There is no doubt that electronic invoicing (e-billing) is one of the fastest growing trends in the client/law firm commercial relationship. By now the majority of UK firms have been approached by clients (or one of the e-billing intermediaries) to enquire as to the law firm’s capability to produce and deliver bills electronically.
Before looking at the specific compliance issues faced by law firms approaching an e-billing initiative, one must distinguish between ‘full’ e-billing as against the uploading of a PDF or Word copy of a paper bill or the keying of invoice details to a client or third-party web site. Full e-billing involves the production of an electronic file, usually in one of the LEDES (Legal Electronic Data Exchange Standards) formats, which contains not just the invoice header, matter information and bill totals but a detailed breakdown of time lines and expenses, coded using the UTBMS (Uniform Task Based Management System) code sets for Tasks, Activities and Expenses (see Definitions below).
The recent implementation of key legislation in the Legal Services Act 2007, amending s 69 of the Solicitors Act 1974, allows solicitors to deliver their bills electronically and removes the requirement for law firms to produce a paper bill. That overcomes one of the main obstacles to full e-billing in England and Wales.
In addition, many UK firms produce both a legal ‘bill’ and a separate tax invoice. If the e-bill is to replicate both documents, certain statutory/regulatory issues have to be satisfied. Firms have to ensure that their e-bills and other information sent to clients and intermediaries comply with, among others, the requirements of the Solicitors’ Accounts Rules (SARs), HM Revenue & Customs rules, the law on data protection, business names legislation and EU billing directives. Firms should also ensure that the e-billing intermediary system handles these requirements correctly and that the e-bill, as delivered to the client, complies with all the appropriate regulations.
Barriers to E-billing
In the UK there have been some significant barriers to the adoption of e-billing by the law firms, mainly financial, cultural and statutory/regulatory issues and concerns. Financial barriers have included set-up costs, system costs and the resources required to run e-billing. Cultural issues include how firms ensure that lawyers are entering the correct ‘Task’ and ‘Activity’ codes when recording time. Are time narratives being entered correctly bearing in mind they are visible to the client? Are e-bills compliant with the client’s (often complex) billing and submission guidelines? Many UK law firms have had to overcome these barriers and to answer a number of questions in order to successfully implement e-billing in their organisations. While many firms have or are addressing these financial and cultural issues, there is still a lack of appreciation of the statutory and regulatory environment impacting e-billing in the UK and wider EU.
LEDES Formats
The early LEDES e-bill formats, such as LEDES 1998B were developed purely for the US market, ie no VAT, no multi-currency and a more relaxed regulatory system defining what a legal bill should look like. Even those LEDES formats that have been introduced to meet the requirements in the UK are still deficient in some of these detailed compliance issues.
With the latest format, LEDES XML v2.1 (released in August 2008), there are significant changes to cater for UK/EU tax and other regulatory requirements. The format will calculate and store VAT and withholding tax and has a provision for holding statutory and regulatory statements. Even though the XML v2.1 LEDES format specifically addresses some of these tax and compliance issues they are not necessarily reflected in the data output by the time and billing systems. For example, knowledge on which fields are required and how these fields have to be included on an e-bill is still often lacking among the e-billing system and practice management system vendors.
Statutory/Regulatory Issues
What then are the relevant pieces of legislation and regulations that have to be taken into account when approaching an e-billing initiative?
The key ones are:
- VAT rules (including the EU Invoicing Directive)
- the EU Reverse Charge mechanism
- business names legislation
- ‘Not Yet Paid’ Disbursements – SARs 32(8)
- Legal Services Act 2007 (Commencement No. 1 Order)
- data protection issues
- client confidentiality obligations.
VAT and EU Billing Requirements
The key issues around VAT are, not surprisingly, requirements across the EU rather than being UK specific.
- Currently the EU Invoicing Directive (77/388/EEC) requires that if raising a VAT invoice in another currency, we have to show the VAT in GBPs as well. The supply currency and VAT amount have to be ‘expressed’ on the bill; this can be a narrative field and is not part of the financial information of the bill.
- EU Reverse Charge mechanism – HMRC have implemented significant reporting and compliance changes to the VAT rules for cross-border invoices (part of the 2010 VAT Package) to bring the UK into line with the EU. Among other things, this requires the law firm to add some suggested text to the face of the bill. These changes can be summarised as follows and are dependent on where the client is based and on the supply status.
If the client belongs in another EC member state and the supply is in their business capacity:
No VAT is chargeable (zero-rated) but you must obtain and quote on the face of the invoice their full VAT registration number, including country code, and add the appropriate text, for example ‘Outside the scope of UK VAT: Reverse Charge Supply’.
