What a DBA Is, and Why the Caps Matter

A damages-based agreement, or DBA, is a contingency-fee arrangement under which a law firm is paid a percentage of the sums its client recovers, rather than a fee calculated on the time it spends. If the client recovers nothing, the firm is paid nothing under the DBA. DBAs are permitted by section 58AA of the Courts and Legal Services Act 1990 and are governed in England and Wales by the Damages-Based Agreements Regulations 2013 (SI 2013/609), which came into force on 1 April 2013.

The headline point, and the one most firms misread, is that the regulations cap the firm's percentage and that each cap is expressly inclusive of VAT. There are three caps: 25% for a personal-injury claim at first instance, 35% for an employment matter, and 50% for all other claims. Each one is the ceiling on the total the firm can take, VAT and all, not the fee before VAT is added. Get that wrong and the agreement is unenforceable to the extent it breaches the cap.

The accounting and tax consequences follow from the contingent nature of the fee. Because the firm's payment depends on a recovery that may never happen, revenue cannot be recognised as time is spent. Under FRS 102 it is recognised only when recovery is probable and measurable, which usually means at the win, and the VAT tax point arises when the firm bills or is paid. This guide sets out the three caps precisely, explains the VAT-inclusive mechanic, and then works through the recognition and tax timing.

A DBA is a different instrument from a conditional fee agreement (CFA). A CFA charges the firm's normal base costs plus a percentage uplift on those costs (the success fee); a DBA pays a flat percentage of the recovery with no separate base-cost element. The accounting treatment of the success-fee model is covered in our companion guide to conditional fee agreement (CFA) success-fee accounting and tax. This page stays on the percentage-of-damages model.

The Three Statutory Caps (DBA Regulations 2013, SI 2013/609)

The caps are the legal anchor for everything that follows. They sit in two regulations of the Damages-Based Agreements Regulations 2013.

  • Personal injury, first instance (regulation 4): the agreement must not provide for a payment above an amount which, including VAT, is equal to 25% of the combined sums (general damages and past pecuniary loss, net of Compensation Recovery Unit sums).
  • All other (non-employment) claims, first instance (regulation 4): the agreement must not provide for a payment above an amount which, including VAT, is equal to 50% of the sums ultimately recovered by the client.
  • Employment matters (regulation 7): the agreement must not provide for a payment above an amount which, including VAT, is equal to 35% of the sums ultimately recovered by the client.

Three things are worth fixing in mind. First, the phrase "including VAT" appears in the regulations themselves: it is not a gloss. Second, the percentage caps apply at first instance; appeal proceedings sit outside these specific first-instance caps. Third, the caps are maxima, not defaults: a firm can agree a lower percentage, and competitive pressure or client-care duties may mean it should. These figures are current as at June 2026; always check the regulations are unamended before drafting.

"Including VAT" Is the Trap

This is the feature that catches firms out, so it is worth stating in the plainest possible terms. The cap is the lid on the total payment the firm takes, fee and VAT together. The VAT is carved out of the cap; it is not added on top of it.

Consider the 50% cap on a commercial claim. A firm that reads the cap as "our fee is 50% and then we add 20% VAT" would be taking 60% of the recovery in total (50% fee plus 10% VAT), which breaches the cap. The correct reading is that the firm's fee plus the VAT on that fee must together come to no more than 50% of the recovery. If the firm takes the full 50%, that 50% is the VAT-inclusive sum: the VAT element is the VAT fraction of it (one sixth at the 20% rate), and the firm's net fee is the remaining five sixths.

The same logic applies to the 25% personal-injury cap and the 35% employment cap. In every case the percentage is the ceiling on fee-plus-VAT, so the firm carves the VAT out of the capped amount rather than adding it on. This is the opposite of a normal time-costed bill, where the firm calculates its fee and then adds VAT separately. On a DBA, the VAT lives inside the cap.

What the Percentage Is Applied To

The base to which the percentage is applied differs by matter type, and getting it wrong can either short-change the firm or breach the cap.

For a personal-injury claim at first instance, the 25% applies to a defined and relatively narrow base: general damages for pain, suffering and loss of amenity, plus past pecuniary loss, net of any sums recoverable by the Compensation Recovery Unit. Damages for future pecuniary loss are excluded from the base. This protects a claimant's future-care and future-loss awards from being eroded by the firm's percentage.

