CFA Success Fee Accounting and Tax: A UK Law Firm Guide

What a CFA Is, and Why Its Accounting Is Different

A conditional fee agreement (CFA) is a no-win-no-fee arrangement under the Courts and Legal Services Act 1990 (CLSA 1990) s.58: the firm's fees and expenses, or any part of them, are payable only in specified circumstances, and the firm can charge a success fee, a percentage increase on its base costs, if it wins. The legal framework is the easy half, and most firms running litigation know it well: a 100 per cent cap on the success fee, and a 25 per cent cap on the success fee taken from a personal injury claimant's damages.

The hard half is accounting and tax, and it is where this page earns its place. Because the fee is contingent, the firm should not recognise revenue (or the success fee) until it is probable the firm will win and the amount can be measured reliably (FRS 102 Section 23). And the VAT tax point does not arise until the firm issues a bill or VAT invoice or receives payment, which on a CFA is typically at successful conclusion. Until then, WIP on a CFA matter sits at a value that reflects the contingency, not full charge-out rate. This guide sets out the s.58 limits, then the revenue-recognition and VAT-timing rules that actually drive the firm's tax. The focus is England and Wales.

The Statutory Framework: CLSA 1990 s.58

Section 58 of the CLSA 1990 is the legal anchor. It defines a conditional fee agreement as an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances. That is the no-win-no-fee core: payment is contingent.

It also defines the success fee. A CFA provides for a success fee if it provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not payable only in specified circumstances. And it sets the limit by reference to order: under s.58(4)(c) the percentage increase must not exceed the percentage specified in relation to the description of proceedings by order made by the Lord Chancellor. A CFA is enforceable only if it satisfies the s.58 conditions, so an agreement that breaches them risks leaving the firm unable to recover any fee at all.

The Success-Fee Cap: 100% of Base Costs (CFA Order 2013)

The order that fixes the maximum is the Conditional Fee Agreements Order 2013 (SI 2013/689). Article 3 specifies that the percentage for the purposes of s.58(4)(c) is 100 per cent. So the success fee can at most double the base costs; it cannot exceed them.

This is a hard ceiling on the uplift, not a target. The actual success-fee percentage on any given matter reflects the firm's assessment of the litigation risk at the outset, and many matters carry an uplift well below the maximum. But the 100 per cent figure is the statutory cap as at 3 June 2026, and a CFA purporting to charge a higher percentage increase would breach s.58 and the order. Whatever the agreed percentage, the accounting question (when is that uplift recognised) is the same, and it is the subject of the next sections.

The 25% Personal-Injury Damages Cap

For personal injury work there is a second, narrower cap. In PI proceedings at first instance, the success fee deducted from the client's damages is capped at 25 per cent (CFA Order 2013 art 5). The 25 per cent does not apply to the whole award. It applies to general damages for pain, suffering and loss of amenity, and to damages for pecuniary loss other than future pecuniary loss, calculated net of any sums recoverable by the Compensation Recovery Unit of the Department for Work and Pensions. Future pecuniary loss is excluded from the base.

The post-LASPO context matters here. Since 1 April 2013, under the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), a CFA success fee (and an after-the-event insurance premium) is generally not recoverable from the losing party. The success fee instead comes out of the client's damages, subject to the 25 per cent cap. So the success fee in a modern PI CFA is a deduction from the client's damages, not an inter-partes recovery against the other side. That distinction also separates this page from the recovered-costs analysis in our sibling guide on inter-partes costs recovery and VAT.

Revenue Recognition on a Contingent Matter (FRS 102 Section 23)

Here is the accounting differentiator. Under FRS 102 Section 23, revenue from services is recognised when the amount can be measured reliably and it is probable that the economic benefits will flow to the entity. Both tests must be met.

On a CFA the right to be paid is contingent on success. Until success is probable and the amount measurable, neither test is satisfied, so revenue (and the success fee) should not be recognised. This is a sharp contrast with standard time-recorded work, where the firm obtains the right to consideration as it performs and revenue accrues as work is done. On a no-win-no-fee matter, recognition is deferred. You do not book revenue simply because hours have been recorded; you book it when the outcome that makes those hours billable becomes probable. In practice that is at, or close to, the win.

The word probable does the heavy lifting, and it is a matter of judgement applied to each matter on its facts. Recording hours, incurring disbursements and forming an optimistic view of the merits do not, by themselves, make recovery probable. A matter can run for a long time with the firm fully committed and yet still fail the test, because liability remains genuinely in issue or quantum cannot be measured reliably. The judgement should be evidenced and revisited as the matter develops: an early-stage claim with disputed liability is a long way from probable, whereas a matter approaching a favourable settlement or judgment may cross the threshold before the formal conclusion. The discipline is to tie recognition to a defensible assessment of probability and measurability, not to the calendar or to sunk time.

