Government Targets Law Firm Client Accounts to Fund Justice System
Justice Secretary David Lammy has unveiled a controversial proposal to redirect interest earned on law firms' client accounts to help fund what he describes as a "crumbling" criminal justice system in England and Wales. The Ministry of Justice estimates this measure could generate over £100 million annually, but legal professionals are viewing it as an unwarranted tax raid on their sector.
Substantial Revenue Stream Under Threat
Law firms have historically generated significant income from interest on client accounts, particularly during periods of elevated interest rates. According to data from Taha & Co, UK firms earned more than £350 million from this source in 2024 alone. This revenue has become an important component of firm profitability, especially for smaller practices operating on tighter margins.
The Ministry of Justice justifies the proposal by pointing to systemic challenges within the justice system. A departmental spokesperson stated: "We're exploring how interest earned on accounts – a tried and tested idea already operating in many countries around the world – could be invested to strengthen our justice system, making it fairer and more accessible for all."
Mounting Crisis in Criminal Justice
The government's rationale stems from genuine concerns about the state of justice infrastructure. The Crown Court backlog has reached nearly 80,000 cases, creating years-long delays that have resulted in collapsed trials. Simultaneously, court buildings are deteriorating and staff shortages continue to worsen across the system.
David Lammy has made addressing these issues a priority since taking office. However, his proposed solutions have consistently generated controversy. In December, he announced plans to scrap some jury trials to tackle the backlog, a move that drew criticism from both legal professionals and the public.
Legal Sector Pushes Back
The response from the legal community has been overwhelmingly negative. James Quarmby, partner at Stephenson Harwood, described the government's justification as "flimsy," questioning why lawyers and their clients were being singled out when all sectors benefit from the legal system.
Hywel Pegler, head of professional and business services at RSM UK, warned of potentially severe consequences for legal businesses: "To address this potential shortfall, firms may need to increase prices and reconsider their capital and banking arrangements. It could even lead to the closure of some high-street firms that are unable to sufficiently absorb the cost of these changes."
International Precedents and Previous Proposals
The government points to similar schemes operating successfully for decades in countries including the United States, Canada, Australia, and France. However, critics note this proposal follows an abandoned plan to target limited liability partnerships (LLPs) for additional taxation.
Francis Kendall, director at Kain Knight, observed that the timing is "particularly striking" given the government's recent decision not to proceed with taxing LLPs, "having acknowledged the risk of placing additional strain on professional services firms."
Legitimate Practice Under Scrutiny
For non-lawyers, the revelation that firms benefit from client cash sitting in their accounts may come as a surprise. However, this represents a legitimate and long-established practice. Jarret Brown, head of compliance at Stokoe Partnership Solicitors, explained: "The SRA has long accepted that law firms are able to retain a marginal and fair difference on client account interest as part of the cost and risk of holding funds on trust, and it has never been treated as improper or surplus income."
Questions About Government Spending Priorities
Critics argue the government should examine its own spending before imposing additional burdens on businesses. A recent Public Accounts Committee report revealed the Ministry of Justice spends £4 million annually maintaining HMP Dartmoor, a prison rendered uninhabitable by dangerous radon levels.
The legal sector already contributes approximately £38 billion to the UK's GDP annually, raising questions about whether further taxation represents the most appropriate solution to justice system funding challenges. As the debate continues, legal professionals await further details about how the proposed scheme would operate in practice.
