17/04/20

UK: Tax schemes “discourage investment” in legal start-ups.

As published on legalfutures.co.uk, Friday 17 April, 2020.

Government schemes to help SME companies grow by offering investors tax relief exclude legal businesses and so constrict technological innovation in the market, it has been claimed.

Leading will-writing business Farewill also called for legal regulation to work better so that it can join the unregulated and regulated parts of its business together better for the benefit of customers.

From launching in 2015, Farewill now claims to write one in every 30 wills, and also offers probate and cremation services. It has an alternative business structure (ABS), Farewill Legal Services, to handle the reserved probate work.

Writing in a collection of articles published by the Legal Services Board on legal technology and regulation, Lorraine Robinson, Farewill’s head of legal, said investors were attracted to start-ups which qualified for the government’s Seed Enterprise Investment Scheme or Enterprise Investment Scheme. These offer new investors tax reliefs.

However, start-ups that offered as a substantial part of their business – interpreted by HM Revenue & Customs as about 20% – “services customarily provided by members of the legal profession” disqualified them from both schemes.

Ms Robinson continued: “So, if you want to disrupt services traditionally offered by solicitors, you’ve got an investment problem to navigate first. And a business less diverse or ambitious in its product offering than ours may struggle to structure their business in a way to attract early investment.

“HMRC schemes are therefore effectively shielding services customarily provided by members of the legal profession from venture backed competition, and it’s a barrier to technological innovation in the sector.”

The solicitor explained the “friction” in the customer journey that was caused by passing probate clients from Farewill to the ABS, which she described as at best unnecessary and “at worst obstructing access to justice for vulnerable customers”.

She said: “There has to be informed consent to referral, and it doesn’t really make a whole lot of sense to them – to be honest it just sounds like a lot of lawyerly red-tape – as it’s still a Farewill group business they’re dealing with after all.

“Plus, they’re bereaved and just want probate, not a lesson in legal services regulation.”

Ms Robinson argued that the rationale behind the separate business rules was to prevent a regulated firm using those credentials to acquire customers and then hive the work off into an unregulated business – but at Farewill the referral was going in the opposite direction.

“We believe it should be possible for a regulatory framework to operate to support separate businesses to play to their strengths in pursuit of greater access to justice.

“Farewill is great at technology and customer service and our legal team in Farewill are great at getting probate sorted. There should be a way through the regulatory framework where each can play to their strengths, and the customer gets what they need from the people who do it best.”

She added that there were additional risks and costs to running separate business units ,ranging from increased handling time and multiple systems to additional training to mitigate risks across the regulatory line, and greater regulatory overheads.

“They add to our bottom line and reduce the savings we can pass on to our customers. It would be attractive to us to be able to deliver our entire portfolio of products to customers through one business but we don’t think the answer is over-regulation of low-risk legal activities in order to access some sort of regulatory framework.

“So, we wouldn’t want, and don’t believe it would be in our customers’ interests, to shift our current unregulated work into the current regulatory framework.”

Ms Robinson said regulation could also be more supportive by allowing unregulated businesses to “demonstrate our responsibility in delivering services” – for example by having minimum levels of professional indemnity, transparent pricing and a willingness to refer complaints to the Legal Ombudsman – and in return “be permitted onto a regulated playing field”.

The Legal Ombudsman is unable to deal with complaints from unregulated businesses, and Ms Robinson said that, without access to the complaints-handler, “we’ve occasionally been unable to forge mutually beneficial commercial partnerships, and therefore reach more customers”.