Litigation funding, also known as third-party funding, is permitted in England and Wales and has become an increasingly recognised and utilised part of the legal landscape.

In England and Wales, the rules and regulations governing litigation funding, particularly those pertaining to collective actions (class actions), involve a blend of legal principles, self-regulatory frameworks and judicial oversight.

General Rules and Regulations for Litigation Funding

Historic restrictions

Historically, English law had restrictions on third-party funding such as maintenance (improper support of litigation by a third party) and champerty (where the third party shares in the profits of the litigation). These doctrines aimed to protect the integrity of the judicial process by preventing financial speculation on lawsuits and ensuring that legal disputes were resolved based on their merits, rather than the depth of the litigants’ financial resources.

In England and Wales, the traditional prohibitions against maintenance and champerty have been significantly modified to accommodate the evolving legal landscape, particularly with regard to litigation funding, with such funding being permissible under specific conditions that ensure it does not compromise the integrity of the legal process nor exert undue influence over the litigation. The Legal Services Act 2007, among other legal frameworks, has facilitated this shift by setting out regulations that allow for third-party involvement in litigation, provided it is conducted in a transparent and regulated manner.

Self-regulation

The Association of Litigation Funders (ALF) provides a self-regulatory framework, in the format of ALF’s Code of Conduct, which includes requirements for capital adequacy, transparent terms of funding, and restrictions on the funder’s ability to control the litigation. The Code of Conduct for the Association of Litigation Funders mandates that members adhere to principles designed to ensure ethical and transparent funding practices in litigation. This includes the requirement for litigation funders to provide clear and comprehensible funding agreements, ensuring that the funded parties fully understand the terms and conditions, including the costs involved and the specifics of the funding arrangement. The code also emphasises the importance of maintaining independence between the litigation funder and the legal proceedings, stipulating that funders should not attempt to exert control over the legal strategy, settlement decisions or the choice of legal counsel. Please see 1.3 Non-Legal Rules for more detail.

Judicial oversight

Judicial oversight of litigation funding is an integral part of ensuring that litigation finance operates within a framework that upholds the integrity of the legal system while allowing parties access to justice. The courts play a crucial role in scrutinising the arrangements between litigants and their funders, focusing particularly on issues of control, fairness and transparency. This oversight extends to ensuring that litigation funding agreements (LFAs) do not grant funders undue influence over legal strategy, decision-making or settlement negotiations, thereby safeguarding the independence of the legal proceedings and the interests of the funded party. In addition, the judiciary examines the terms of funding agreements to ensure they are fair and do not result in excessive costs or disproportionate shares of any awards or settlements being allocated to the funder.

Court cases

Several key court cases have shaped the landscape of litigation funding, establishing important legal principles and regulatory standards. Among these, the case of Arkin v Borchard Lines Ltd [2005] EWCA Civ 655 introduced the “Arkin cap”, which limits a litigation funder’s liability for adverse costs to the extent of the funding provided. This principle encourages litigation funding by capping funders’ potential financial exposure. The case of Chapman v Christopher [1998] 1 WLR 12 further highlighted the courts’ stance on third-party funding, affirming its legality under specific conditions, thereby supporting the development of the litigation funding industry. Excalibur Ventures LLC v Texas Keystone Inc and Others [2016] EWCA Civ 1144 emphasised the importance of responsible funding practices, indicating that funders can be liable for indemnity costs where the funded litigation is pursued irresponsibly. These cases, among others, have contributed to a robust framework governing litigation funding, focusing on transparency, fairness and the responsible conduct of funders, while also ensuring access to justice for parties involved in litigation.

In recent cases, including the UK Supreme Court decision in R (PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28 (“PACCAR”), courts have focused on the commercial terms of LFAs and the structure of the permitted return to the funder. Following PACCAR and other decisions on similar points, the UK government has indicated that it may regulate and further clarify the structure of funding arrangements, especially as applicable to “opt-out” competition law cases.

