The government stands to lose more than £100m a year in unretrieved taxes if it goes ahead with reform of insolvency costs, a campaign group said today.
The Ministry of Justice is expected to announce this week whether the exemption from the Legal Aid, Sentencing and Punishment of Offenders Act will be lifted from insolvency proceedings.
The legislation was introduced in April 2013 and removes the recoverability of success fees and after-the-event insurance from losing defendants in most civil justice cases.
Campaigners have pressed the MoJ to keep the insolvency exemption in place and today they say that new research proves the need to maintain old rules for these types of cases.
The initial research, from Professor Peter Walton at the University of Wolverhampton, shows that the type of litigation currently enabled by the exemption helps retrieve approximately £480m owed to creditors per year and allowed the insolvency profession to pursue more than £1bn owed to creditors in 2014.
This includes around £115m owed to HMRC being retrieved and approximately £240m owed to HMRC being pursued. A full report is expected to be published next year.
The value of this litigation appears to have grown since the exemption: an earlier report by Walton found in the 12 months before July 2013, up to £160m of creditors’ money was retrieved, while in 2010, £300m of creditors’ money was pursued.
The research found that around 2,300 cases are backed by CFAs every year.
Phillip Sykes, president of insolvency trade body R3, says: ‘The MoJ is at risk of throwing creditors’ money away. The only beneficiaries of an end to the existing exemption are rogue directors and others who try to prevent money getting back to creditors.
‘It’s honest, ordinary businesses and the taxpayer that will lose out.’
Other groups backing the retention of the exemption include the Association of Chartered Certified Accountants, the Association of British Insurers, the Bar Council, the British Property Federation, the Chartered Institute of Credit Management, the FSB, ICAEW, the Institute of Chartered Accountants of Scotland, and the Insolvency Practitioners Association.
Sykes said the loss of the exemption would create a ‘funding black hole’ that could not be filled by third-party funding.
In October, Lord Justice Jackson, the author of the proposals on which much of LASPO was based, said the exemption should be lifted. He noted that firms have had ‘more than enough time to prepare’.
The ministry had intended to drop the exemption in April this year but announced a delay in February.
Justice minister Shailesh Vara, who last year argued in favour of applying LASPO to insolvency cases to ‘tackle excessive costs’, said the government agreed that ‘more time is needed’.