For employment and all other claims, the percentage applies to the sums ultimately recovered by the client. The treatment of counsel's fees and certain expenses within the calculation is governed by the regulations, so the agreement should make clear what is and is not netted off before the percentage is taken. Whatever the matter type, the firm should document the recovery base in the DBA itself, because the base feeds directly into both the enforceability of the cap and the amount the firm will eventually recognise as revenue.

The reason the base matters so much for the accounts is that revenue is recognised on the capped percentage of that defined base, not on a notional value of the work. Two matters that consume identical amounts of fee-earner time can produce very different recognised revenue because their recoveries differ, and a matter that settles for less than expected will recognise correspondingly less. The firm's management accounts should therefore track the expected recovery base for each live DBA matter, not just the hours recorded, so that the contingent WIP and the eventual recognition are both grounded in the right figure rather than in charge-out value.

DBAs and the Recoverability of Costs

A DBA operates against the client's recovery, but litigation often also produces an award of costs against the losing party. Where the client recovers costs inter partes, the firm generally gives credit for those recovered costs against the DBA payment, so that the client is not effectively charged twice for the same work. The net DBA payment, after that credit, is what the firm ultimately bills and recognises.

The mechanics of recovered costs, including how VAT is claimed against the paying party and to whom the firm issues its tax invoice, are a topic in their own right. They are set out in our guide to inter-partes costs recovery and its VAT treatment for law firms. The point to hold here is that the figure that crystallises in the firm's accounts is the capped DBA payment net of any credit for recovered costs, not the gross percentage in isolation.

Revenue Recognition on a DBA (FRS 102 Section 23)

This is the accounting core. Under FRS 102 Section 23, revenue from the rendering of services is recognised only when the outcome of the transaction can be estimated reliably and it is probable that the economic benefits will flow to the firm. On time-recorded work that test is met as the work is done, because the firm has a right to be paid for the time regardless of outcome. On a DBA it is not.

Because the firm's payment depends on, and is a percentage of, a recovery that may not materialise, the outcome cannot be estimated reliably and the economic benefit is not probable until the case is, in substance, won or settled. So no DBA revenue is recognised while the matter is contingent. The firm carries the work as conservatively valued work in progress and recognises the capped percentage as revenue only when recovery becomes probable and measurable.

This is a deliberate, prudent answer rather than a timing accident. Recognising contingent revenue early would inflate the balance sheet with income the firm has no enforceable right to, and would pull forward a tax charge on profit it may never see. Deferring recognition keeps the accounts honest and aligns the tax with the cash.

WIP on DBA Matters

The treatment of work in progress flows from the same FRS 102 logic. A law firm recognises WIP under FRS 102 as it obtains the right to consideration for its performance. On ordinary chargeable work that right accrues steadily; on a DBA it does not accrue until recovery is probable, so unbilled DBA time sits on the balance sheet at a value that reflects the contingency, not the full charge-out rate.

Carrying contingent WIP conservatively matters for lock-up management as well as for the accounts. A firm with a large contingent caseload can show a deceptively healthy WIP figure if it values that work at full rates; valuing it to reflect the probability of recovery gives a truer picture of the working capital genuinely tied up. The general method is covered in our guide to the WIP valuation method for UK law firms, which does not itself address contingent work, so DBA matters need the conservative overlay described here.

The VAT Tax Point on a DBA

Legal services are standard-rated for VAT at 20%, and a DBA payment is simply the firm's fee for its standard-rated supply of legal services. There is no special VAT regime for contingency work. What matters is when the output VAT becomes due, which is the tax point.

Under VATA 1994 section 6, the basic tax point for services is when they are performed or completed. An earlier actual tax point arises to the extent the firm issues a VAT invoice or receives payment before that, and the 14-day rule can fix the invoice date as the tax point where the invoice is issued within 14 days of the basic tax point. On a DBA, the firm typically issues its bill for the capped payment at recovery, so the tax point usually falls then. The detailed time-of-supply rules for legal billing are in our guide to the VAT tax point and time of supply on law-firm billing.

The amount of output VAT follows the VAT-inclusive cap. Because the capped payment already includes the VAT, the output VAT is the VAT fraction of that inclusive amount: at the 20% rate, one sixth. So the firm does not gross up the capped payment by 20%; it strips one sixth out of it as the VAT due, leaving five sixths as its net fee.

Worked Example: The VAT-Inclusive Cap in Numbers

This example is illustrative only and is not advice; every matter turns on its own facts and its own DBA terms.