Following PACCAR, a number of cases heard in the Competition Appeal Tribunal (CAT) in 2024 held that LFAs where the funder’s fee is only calculated by reference to a multiple of the total funding commitment were not damages-based agreements (DBAs) and do not fall foul of the Courts and Legal Service Act 1990 (CLSA) (Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe [2024] CAT 1; Mark McLaren Class Representative Ltd v MOL (Europe Africa) Ltd [2024] CAT 10; and BSV Claims Ltd v Bittylicious Ltd [2024] CAT 48).

Disclosure

There is no statutory requirement for mandatory disclosure of funding arrangements, but courts may require disclosure, particularly if there is a potential for conflicts of interest or cost implications. Please see 1.6 Disclosure Requirement for more detail.

Costs and recovery

In England and Wales, the losing party may be required to pay the winner’s costs, which can include costs of the litigation funding. However, the extent to which these costs are recoverable varies and is subject to court discretion. Please see 2. Adverse Costs and Insurance for more detail.

Specific Rules for Collective Actions

Collective actions in England and Wales are typically brought as either group litigation orders (GLOs) or representative actions. The rules for collective actions in England and Wales are primarily governed by the Civil Procedure Rules (CPR), particularly under Part 19, which deals with “Parties and Group Litigation”. Collective actions, often referred to as class actions in other jurisdictions, allow multiple claimants with similar claims to join together or be represented in a single legal action. This can be more efficient for the courts, and beneficial for claimants in terms of sharing litigation costs and resources. However, the English legal system traditionally has been more conservative in its approach to collective litigation compared to some other jurisdictions, like the United States.

Group litigation orders (GLOs)

A GLO is an order that allows claims that share common or related issues of fact or law to be managed collectively. The primary purpose is to provide an efficient and effective mechanism for handling numerous related claims that might otherwise require separate proceedings. A party can apply for a GLO by demonstrating to the court that there are multiple claims that share common or related issues. The application process involves submitting detailed information about the claims, the issues they share, and why a collective approach is justified.

Once a GLO is made, the court will manage the grouped claims collectively. This involves establishing a register of claims to be included in the group litigation, appointing lead solicitors for the claimants and, if necessary, for the defendants, and setting out a timetable for key steps in the litigation process. The court may order a trial of common issues, which are the legal or factual questions shared by the group claims. The outcome of this trial can apply to all claims within the group, potentially resolving key aspects of the litigation efficiently.

The legal framework distinguishes between “opt-in” and “opt-out” actions. The choice between these affects various aspects of the litigation, including funding and the distribution of damages.

Representative parties (CPR 19)

Under CPR Part 19, there is also provision for representative parties, where one or more persons may sue or be sued on behalf of, or for the benefit of, others with the same interest in a claim. This is less formal than a GLO and does not require a specific order. For a representative action, all parties represented must have the same interest in the claim. The representative(s) must fairly and adequately protect the interests of the group. A judgment or order in a representative action is binding on all persons represented, but it may not be enforced by or against anyone who is not a party to the proceedings, except with the court’s permission.

While not a formal collective action mechanism under the CPR, test cases are sometimes used as a practical way to manage multiple claims with similar issues. A test case involves selecting one or more individual cases to go to trial, with the outcome guiding the resolution of other similar claims. The court may give directions regarding the conduct of the test case(s), and the outcome can significantly affect the remaining claims, potentially leading to settlements or further litigation based on the precedent set.

Role of the CAT

The framework governing collective actions within the CAT in England and Wales is encapsulated within the Consumer Rights Act 2015, which significantly reformed the landscape for competition law litigation. Under this regime, collective actions may be initiated where claims share common legal and factual issues, subject to a certification process by the CAT that evaluates the appropriateness of treating the claims on a collective basis. Upon certification, the tribunal designates a representative, who may be an individual, a corporate entity or an organisation, tasked with representing the interests of the class members. This procedural mechanism is designed to facilitate the efficient adjudication of competition disputes, enabling claimants similarly affected by anti-competitive conduct to consolidate their claims, thereby mitigating the individual burdens of litigation costs and complexity.

