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One of the most popular articles we have done has been on the topic of what solicitors can legally deduct from a client’s personal injury compensation, in particular whether they can charge VAT on top of the 25%. We have had a lot of calls and emails about this and so, after taking a look at the original article, we’ve added some thoughts and updates.

Update and recent developments:

Since the original article went live, we’ve had numerous calls (many regarding the same Manchester law firm, who we don’t name here) on this issue.

Whilst some firms seem to be ignoring the rule about the 25% being inclusive of VAT completely, at least one firm is trying to circumvent the rules with an interesting tactic, which I call “the contribution system.”

What “the contribution system” appears to be is that the law firm says:  “Although we will charge a success fee limited to 25% of past losses inclusive of VAT (i.e. one that fits the rules) we will IN ADDITION charge the client an extra “contribution” charge from their compensation, which “tops up” the amount the client pays to 25% of all of their compensation, plus VAT on top.

I have discussed the legality of this “contribution system” with a senior costs lawyer who considers it is “borderline legal.”

The issue here is that, technically, there is nothing to stop a law firm offering a very unfavourable agreement to a client – it does not make it automatically illegal though my personal view is that a court may view it as a deliberate attempt to circumvent the rules.

It could also be a situation of misrepresentation – consider this scenario:

A personal injury client, looking for a solicitor, telephones a number of law firms and asks what deduction they take.  All the firms reply “25%” – however, what they mean by that is 25% of past losses only and inclusive of VAT. Now, when the client speaks to the rogue firm who also say “25%” the client thinks it is the same deal – but it isn’t!  What the client does not realise is that when the rogue firm says “25%” they are talking about 25% of the client’s entire compensation i.e. including future losses, and then adding VAT on top.  The client is fooled into believing the rogue firm is offering the same fee arrangements as the other firms.

This could make a substantial difference to a client as in this example: A client has a claim worth £100,000.  £20,000 are past losses (such as injury compensation, lost earnings) but £80,000 are future losses (such as future medical needs, future lost earnings etc).

Whereas law firms following the law will deduct £5,000 inclusive of VAT (i.e. 25% of past losses inclusive of VAT), the rogue firm will deduct £25,000 plus VAT, therefore £30,000, leaving the client a whopping £25,000 out of pocket.

This is why it is absolutely essential when searching for a solicitor to ask them explain exactly how the deductions will work. The other tactic, which the same type of firms seem to be engaging in, is charging the client an excessive “legal expenses insurance premium”, which we will look at in more detail.

Legal expenses insurance premiums

In some cases it is advisable for the client to take out a legal expenses insurance policy to protect them against a limited number of scenarios where they may be liable for some of the costs in the case. Each case is different and the solicitor will advise the client as to whether it is in their best interests to take out such a policy or not. The downside of any policy is that the premium (following changes to the law in 2013) is deducted from the client’s compensation at the end if they win (if they do not win the premium is usually waived).

Now, this is not much of an issue if the premium is reasonable, say a few hundred pounds up to a couple of thousand pounds for a very complex and very high value matter, but what we are seeing is that a number of firm’s are encouraging clients to take out policies with extortionate premiums, in cases where it is debatable as to whether any policy is needed at all.

A client came to us around a year ago regarding a dispute with the same Manchester firm referred to above following their attempt to charge him more than the 25% inclusive of VAT permissible. Upon reviewing his file of papers we noted the firm had taken out a legal expenses insurance policy with a £4,000 premium!  Such a premium, in our view, was wholly unjustifiable, given the case was a relatively minor work injury.

So why do some firms push clients into extortionate insurance premiums? The answer, more often than not, is that they receive commission from the legal expenses insurance company. Whilst firms are required to notify clients of this, such clauses are often buried in small print which the majority of clients will not spot.

Summary

Changes to the law in 2013 mean personal injury firms make less money per case than they used to; many have therefore looked for other ways to increase profits and, regrettably, for some firms this has manifested in either attempts to circumvent the 25% inclusive of VAT limit and/or large commission payments from unnecessary and excessive insurance premiums.

This really is a situation of “buyer beware”; do not assume all firms and/or no-win-no-fee agreements are equal. Ask for the specifics of the arrangement and even a worked example so that you know exactly how much of your compensation you will receive.

If you would like to discuss any of the issues raised in this article please feel free to contact us for a free-of-charge and confidential discussion on either 0161 399 1231 or info@astonknightsolicitors.co.uk. Aston Knight Solicitors are a specialist firm and deal with a range of litigation matters including injury at work claims, breach of contract disputes, property ownership disputes, medical negligence cases and many more.

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