The Law Society has warned that taxing law firms on work they have yet to be paid for could result in small practices getting into financial trouble.

President Paul Marsh has written to HM Revenue & Customs asking the authority to suspend the UITF 40 tax regime for the duration of the credit crisis for firms with turnover under £2m, or give firms the option to ‘opt out’ and return to cash-based accounting.

UITF 40 taxes businesses on work in progress which may not have been paid for when the tax is due.

Law firms involved in legal aid work are particularly vulnerable because of the lengthy payment process of the Legal Services Commission, Chancery Lane said.

Marsh said: ‘Since its introduction in 2005, this tax regime has caused a lot of financial difficulties for legal practices. Many legal aid firms have in the past taken out annual loans in order to meet their tax liabilities. However, in this present credit crisis, many of those firms could be facing closure because the LSC payments take so long to process and banks are no longer advancing loans.

‘Not only will this continued tax regime harm legal aid law firms, it will essentially hit those vulnerable people who require access to justice. The number of law firms providing legal aid services is decreasing, mirroring the shrinking legal aid budget.’

The Society recently met HMRC to discuss the matter, and also carried out a questionnaire among members looking at what issues, including tax, affected them in the current downturn.

The Law Society has since issued a practice note advising solicitors how to access HMRC’s tax deferral scheme and, following meetings with HMRC, has been invited by HMRC to make written presentations for changes to be made to the UITF 40 tax regime.

Marsh added: ‘This is the latest initiative from the Law Society aimed at helping solicitors survive the downturn. It is vital that our submissions should be given serious consideration and that our recommendations are implemented in some form in this year’s Budget.’