The CAT has the authority to assess and approve funding arrangements as part of the certification process for collective actions, ensuring that the terms are fair and in the best interests of the represented class. This includes evaluating the funder’s commitment to meet adverse costs orders and the reasonableness of any return to the funder from the proceeds of the action. Judicial decisions have further refined the landscape, setting precedents on the treatment of funding costs and the responsibilities of funders in collective litigation.

In addition to the rules and regulations described in 1.2 Rules and Regulations on Litigation Funding, in England and Wales such funding is also governed by a combination of non-legal rules and ethical principles, including the following.

ALF Code of Conduct

The Association of Litigation Funders (ALF) in England and Wales has established a comprehensive code of conduct for its litigation funder members. The ALF Code sets standards to ensure fair and ethical practices in the funding of litigation, including the following.

• Capital adequacy requirements – members must have sufficient capital to meet their funding obligations in the cases they agree to fund. This is to ensure that funders can cover the costs of litigation they have committed to, including adverse costs if the case is lost and the funders are required to contribute to the costs.
• Control of litigation – the funder must not seek to exert inappropriate influence over the litigation, and needs to comply with the champerty and maintenance rules set out in 1.2 Rules and Regulations on Litigation Funding. The litigant and their legal team must remain in control of the case, including decisions about settlement. The code also specifies conditions under which a funder can withdraw funding. Generally, funders cannot terminate funding arbitrarily, and must adhere to pre-agreed conditions to do so. The code includes mechanisms for resolving disputes between the funder and the funded party, often through arbitration or other dispute resolution processes.
• Confidentiality and privilege – the funder is required to maintain confidentiality and respect the legal professional privilege of the documents and information related to the litigation.
• Independent advice – the funder must take reasonable steps to ensure the funded party receives independent advice on the terms of the LFA. The promotional literature of the funder must be clear and not misleading, and the funder must undertake to be audited annually by a recognised audit firm.

Solicitors Regulation Authority (SRA) Rules

The SRA in England and Wales sets out rules and ethical guidelines that solicitors must follow, including aspects that relate to litigation funding. These rules are designed to ensure that solicitors act in the best interests of their clients while maintaining the integrity of the legal process. Key SRA rules relevant to litigation funding include the following.

• Client’s best interest transparency – solicitors must always act in the best interests of their clients, including providing clear advice about the implications, risks and benefits of entering into an LFA. Solicitors are required to ensure that their clients fully understand the terms and conditions of the funding agreement, including the costs involved, the funding structure and any potential impact on the case.
• Conflicts of interest – the SRA rules mandate that solicitors must avoid conflicts of interest. This means ensuring that the decision to use a particular funding provider is made in the client’s best interest, and is not influenced by any personal or financial interests of the solicitor or their firm. Solicitors should conduct due diligence on litigation funders to ensure they are reputable and comply with applicable guidelines, such as those set by the Association of Litigation Funders (ALF). The terms of any funding agreement should be carefully scrutinised and negotiated where necessary to protect the client’s interests. Solicitors must ensure that terms are fair and compliant with legal and regulatory requirements.
• Confidentiality and privilege – maintaining client confidentiality and privilege is paramount. Solicitors must ensure that sharing information with a third-party funder does not compromise these principles.
• Financial management – solicitors have a duty to manage financial matters ethically. This includes the proper handling of client funds and transparent fee arrangements.
• Advice on costs and insurance – clients should be advised about the implications of cost recovery and the potential liability for adverse costs, especially under the “loser pays” principle in England and Wales. Solicitors should advise on the need for after the event (ATE) insurance to cover potential adverse costs.
• Reporting and compliance – solicitors must keep proper records of their dealings with funders and funding agreements. They must also comply with broader SRA regulations and principles, ensuring their conduct upholds the rule of law and the proper administration of justice.