It also follows that recognition is not all-or-nothing across a portfolio. Each CFA matter is assessed on its own facts, so at any reporting date some matters will have crossed into probable-and-measurable (and are recognised) while others remain too uncertain (and are not). A firm running a book of CFAs should expect a moving picture, with matters migrating into recognition as their outcomes firm up. That is exactly why the profit profile is lumpy, and why the WIP carrying value needs regular, evidenced review rather than a single blanket assumption.

WIP on CFA Matters

That recognition test drives how CFA work in progress sits on the balance sheet. WIP is recognised under FRS 102, but on a contingent matter the reliable-measurement and probable-inflow conditions mean CFA WIP is carried at a value that reflects the contingency, often little or nothing until the outcome is probable, rather than at full charge-out rate.

This is consistent with the established position on conservative WIP valuation: where the outcome of a matter cannot be measured reliably, as in conditional fee agreements, a more conservative carrying value is justified. Do not recognise full speculative WIP on a CFA. Doing so overstates the balance sheet and, because recognised WIP feeds the taxable result, accelerates tax on profit the firm may never earn. Carry CFA WIP down to reflect the real chance of recovery, and step it up only as success becomes probable. For the underlying mechanics, see our guide to the WIP valuation method for UK law firms.

The VAT Tax Point on a CFA

Output VAT becomes due at the tax point, not as work is done. Under VATA 1994 s.6 the basic tax point is performance, overridden by the earlier of a VAT invoice (or bill) or payment, with the 14-day rule capable of moving the tax point to the invoice date. On a CFA, no bill is rendered until the win, because there is nothing to bill until the contingency is satisfied. So the tax point typically arises at successful conclusion, when the firm renders its account or is paid.

At that point the firm accounts for output VAT on the base fee and on the success fee for that VAT period. Legal services are standard-rated at 20 per cent, and the success fee is part of that supply. The caption to hold: the VAT tax point on a CFA is the bill at the end, not the work along the way. For the full time-of-supply rules, see our guide to the VAT tax point and time of supply for law firm billing, and for the foundational standard-rate position, VAT on legal services.

Is the Success Fee Subject to VAT? Yes

The success fee is part of the firm's standard-rated supply of legal services. It is not a separate exempt payment or something outside the scope of VAT. So VAT is charged on it at 20 per cent, accounted at the same tax point as the rest of the bill.

The interaction with the 25 per cent PI cap needs care. The CFA Order cap is on the amount of the success fee deducted from the client's damages. Where the success fee is taken from damages, the success fee and its VAT must fit within the 25 per cent cap on the relevant slice of damages; the VAT is accounted for within the capped amount, not added on top of it. In other words, the cap limits what is taken from the client, and the VAT on the success fee sits inside that limit. Frame this precisely in the client care documents so the client understands the capped figure is inclusive of the VAT on the success fee.

This precision matters because the wrong framing can either breach the cap or short-change the firm. If the firm calculated a success fee at the cap and then added VAT on top, the total taken from the client's damages would exceed the 25 per cent limit, which the order does not permit. So the firm has to work within the capped figure: the success fee plus the VAT on it together cannot exceed the cap on the relevant slice. The output VAT the firm owes HMRC is unaffected by the cap; the cap simply constrains how much can be recovered from the client, and the VAT element of what is recovered is then accounted to HMRC in the normal way. Document the calculation so it is clear the capped amount is VAT-inclusive, and so the client sees what is deducted and why.

Tax Timing: Paying Tax on Profit You Have Not Yet Won

The whole point of conservative recognition is that a firm should not be taxed on speculative CFA WIP. While success is uncertain, no revenue is recognised, so no taxable profit arises on the contingent work. That protects the firm from paying tax on fees it may never earn.

The flip side is concentration. Once the matter is won and recognised, a large slug of revenue (base costs plus the success fee) crystallises in a single period. LLPs and partnerships with a corporate partner are excluded from the cash basis, so most firms are on the accruals basis, and the tax-year basis applies from 2024/25. A firm running several CFAs can therefore see profit swing sharply between periods depending on when matters conclude. Plan for that lumpy, contingent profit profile: forecast likely conclusion dates, and reserve for the tax that lands when a cluster of matters succeeds. Our guides to law firm cash flow management and partner tax reserving and payments on account set out the reserving discipline.

