UK law firm insolvencies rise by a third in a year

Mark Turner, 14 June 2023

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Insolvencies of UK law firms have risen 33% in the past year, with 61 going under in the year to 31 March 2023, up from 46 in the previous year.

The last 12 months have seen a slowdown in demand for many law firms, whilst they’re struggling to deal with a substantial increase in overheads.

What’s been happening?

There have been sharp rises in the costs of energy, staffing and professional indemnity insurance which have contributed to a significant growth in overall costs for many firms since before the pandemic.

With pay rises for junior solicitors in 2022 between 15% and 50% at most firms, the average newly-qualified lawyer salary in the City now stands at £185,000**.

Broader stress in the economy is also causing even some previously prompt-paying clients to take longer to settle their bills. This is exacerbating a long-standing late payments issue and creating a cash crunch for some law firms.

The financial strain on the legal profession has recently been drawn into sharp focus by the insolvency of 150-year-old firm Ince & Co which had been one of the UK’s few stock market listed law firms.

Why are law firm insolvencies becoming more frequent?

Law firm insolvencies are accelerating as the cost of living crisis worsens. Late payments are stretching some firms’ cashflow to breaking point.

With overheads likes salaries and energy increasing and inflation stuck at 10%, the cash flow situation for a lot of firms is getting very tight. Even some law firms not previously touched by financial challenges are having to tighten their belts.

Insolvencies of law firms are often triggered by key payment dates in firms’ financial calendars – such as quarterly VAT bills, tax bills and Professional Indemnity Insurance renewal bills.

Professional Indemnity Insurance renewals fall on 1st October for many firms. This cost can represent a significant percentage of annual turnover for firms that insurers see as higher-risk. The cost of this renewal is now a major trigger of insolvencies each year.

What implications should you consider this financial year?

The 2023/2024 financial year will present further crunch points for law firms’ cash flow.

For limited company law firms, corporation tax has risen this year to 25% from 19%, which will shrink the cash available to pay other bills.

The cost of VAT is compounded by the fact that it must be generally paid on what was billed on the quarter, even if those bills have not yet been paid.

The result can be a significant cashflow crunch.

How can we help?

If you would like to have an informal chat with an expert regarding any of the issues mentioned, get in touch with Mark Turner ( our Head of Professional Services or Phil Blackburn ( our Head of Tax.

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* Source: Insolvency Service

** Source: Robert Walters