Specific circumstances of a case might necessitate particular considerations under these rules.

International Legal Finance Association (ILFA) Rules

The ILFA has its own set of rules and guidelines for litigation funding. It operates internationally and may have broader guidelines that are not specific to England and Wales. Key aspects of ILFA guidelines include:

• promoting ethical and professional standards for litigation funding on an international scale;
• ensuring that members comply with local laws and regulations in jurisdictions where they operate;
• educating stakeholders about the benefits and uses of legal finance; and
• advocating for policies and regulations that support the industry’s growth and development.

In England and Wales, the landscape for litigation funding, particularly when provided to consumers, may be subject to certain regulatory frameworks and, potentially, licensing requirements. However, it is important to differentiate between traditional litigation funding and consumer credit (loans).

Traditional litigation funding involves a third party (the funder) financing the costs of legal action in return for a share of the proceeds if the case is successful. Typically, a funder will fund a law firm that is acting on behalf of a group of consumers. This is typically not considered a loan.

A consumer credit loan is where a lender provides a cash loan or any other form of financial accommodation (where the borrower would normally have to pay immediately) to a consumer. The loan must be repaid regardless of the case’s outcome and, as such, this may fall under consumer credit and be subject to different regulations.

If the third-party funder's arrangement is subject to the purview of consumer credit, there may be some applicable consumer credit rules to abide by. In these circumstances, most likely a consumer would be an individual who is seeking funding for personal legal actions and not for business-related legal matters. These additional rules are provided by the Consumer Credit Act 1974 and the Financial Conduct Authority (FCA), and include obligations for the funder to assess the borrower’s creditworthiness before entering into a credit agreement (considering their ability to repay the credit) and to provide comprehensive pre-contractual information and explanations to consumers about credit products. Consumers typically have a 14-day cooling-off period to withdraw from credit agreements. There are regulations limiting the amount of interest and charges that can be applied to consumer credit products. Consumers also have rights to lodge complaints against credit providers, and providers must have procedures in place for dispute resolution.

Separately, as mentioned earlier, there are licensing requirements and restrictions for litigation funding, and restrictions and ethical considerations of which a funder must be aware.

Licensing and Restrictions for Litigation Funding

These include the following.

• FCA regulation – if the funding arrangement constitutes a consumer credit agreement, the funder may be required to be authorised and may be regulated by the FCA. Litigation funding that is non-recourse (only repayable if the case is successful) is not usually considered as falling under FCA regulation as a regulated consumer credit product, but legal advice should be sought for each specific case. Furthermore, litigation funding given to a law firm as a credit line for its business or specific cases would not qualify as consumer credit and would not trigger relevant consumer credit requirements.
• No specific licence for traditional litigation funding – unlike regulated consumer credit providers, traditional litigation funders in England and Wales are not required to have a specific licence to operate. However, they are expected to comply with general legal and ethical standards in their practices mentioned above.

There are two further types of term to be aware of when drafting an LFA subject to English law. First, LFAs run the risk of being in breach of the rules under English common law against “maintenance” (supporting litigation without any legitimate concern in it, without just cause and excuse) and “champerty” (benefiting financially from that support). Under the common law, the position was that an agreement to provide maintenance, or a champertous agreement, was unenforceable. The strict position has been limited by:

• the introduction of the CLSA (and subsequent amendments to it), which permits certain funding arrangements (such as DBAs) that would historically have breached the rules on maintenance and champerty; and
• a significant change in the legal market and a broader recognition of the importance of alternative financing arrangements, including litigation funding, to promote access to justice.

Second, there is a risk that, by funding the litigation, litigation funders may expose themselves to an adverse costs risk that extends to meeting the full costs of the other side in an unsuccessful funded claim. The risk can normally be mitigated by purchasing ATE insurance or providing the funding to a law firm as per operating expenses, as opposed to funding against specific cases.