There is a cash-flow dimension that runs alongside the tax timing and pulls in the same direction. The firm funds the work (staff time, disbursements, sometimes ATE premiums) throughout the life of a CFA matter while recognising no revenue, then receives the base costs and success fee in a single tranche at conclusion. That is a long lock-up by design, and on a portfolio of CFAs the firm is effectively financing a pipeline of speculative work. When several matters then conclude in quick succession, both the recognised profit and the cash arrive together, and the tax on that profit follows. A firm that has not reserved through the lean periods can find the tax charge on a good year of conclusions falling due just as it is trying to redeploy the cash into the next wave of matters. Treat CFA work as a funded pipeline, model the likely conclusion timing, and hold tax reserves against recognised profit so the eventual liability does not collide with the next round of speculative investment.

Disbursements and ATE on CFA Matters

Disbursements on a CFA follow the same eight-condition test as any other matter (VAT Notice 700 section 25.1.1): a genuine disbursement, such as a court fee the client is liable for, is outside the scope of VAT and recharged with no VAT, while an outlay the firm uses in its own service, or where a condition fails, is part of the firm's standard-rated supply. After-the-event (ATE) insurance premiums and any litigation funding sit alongside the CFA and interact with the firm's cash flow and the client's overall funding package; for the funding angle see our sibling guide on disbursements and litigation funding cash flow.

Counsel on a CFA, including where counsel runs its own CFA, is a supply to the firm by default. The firm uses counsel in making its onward standard-rated supply, so it recovers the input VAT and charges output VAT on its total fee; counsel is a disbursement only in the rarer client-instructed case, and the firm cannot both treat counsel as a disbursement and reclaim the input VAT. See our guides to the VAT treatment of disbursements and counsel's fees and VAT.

A Worked Example: From the Caps to Recognition, WIP and VAT

This example is illustrative only and is not advice. Start with the caps. A firm runs a matter on a CFA with a 100 per cent success fee. The success fee cannot exceed 100 per cent of base costs (CFA Order art 3), so at most it doubles the base costs. In a PI claim won at first instance, the success fee deducted from the client's damages is also capped at 25 per cent of general damages plus past pecuniary loss, net of CRU recoveries and excluding future loss (art 5). The caption: the success fee is capped at 100 per cent of base costs, and the PI deduction from damages at 25 per cent of the right slice.

Now the accounting. The matter runs for two years on a speculative basis. Under FRS 102 Section 23 the firm recognises no revenue and carries WIP conservatively while the outcome is uncertain. When success becomes probable and measurable (here, at the win), the firm recognises base costs plus the success fee in the period of the win. The caption: no revenue until the win is probable, then it lands in one period.

Finally the VAT. On the successful conclusion the firm renders its bill. The tax point arises then, and output VAT at 20 per cent is due on the base fee and the success fee for that VAT period. If the success fee is taken from the client's damages, it sits within the 25 per cent cap inclusive of its VAT. The caption: the VAT tax point on a CFA is the bill at the end, not the work along the way.

Practical Checklist

For a personal injury or litigation firm running CFAs:

• Ensure each CFA satisfies the s.58 conditions, so it is enforceable and the firm can recover its fee.
• Keep the success fee within 100 per cent of base costs, and for PI within the 25 per cent damages cap on the relevant slice.
• Recognise revenue only when success is probable and the amount measurable (FRS 102 Section 23), not as time is recorded.
• Carry CFA WIP conservatively, reflecting the contingency, rather than at full charge-out rate.
• Account for output VAT on the base fee and the success fee at the tax point on the win (standard-rated at 20 per cent).
• Reserve for the lumpy profit recognition that concentrates when matters succeed.
• Treat disbursements under the eight-condition test, and counsel as a supply to the firm by default.

The Cluster B siblings cover the related funding models: damages-based agreement accounting and tax (the percentage-of-damages variant), disbursements and litigation funding cash flow, inter-partes costs recovery and VAT, and VAT on legal aid work and the LAA cash-flow lag.

Speak to a Specialist

CFAs reward firms that pair the statutory caps with disciplined accounting: recognise revenue only when the win is probable, carry contingent WIP conservatively, account for VAT at the bill, and reserve for the lumpy profit profile. The statutes and figures cited here (CLSA 1990 s.58, CFA Order 2013 arts 3 and 5, FRS 102 Section 23, VATA 1994 s.6) are stated as at 3 June 2026; confirm the current position before you rely on it. If your firm runs no-win-no-fee work and wants to confirm its revenue-recognition, WIP and VAT-timing treatment, speak to a legal-sector-specialist accountant who can review your CFA accounting against your own matters.