The ‘catastrophic impact’ of the government’s proposed legal aid cuts could leave 50% of firms doing publicly funded work at risk of closure, according to research commissioned by the Law Society, seen exclusively by the Gazette.

Consultants Andrew Otterburn and Vicky Ling surveyed 163 civil and criminal law firms to assess the potential impact of the Ministry of Justice proposals, which will cut fee rates and remove large areas of civil work from scope.

The study found that the removal of work from the scope of legal aid will have a ‘catastrophic impact’ on firms.

In particular, firms that undertake large volumes of family or Crown court work, or specialise in areas of civil work such as housing, immigration or clinical negligence, will find the impact of the proposals ‘unsustainable’.

‘Many suppliers will not survive the withdrawal of scope and risk closure,’ said the report.

It also found that the reduction in fee levels will weaken firms currently struggling due to the recession, and further squeeze tight profit margins.

The study calculated the impact of the reforms on profits per partner (PPP), after allowing for a notional salary based on the wages of the highest-earning employee, plus 10%.

On average, the study found that PPP will fall from around £27,000 (plus a notional salary of £49,500) to £11,000 after the rate cuts, leading to a £48,000 loss after the removal of work from scope.

The consultants calculated that firms would need to reduce their payroll costs by 40% to retain their current levels of profitability. This would mean funding ‘significant redundancy liabilities’.

As with other sectors, the report found that the last three years had been ‘extremely difficult’ for firms, and most have seen profits fall, partner capital depleted, and have made redundancies.

The study showed that median capital was just under £69,000 per partner, and the median bank balance was an overdraft of £2,000 per partner.

The median profit was £27,000, but a quarter of firms are barely covering the salaries of equity partners.

Otterburn said: ‘We may see a 50% reduction in the supplier base [if the proposals go ahead] and an end to the large firm model because the volume of work, except in public law family and crime, will no longer exist.’

He advised firms to start scaling back their operations now, and to begin reducing their capacity and payroll in a controlled way.

He said firms should also try to diversify out of legal aid, and take advice to protect their personal assets, particularly if they are still partnerships with unlimited liability.

The research did not take into account the likely impact of the proposed increase in telephone advice work, which is expected to reduce civil work even further.

See the full report.