Judicial review continues to shape litigation funding and the commercial arrangements used by parties. Following the Supreme Court’s decision in PACCAR in July 2023 (see 1.2 Rules and Regulations on Litigation Funding), the validity of the funder’s return calculated by reference to a percentage of the recovered damages – and not structured under the Damages-Based Agreements Regulations 2013 (the “DBA Regulations”) – has been called into question. At the time of writing, there was a legislative initiative to further clarify this point.

Following PACCAR, a number of cases heard in the CAT in 2024 held that LFAs where the funder’s fee is only calculated by reference to a multiple of the total funding commitment were not DBAs and do not fall foul of the CLSA (Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe [2024] CAT 1; Mark McLaren Class Representative Ltd v MOL (Europe Africa) Ltd [2024] CAT 10; and BSV Claims Ltd v Bittylicious Ltd [2024] CAT 48).

Following industry feedback on the common law developments regarding LFAs in 2023, and in acknowledgement of the importance of access to justice via the support of third-party funding, the UK government proposed legislation regarding LFAs. The Litigation Funding Agreements (Enforceability) Bill (the “LFA Bill”) was introduced to the House of Lords on 19 March 2024. It was described by the government of the time as the creation of a “litigation funding regime which promotes access to justice, as well as enhancing the competitiveness of the jurisdiction”.

Following the UK General Election in July 2024, the new government ordered a Civil Justice Review; in October 2024, the Civil Justice Council published the interim report and consultation on litigation funding. Key issues considered included:

• the current self-regulatory model of the industry;
• approaches to the regulation of third-party funding across different jurisdictions;
• the relationship between costs and funding; and
• existing funding options.

The full and final report is expected in the summer of 2025.

There is no general requirement to disclose to the opposing party either the fact that a party is being funded by a third-party litigation funder, or the LFA itself. In most cases (eg, collective actions), the opposing party will know or alternatively assume that the claim against it is most likely being funded by a third-party litigation funder.

The issue of disclosure most commonly arises in the context of security for costs applications the defendant can serve on the claimant/its funder, because the opposing party wishes to know whether there is suitable protection in place for its costs in the event the funded claim is unsuccessful and/or to reveal the identity of the litigation funder to the opposing party so that they can pursue a security for costs application against the correct counterparty. The English courts have determined that there is an inherent power within Rule 25.14 of the CPR (relating to orders for security for costs against non-parties to the litigation) to order a claimant to disclose who is funding the litigation, so that the appropriate order can be made. This can be mitigated by purchasing an “anti-evidence” endorsement from the insurer.

In England and Wales, the law surrounding the payment of adverse costs in litigation funding is significantly influenced by case law, notably the decisions in Arkin v Borchard Lines Ltd [2005] EWCA Civ 655 and Chapelgate Credit Opportunity Master Fund Ltd v Money and Others [2020] EWCA Civ 246. The Arkin case established the principle known as the “Arkin cap”, whereby a litigation funder’s liability for the opposing party’s costs is capped at the amount of funding they have provided to the litigation. However, the Chapelgate case later refined the application of the Arkin cap, demonstrating the courts’ discretion to depart from this cap based on the circumstances of the case. The Court of Appeal in Chapelgate held that the Arkin cap is not a binding rule but rather a guideline, allowing for a more flexible approach to the issue of cost liability.

In view of the above position, parties and/or litigation funders usually insist on ATE insurance being placed.

In England and Wales, the rules governing security for costs are designed to protect defendants from the risk of incurring unrecoverable legal costs in the event that they successfully defend against a claim brought by a claimant who might not have sufficient resources to pay those costs. These rules are primarily codified in the CPR, specifically under Part 25. Security for costs can be ordered by the court in various circumstances, such as when:

• the claimant is a company or other body and there is reason to believe it will be unable to pay the defendant’s costs if the claim fails;
• the claimant is a foreign party not resident in a Brussels Regulation state or a Lugano Convention state; or
• the court is satisfied there is a need to provide security for costs due to the claimant’s conduct in the litigation or other pertinent reasons.