If the client belongs in another EC member state and the supply is in their private capacity:
VAT must be added at the current rate. No text on the face of the bill is necessary.
If the client belongs outside of the EC:
No VAT is chargeable. For clarity, you may add the text ‘Outside the scope of UK VAT: Supply outside of the EC’.
While the more recent LEDES formats have specific fields to hold VAT rates and amounts, they may not have specific fields to represent this required textual VAT information. Law firms and clients will have to agree how this information is to be included on the LEDES file if the e-bill is to replicate the legal bill and the VAT invoice.
Business Names Legislation
The Business Names Act 1985 (as updated by the Companies Act 2006) lays down the legal disclosure information that must be present on invoices and receipts for companies, partnerships and limited liability partnerships (LLPs).
For example, in the case of invoices sent by partnerships and LLPs of over 20 persons, the Act specifies….’ [That] the document states in legible characters the address of the principal place of business of the partnership or LLP and that the list of members’ names is open to inspection at that place’.
(Just to note – different rules apply to partnerships and LLPs of fewer than 20 persons, where the Act requires that if the LLP includes the name of any member on its letters, invoices and receipts, other than in the body of the letter or as a signatory to it, it must include all the members’ names. It cannot be selective about which names to include.)
The LEDES formats do not have specific fields for this data but again, in order for the e-bill to be compliant, the appropriate information should be inserted in the LEDES file.
Solicitors’ Accounts Rules (SARs)
Under SARs 32(8) there is a requirement for firms to indicate on their invoices which disbursements are not yet paid at the date of the bill.
As with many of these billing issues, the need for ‘not yet paid’ disbursements to be distinguished is not a requirement in the US, therefore it is not surprising that the LEDES formats do not have provision for holding this.
Firms have to agree with their clients and the e-billing intermediaries how this requirement can be met on the e-bill to avoid being in breach of SARs.
Legal Services Act 2007
As mentioned earlier, in March 2008, the Legal Services Act 2007 (Commencement No. 1 and Transitory Provisions) Order 2008 put in place the legislation to amend s 69 of the Solicitors Act 1974. That effectively cleared the way for e-billing in England and Wales.
The previous requirement for legal bills was that law firm invoices had to be delivered under cover of a letter signed by a partner in order for the firm to be able to sue for costs. This was removed by the Legal Services Act 2007. One further point to note is that the sending of both paper and e-bills for the same matter (ie ‘dual invoicing’) is not allowed by HMRC except as part of a system test or for a strictly limited period, for example, when implementing a new billing system.
Other Textual Requirements
Apart from the issues already highlighted as definite legal requirements, there are no hard and fast rules for what must appear on a firm’s invoices. Anyone who has seen a selection of legal bills knows that firms vary on what other textual information they include on their paper bills. These text fields may include legal status, jurisdictional information, regulatory data and a statement such as ‘This invoice is payable on receipt’ or ‘This invoice is due and now payable’.
Finally, depending on the client’s needs or the type of work being undertaken, firms may need to include the text ….’Payable by [Party name details]’ if the invoice is to be paid by a third party.
Whether this data has to appear on an e-bill is largely down to the demands of the law firm’s billing managers and the needs of the client.
Client Confidentiality and Data Protection Concerns
In general there are three areas of concern, from a data protection and confidentiality point of view, with e-billing.
Firstly, as part of the e-billing process, firms are required to provide information about their lawyers working on the client’s matters. This data includes name, practice area, status (ie partner, solicitor etc), years PQE and charge out rates.
The relevant data protection legislation regarding personal information hangs on the definitions of who the data is controlled by and/or processed by and e-billing raises such questions as: Are the e-billing intermediaries, who are mainly based in the US, just brokers or agents of the client? What contractual agreements are in place between the client and the intermediary and the law firm and the intermediary? Hence, the question to be addressed is who is the controller of the data at any point in the process and who is prepared to accept liability if anything goes wrong?
Some firms when facing this issue take a fairly pragmatic approach about making this information available. The advice usually given by specialist lawyers is along the lines of…’the disclosure of this information is justifiable on the basis that it is necessary for the pursuance of the law firm’s and the client’s legitimate interests; and does not prejudice the rights, freedoms or legitimate interests of the lawyers concerned…..and the lawyers would expect their details to be made available to clients in this kind of context’.
