affordable. It will incentivise individuals to choose dispute resolution models such as mediation and collaborative law that objectively produce better outcomes at lower cost. The reduction in VAT receipts will be offset (I’m guessing) by the drop in numbers using the (expensive to maintain) family court system and perhaps even reverse the increase in litigants in person that is now threatening the bring the courts grinding to a halt. Timely legal advice can prevent a host of problems later on and I don’t know how you even begin to count the cost in developmental and emotional terms for those kids whose parents cannot stop warring without legal intervention, or who don’t receive maintenance or the opportunity to develop a relationship with a parent who has been excluded from their lives.
Worth a punt?