When deciding whether to order security for costs, the court considers several factors, including the merits of the claim, the claimant’s financial position, and whether making such an order would unjustly prevent the claimant from pursuing a legitimate claim. The amount and manner of providing security are at the court’s discretion, and security can be provided in various forms, including cash, bank guarantee or payment into court.

The Court of Appeal has previously confirmed that “a corporate funder will not be required to provide security if it is sufficiently capitalised and solvent that there is no reason to believe it will be unable to meet an adverse costs order” (Rowe and Others v Ingenious and Others [2021] EWCA Civ 29). However, the Commercial Court has also noted that the reality is that litigation funders may find themselves standing in the “front line” to meet adverse costs in collective actions where there are several claimants, or in claims where a GLO has been made and liability for costs is several as amongst the claimants, “making enforcement against individual claimants awkward, at best” (In re RBS Rights Issue Litigation [2017] EWHC 463 (Ch)).

The current position is that the more information there is available to confirm the litigation funder is equipped to meet an adverse costs order in the magnitude that the defendant (as applicant) could reasonably expect to recover, the less likely it is that an order for security for costs will be made against it.

ATE insurance is used frequently in funded cases in the English courts and is usually required by a litigation funder, in view of the risk that a funder may be exposed to adverse costs if the claim is unsuccessful. Since 2013, it has not been possible for parties to recover the cost of ATE insurance premiums from their opponents, and therefore the premium on funded cases is usually recovered from the damages awarded to claimants if the claim is successful.

Defendants typically seek disclosure of the ATE insurance policy when assessing whether to pursue an application for security for costs. As with the LFA, there is no obligation to disclose the details of the insurance, although doing so may reduce the risk of any application being made. Another contentious aspect of ATE insurance policies is the insurer’s ability to avoid the policy in the event that the claimant has misrepresented the risk or failed to give adequate disclosure in respect of it. Defendants are often concerned about this risk, as they have had no control over the placement of the policy. One possible solution is the purchase by the insured of an additional “anti-avoidance” endorsement, by which the insurer agrees to give up its entitlement to avoid the policy in the event of misrepresentation or non-disclosure.

In England and Wales, lawyers have various alternative fee structures that they can offer clients. Each of these structures is designed to meet different client needs and case types, and they come with specific legal restrictions and requirements, including the following.

• Contingency fees (DBAs) – under a DBA, a lawyer agrees to receive a percentage of the damages awarded in a case as their fee, contingent upon winning the case. These structures are governed by the DBA Regulations. There are caps on the percentage of damages that can be taken as fees, varying by type of case (eg, personal injury, employment disputes). The agreement must be in writing, and the fee structure must be clearly explained to the client, including the percentage and how it is calculated.
• Success fees (conditional fee agreements, or CFAs) – under a CFA, a lawyer only gets paid their standard fee if the case is successful. They may also charge an additional “success fee”. The success fee aspect is regulated by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO). In personal injury claims, the success fee is capped at 25% of the damages awarded, excluding damages for future care and losses. The CFA must be agreed in writing, with clear terms about the calculation of the success fee.
• Fixed fees – a fixed fee arrangement involves charging a set amount for specific legal services. It is commonly used for more predictable legal matters such as will writing, property conveyancing or simple divorce proceedings. The scope of the legal services covered under the fixed fee should be explicitly agreed upon in writing.
• No win, no fee – this is typically a form of CFA where the lawyer’s fee is contingent on winning the case. Clients may need to take out ATE insurance to cover the opponent’s costs and their own disbursements if the case is lost.
• Hourly rates – this is a traditional fee structure that involves charging based on the amount of time spent on a case. Rates can vary significantly depending on the lawyer’s expertise, the complexity of the case, and geographic location.
• Restrictions and ethical considerations – the fees must be proportionate to the work done and fair considering the case’s nature and complexity. Lawyers must ensure that clients fully understand the fee arrangement, including any potential additional costs. All fee arrangements should be agreed upon with the client’s informed consent, documented in writing.