The second area of concern is the potential for client-sensitive information to be included in the e-bill, mainly sensitive matter descriptions and confidential information in lawyers’ time narratives on the e-bill. (The major change that e-billing brings is that much more of the firm’s data is now exposed to the client and processed by them using powerful analysis software.) While time narratives themselves are not strictly part of this financial number crunching, the fact remains that the data is potentially visible to the intermediary and definitely visible to the client. To some extent this issue has always existed and we have all become used to the coding of sensitive matter names and the use of coded names in confidential narratives. The accepted view would be that part of the implementation of e-billing is to ensure that lawyers fully appreciate the wide audience for everything that they enter on a time sheet and train them to act accordingly.
Finally, there is the general commercial confidentiality issue relating to a client’s business data being sent on an e-bill and the fact that this data is at times outside the control of the law firm and the client. In reality, the risk to the law firm of this exposure is reduced, given the fact that it is the clients themselves who are demanding we bill them in this way and therefore one expects that they have done their own risk assessment so far as the security of the end-to-end process is concerned. Law firms may want to take further internal advice on this issue from their own risk management specialists.
As e-billing spreads to include jurisdictions outside of the UK, all of the above issues will need to be re-considered in the light of the professional duties and legal obligations in each country concerned. Some countries have much stricter confidentiality and data protection laws than we do in the UK and their data may have to be handled differently.
What’s Next for E-billing?
More and more clients are asking law firms to render their bills electronically, and in the past year or so we know that some significant e-billing projects have been undertaken in the UK. In a recent survey of general counsel from leading UK companies carried out by PLC, almost 60% of in-house lawyers said they wanted to be able to see their bills electronically. This compares with a figure of fewer than 10% of counsel who are currently able to receive billing data directly from their law firms.
There is no doubt that e-billing is here to stay in the UK and law firms have to meet the demands of their clients – but without undue cost and too many resources being required. Both the client and the law firm can gain benefits from a well-implemented e-billing strategy and firms should be in a position where e-billing is seen as a ‘business as usual’ activity and potentially becomes the normal way of rendering bills to clients.
If, however, the e-bill is to replicate both the paper bill and VAT invoice then the statutory/regulatory issues have to be satisfied in order for law firms to avoid rendering non-compliant invoices.
E-billing Definitions
Legal Electronic Data Exchange Standards (LEDES)
These are the standard file formats used for the transmission of e-bills between law firm and client. The current LEDES format standards are: LEDES 1998B, LEDES 1998B-I, LEDES 2000 and LEDES XML v2.
In 1995 Price Waterhouse convened a consortium of leading legal time and billing system and case-management system vendors in order to define a standard electronic billing format for use by the legal industry. From this initial work the LEDES 1998B format emerged and is still used widely in the US. More recently, other LEDES formats have been added to accommodate features such as VAT and multi-currency, as well as other e-billing requirements outside the US. The LEDES standards are now governed by the LEDES Oversight Committee (LOC). The LOC is an international, voluntary, not-for-profit organization comprised of legal industry representatives, who are charged with creating and maintaining open standard formats for the electronic exchange of billing and other information between corporations and law firms.
For further information, visit: www.ledes.org.
Uniform Task Based Management System (UTBMS)
These are the sets of phase, task, activity and expense codes designed to provide clients and law firms with a common method for identifying the work breakdown and cost information of legal services. This standard was created in the mid-1990s by an industry group, which included the American Bar Association and Price Waterhouse, but in 2006 the UTBMS Task Force merged its efforts under the LOC umbrella. There is now a LOC sub-committee charged with considering the future direction of the UTBMS codes used in legal e-bills.
The original and most widely used phase/task code sets are those for litigation, bankruptcy and counselling matters with the associated activity and expense codes. More recently, new and amended code sets have been defined for patent and trade mark matters and for project/transactional work.
Legal Billing intermediaries
There are a number of organisations, mainly based in the US, who act as e-billing intermediaries on behalf of clients. Some of the key players in this market are DataCert, CT Tymetrix, Serengeti Law, Bottomline and LexisNexis/Examen. Although they have differing operating models, they essentially provide a software link between a client and its law firms and are the first point of contact when e-bills are being submitted. In simple terms, the intermediary software validates the law firm’s e-bills against agreed rules and then either rejects the bill so that the law firm has to amend and re-submit it or, if valid, will pass the bill data to the client’s own internal systems for authorisation and payment. They also provide the client with powerful software that allows an in-house legal team to perform sophisticated analysis on the e-billing data submitted by the various law firms.
Bryan King is an independent legal e-billing consultant. He was the IT development manager at Linklaters and has held senior positions at Lovells and Clifford Chance.
