Why legal software must be ready to remain compliant in 2019

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When it comes to legal software, it is no surprise that firms typically opt for solutions which offer maximum compliance and longevity for their practice. 

Finding a piece of software which meets a firm’s individual needs and those of their clients can therefore be both time-consuming and tedious. The research involved, time taken and the pressure of choosing the right system can often seem like a daunting task - particularly in a time where new legal technologies are emerging regularly across the sector. That said, the appetite to invest in technology is clear to see, with a 2018 report by HSBC indicating that 87% of firms believe it will help to boost revenue by enabling enhanced service offerings to their clients. 

However, the legal software market today is now also going through a period of change and consolidation with many providers now looking to larger organisations for the resources needed to rewrite their solutions with modern technology. 

In years gone by, suppliers in the 1 to 200-user firm market tended to be owner-managed businesses. Firms looking to purchase from them bought into the ethos of the company, the service and the people, safe in the knowledge that if they needed assistance or if there was a problem, the Managing Director (MD) of the supplier company (and in most cases the owner) was a phone call away.

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Today’s landscape is very different, with a good number of these MD-owned businesses having been bought up by larger venture capitalist backed businesses seeking to consolidate the market and drive new product development with greater access to new technology. 

Yet, this focus on innovative, ‘go-forward’ products has created inevitable risks for the existing products already in use across many firms. While these older products may still be supported by their suppliers in the short term, many won’t receive the active development required to keep pace with the changes in profession and may well even be ‘end-of-lifed’ in the future. Ultimately, this means that users risk either not being totally compliant or will have to employ work-arounds to make them both function and remain compliant.  

As 2019 gets underway, more change is fast-approaching for many legal businesses and these movements are turning up the pressure on law firms to digitise in order to adhere to industry regulations. A great and pressing example of this is the HMRC’s Making Tax Digital (MTD) scheme, which launched this year and is set to make fundamental changes to the way the tax system works.

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Making Tax Digital

The first stage of the initiative, which took effect on 1st April 2019 will require firms to record and report their VAT transactions digitally. Currently, VAT registered firms can submit their VAT returns online by manually entering the figures that would have previously been recorded on the old-style paper forms. MTD significantly changes this by now requiring firms to have suitable software in place that can record all VAT transactions and then submit the data to the HMRC via a new Application Programming Interface (API).

Keeping paper only records will no longer be acceptable, every VAT registered firm will need to maintain their accounts digitally. From now on, not only will companies need software that is capable of recording all of their transactions digitally, this software will also need to be capable of communicating directly with the HMRC’s systems. As the current online VAT return submission system will cease to function come April, it is essential that all VAT registered companies have HMRC API compatible software by this time.

The requirement to maintain digital accounting records means that the details of each transaction must be stored in some kind of electronic ledger system. Obviously, almost every firm will have been running accounting software for many years, so this requirement is not particularly onerous. However, even firms that only use Excel to recording their accounts will still have to purchase software that integrates with Excel to allow the VAT return submission and continue working in this way.

It is therefore vital that law firms are checking the status of their systems and that their chosen software has the controls in place to maintain an efficient and compliant operation. As the industry continues to be impacted by new regulations, firms that don’t ask questions of their existing software provider could be leaving themselves open to risks of falling short of legal requirements or incurring higher fees. These risks are particularly high in cases where their current legal software products are no longer receiving the updates required for users to remain compliant, as the industry continues to digitise and regulations change.  

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Staying compliant in 2019

Amidst the almost certain possibility of both further changes to the likes of MTD in the future and the continuing digitisation of the industry, many legal software suppliers will unsurprisingly invest heavily into developing their ‘go-forward’ products in order to meet these demands. The end result of this can be that the software products that law firms invested in are no longer supported, and in many cases are ‘end of lifed’ or ‘sunsetted’. This will of course have repercussions on its users and will potentially push them to make a number of unwilling changes. 

For example, the impact on a law firm could be that their existing supplier requests that they change to an alternative system, which could come at a large expense to the business. Should they chose not to, remaining with their existing system could mean that they simply will not be compliant from the moment any new legislations come into force. 

In addition, many law firms may not have considered the potential time it takes to implement and migrate to a new software solution. Data migration takes considerable time and resources to make sure it’s done right. This can leave many Firms caught out should this process be left too close to regulatory deadline or if the transition is not complete before their current system ceases entirely and is no longer available for use or supported by its provider.

This could have a number of consequences – such as forcing them to accept a high renewal or large migration fee to remain with the current supplier, or even sign a lengthy agreement on a software that they are not fully satisfied with. With a chance of increased costs and non-compliance looming in these circumstances, law firms must now check their existing software’s status and make clear decisions over their software soon if they are to adhere to new industry regulations and remain cost effective as soon as any issues arise. 

Today, firms which make active precautions, such as contacting their suppliers to enquire about the state of their purchased software or seeking advice from legal IT experts will help their managers to make early decisions about the best course of action when faced with the risks of potentially outdated or non-compliant products. Taking these steps now could help firms to reap the full benefits of software suppliers which provide fast migration with full support and expertise, meeting the demands of an increasingly digital sector and preparing them for other industry regulations on the horizon both in 2019 and in the future.

Tim Smith, Technical Director at Insight Legal 

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