The legal framework in England and Wales regarding the sharing of fees between litigation funders and lawyers is guided by specific rules and regulations, primarily enforced by the SRA. These regulations are designed to maintain the ethical practice of law, prevent conflicts of interest, and protect client interests.

• Prohibition on sharing fees with non-lawyers (SRA Rule 6.1) – the SRA’s Principles and Code of Conduct strictly limit fee-sharing arrangements with non-lawyers. Litigation funders, who are typically not solicitors or barristers, fall into this category. The principle behind this rule is to prevent any influence or control by non-lawyers over legal matters, which could compromise professional judgement or client interests.
• Conflicts of interest (SRA Rule 3.6) – lawyers must not enter into arrangements that could, or could reasonably be seen to, impair their independence or professional judgement. Fee-sharing with a litigation funder could create a financial incentive that might conflict with the lawyer’s duty to act in the best interests of the client.
• Referral fees in litigation (SRA Rule 6.2) – the payment or receipt of referral fees in litigation matters is generally prohibited. This means lawyers cannot receive a fee for referring a client to a litigation funder and vice versa.
• Transparency with clients (SRA Rule 8.9) – lawyers are required to be transparent and provide clear information to clients about any costs and arrangements involving third parties, including litigation funders. This transparency is crucial for informed client consent.

Exceptions and alternative arrangements are as follows.

• DBAs allow lawyers to receive a portion of the damages if the case is successful. This is a form of contingency fee agreement regulated under specific rules, distinct from sharing fees with third-party funders.
• ATE insurance, often arranged by lawyers, covers the risk of paying the opponent’s legal costs. Premiums for ATE insurance are separate from fee-sharing with funders but are an important consideration in funded litigation.

In England and Wales, ownership and management of law firms by non-lawyers is generally restricted, with the main exception being ownership of law firms organised as “Alternative Business Structures” (ABSs). However, such ownership is subject to stringent regulations and requirements, primarily governed by the SRA and the Legal Services Act 2007.

Legal Services Act 2007 and ABSs

Non-lawyers can own or invest in law firms if the firm is licensed as an ABS. ABS licences are granted by the SRA or other approved regulators. Non-lawyer owners must pass a “fit and proper” test to ensure they meet the standards of integrity and professionalism expected in legal services. ABSs are subject to the same regulatory standards as traditional law firms, including adherence to the SRA’s Principles and Code of Conduct.

SRA Rules and Regulations

In addition, the SRA requires that ABSs have appropriate management structures in place to ensure compliance with professional standards. This includes having qualified lawyers in key management roles. ABSs must appoint a Compliance Officer for Legal Practice (COLP) and a Compliance Officer for Finance and Administration (COFA), who play a critical role in ensuring regulatory compliance. ABSs must have arrangements in place to protect client money and assets, similar to traditional law firms. Non-lawyer owners must understand and respect the ethical obligations of legal practice, including client confidentiality, conflicts of interest and maintaining client trust. ABSs must demonstrate financial stability and have appropriate levels of professional indemnity insurance. ABSs are required to disclose their structure and any non-lawyer involvement in ownership or management.

Directors

Directorship roles are subject to similar restrictions. In a traditional law firm structure (ie, not an ABS), director roles (especially those with controlling or influential powers) are typically reserved for legally qualified individuals (solicitors, barristers or legal executives). The SRA governs the structure and management of law firms. According to SRA rules, non-lawyers generally cannot hold positions that give them significant influence over the way a traditional law firm is run. The restriction is designed to protect the independence of the legal profession and ensure that legal judgments and decisions are made without undue external influence.

Non-lawyers in a traditional law firm may take on roles in support functions (like finance, HR, marketing or IT), but these roles do not typically include director-level positions with influence over legal practice or decision-making. Non-lawyers may serve in consultative or advisory capacities, but without the power to influence legal decisions or firm governance.

