LAWTECH – The latest buzzword in legal innovation

By Caroline Walton, Technical and Operations Director

LawTech has become a popular buzzword in legal circles recently with the term applied to technological innovation developed for, or within law firms, to help them provide more efficient and cost-effective legal services.

The Law Society Gazette published an article in October 2019 which reported that investment in UK technology had more than tripled in the last two years with start-ups receiving more than £61m in 2018. The Gazette reported that the UK had generated 44% of all LawTech start-ups in the EU, almost double its share of the European Legal Services market.

R&D departments are now becoming a regular feature of the larger law firms within the UK.  LawTech, as an emerging legal sector, has assumed such importance and recognition that the Law Society has confirmed a commitment to the development of the sector. The Law Society, which defines LawTech as  “technologies that aim to support, supplement or replace traditional methods for delivering legal services, or that improve the way the justice system operates” has entered into a partnership with Barclays Eagle Labs to bridge the gap between emerging LawTech innovation and major law firms to help transform the legal industry. The thriving Notting Hill Gate (London) Eagle Lab is a dedicated incubator and home to a growing number of LawTech businesses that are developing innovative products and services to make the legal industry more efficient and accessible.

The Notting Hill incubator has academic support from University College London and the University of Liverpool, as well as support from its law firm partners, which include Allen & Overy and Clifford Chance.

If at this juncture, you are thinking that LawTech is a fancy term which only really applies to global law firms and that it isn`t relevant to smaller law firms, then think again.  The term LawTech covers a wide range of tools and processes, according to the Law Society, with some examples being; document automation, advanced chatbots and practice management tools, predictive artificial intelligence, smart legal contracts and knowledge management and research systems. If you are a law firm that has invested in any technology of this type recently, you are part of a growing number of firms involved with LawTech.

One of the main catalysts for LawTech is the economic challenge with firms looking for ways to increase their efficiency, productivity and reduce overheads in order for their businesses to grow. Legal technology, which can automate parts of the legal process without requiring human intervention, leads to efficiency and savings in terms of human time and costs.

One of the other catalysts for LawTech has been client demand with client`s expectations increasing in sophistication over the years.

Whilst originally the preserve of large institutional clients, it is now the norm for all clients, commercial and private alike, to expect to be able to view progress on their files and legal matters in real-time and to be able to send and receive documents to their solicitor electronically. In addition to client pressure, encouragement to invest in technology has come from within the legal system itself with the court system encouraging the e-filing of documents through practice directions.

Many firms who have not felt any particular pressure to innovate in the past find that it is now necessary to do so. A failure to innovate means that they are unable to compete with other firms who have more to offer clients in terms of technological capability.

Investment in new legal technology can be a very expensive endeavour which requires financial planning and forethought. There are often substantial costs to pay in terms of software development, subcontractors and licence fees, as well as employee time which will be spent developing the new technological capability. Whilst cost and time are accounted for when planning for new software development, what is often overlooked is the possibility of recovering the outlay/R&D expenditure through a claim for research and development tax relief.

Research and development tax relief claims are possible for all law firms incorporated as limited companies and liable to pay UK corporation tax, where the firm in question has been engaged in a project involving research and development activity; as defined by UK R&D tax legislation. Not all software development projects will count as research and development for tax purposes – even though the relevant project may have involved commercial or technical challenges and been costly. The test as to whether a project satisfies the R&D tax definition is whether the aim was (and can be evidenced as being) to achieve an advance in a relevant field of science or technology.

Whether or not a law firm`s software development project meets the R&D definition of ‘advance’ depends on a consideration of the baseline technology against which the development work is measured and on the degree of technological uncertainty/challenge that was identified by the software professionals at the outset, in terms of achieving the project aims. Software projects with little technological challenge and/or uncertainty or where the uncertainties were easily resolved are unlikely to qualify. However, there is significant potential for firms developing bespoke software solutions to meet the needs of their business to qualify.

For more information on R&D tax relief claims and to find out whether you might qualify for a claim, please contact allan@randdreclaims.co.uk

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