In the UK, lawyers providing legal services to clients based in the UK are generally required to charge VAT on their fees. The rate of VAT chargeable on legal services is currently 20%. It should be noted that the position may be different if the client is based outside the UK, in which case the supply of legal services could be outside the scope of UK VAT, such that no UK VAT would be chargeable. Depending on where the client is based, particularly if it is a business client, there may then be an obligation on the client to reverse charge and account for VAT directly in its own jurisdiction.

Ultimately, the position will depend on the exact circumstances; if a client is unsure of their position, professional advice should be sought.

Whether the VAT payable can be reclaimed by a client will depend on several factors, such as whether the client carries on a business in the course of which it makes taxable supplies (for VAT) and whether the legal fees have been incurred for the purpose of that business.

Generally speaking, the following applies for a UK-based client:

• if the client is VAT-registered and carries on a business for which it makes wholly taxable supplies, and the action giving rise to the legal fees has been undertaken for the purpose of that business, then VAT charged on the legal fees should be reclaimable as input tax VAT related to the business;
• a client who is not carrying on a taxable business, and so is not VAT-registered, would not be able to reclaim the VAT paid on legal fees, so the VAT would be an additional cost; and
• a client that carries on a business that makes exempt supplies, or for whom the action is not for the purpose of its taxable business, will be limited in the amount of VAT it can reclaim (if any).

The specific circumstances can affect VAT charges and reclaims. Accordingly, professional tax advice, tailored to the specific situation, should be sought.

The UK tax treatment on payments to funders in offshore jurisdictions will depend on whether the payment is correctly construed under UK law as the payment of interest or whether it can be treated as a capital payment.

Generally speaking, where the litigation funding is structured as a loan and to the extent the payment is treated as the payment of interest on that loan (return on a money debt), then there will be a requirement for the UK payer to deduct UK income tax of 20% at source from the interest payment (withhold) and to account for that tax to HMRC. This liability to withholding tax may be mitigated under the terms of a relevant double tax treaty if the lender is duly resident in a relevant jurisdiction and has the benefit of a treaty between the UK and that jurisdiction under its terms (generally including that the lender is beneficial owner of the interest), and provided the necessary procedures are followed. Where the lender is based in the following common litigation funding jurisdictions, these treaty mitigations are available.

• Cayman Islands – there is no treaty between the UK and the Cayman Islands that will reduce withholding tax on interest. Accordingly, a payment of interest from the UK to a Cayman Islands funder will be subject to a 20% withholding on account of UK income tax.
• Jersey, Guernsey – the treaties between Jersey/Guernsey and the UK provide for the payment of interest gross to a lender resident in those jurisdictions if that lender meets one of the conditions set out in Article 3 of each treaty. These include that the lender is a Channel Island bank or listed company or that it is approved by HMRC as established in the relevant territory other than for the purpose of securing treaty benefits.
• Ireland, Luxembourg – the treaties between Ireland/Luxembourg and the UK contain a general exemption from withholding on payments to interest from the UK to a lender resident in those jurisdictions, provided it qualifies for treaty benefits.
• Delaware (US) – the treaty between the US and the UK contains a general exemption from withholding on payments to interest from the UK to a US lender, provided it qualifies for treaty benefits. The treaty contains complex “Limitation of Benefits” provisions that would need to be analysed to ensure the particular lender can benefit from them.

In some cases, the litigation funding arrangement may be structured not as the lender making a loan, but instead as the lender acquiring rights in the action and accordingly a right to a capital asset. Payments made to the funder on a successful outcome from the action can then be treated as capital returns (or gains) from that asset, and the payment of such capital returns would not generally be subject to UK withholding tax.

Each case will turn on its own facts, and determining whether a funding should be construed as amounting to a loan or as the acquisition of a capital asset will require a detailed analysis of the documentation and background circumstances.