A firm runs a commercial dispute under a DBA with the maximum 50% cap (a non-employment, non-personal-injury claim). The client recovers £200,000. The firm has taken the full 50% cap, so its total DBA payment is £100,000, and that £100,000 is inclusive of VAT.

  • Capped payment (VAT-inclusive): 50% of £200,000 = £100,000.
  • Output VAT (1/6 of £100,000 at 20%): £16,666.67.
  • Firm's net fee (5/6 of £100,000): £83,333.33.

If the firm had wrongly treated the cap as a net fee and added VAT on top, it would have billed £100,000 plus £20,000 VAT, a total of £120,000, which is 60% of the recovery and a clear breach of the 50% cap. The correct figure the firm keeps is £83,333.33, with £16,666.67 accounted to HMRC as output VAT at the tax point.

On the accounting side, suppose the matter ran for two financial years before settling. In year one, with recovery uncertain, no DBA revenue is recognised and the WIP is carried conservatively. In year two, when settlement makes recovery probable and measurable, the firm recognises the £83,333.33 net fee as revenue (with the £16,666.67 VAT as a liability to HMRC, not income), all in that period. The profit, and the tax on it, land in year two.

Tax Timing and the Lumpy Profit Profile

The deferral of recognition has a direct tax consequence: DBA profit is lumpy. A matter that runs for two or three years generates no recognised income in the intervening periods and then a single recognised amount in the recovery period. For a firm with a portfolio of contingent matters, recoveries can cluster, producing a year of unusually high recognised profit.

Most law firms operate as LLPs or partnerships, which are excluded from the cash basis and so use the accruals basis, and partners are taxed on the tax-year basis (profits for the actual tax year) from 2024/25. A spike in recognised DBA profit therefore feeds straight through to the partners' personal tax in that year. The practical answer is to reserve: partners should set aside funds against the tax on recognised contingent profit as it lands, so a strong year of recoveries does not create a payment-on-account shock the following January. Our guides to law-firm cash-flow management and partner tax reserving set out the reserving discipline in more detail.

The cash-flow and tax timing can also diverge. The output VAT on a DBA payment is due for the VAT period in which the tax point falls, which is usually when the firm bills at recovery, so the VAT obligation crystallises promptly. The income tax on the partners' share of the recognised profit, by contrast, is collected through payments on account and a balancing payment, which can fall well after the cash has been received and, in a clustered year, after some of it has been spent. A firm that recognises a large DBA profit in one period should map both the VAT and the eventual income-tax cash-outs against the timing of the recoveries, rather than assuming the receipt of cash and the tax on it coincide. Holding a tax reserve against recognised contingent profit, rather than treating a settlement as fully distributable, is the discipline that keeps a good year from becoming a difficult one.

DBA Versus CFA: The Accounting Difference

It is worth drawing the comparison cleanly, because the two instruments are easy to conflate.

  • CFA (conditional fee agreement): the firm charges its normal base costs plus a percentage uplift on those costs (the success fee). The success fee is capped at 100% of base costs, and in personal injury at first instance the success fee taken from damages is capped at 25% of specified damages. The measurement base is the firm's own time, uplifted.
  • DBA (damages-based agreement): the firm takes a flat percentage of the recovery, capped at 25% (PI), 35% (employment) or 50% (other), each including VAT. The measurement base is the client's recovery, not the firm's time.

Both models defer revenue recognition under FRS 102 Section 23 until recovery is probable, so both produce a lumpy, back-loaded profit profile. The difference is the measurement base and the cap structure, and the VAT-inclusive nature of the DBA caps in particular. A firm running both models needs to keep the two sets of caps and bases distinct in its WIP and billing systems. The CFA mechanics are covered in our CFA success-fee accounting guide.

Funding the Cash Gap

Because DBA revenue lands only at recovery, the firm carries the cost of running the matter, both its own time and the case disbursements, for the whole of the contingent period. That cash gap is often bridged with matter-level funding: disbursement loans, third-party litigation funding and after-the-event insurance. Those products, and their deductibility, VAT and SRA treatment, are covered in our guide to disbursement and litigation funding, cash flow and tax. Funding eases the cash position but does not change the FRS 102 recognition point or the VAT-inclusive cap.

Practical Checklist

  1. Identify the matter type and the right cap: 25% for personal injury at first instance, 35% for employment, 50% for all other claims, each including VAT.
  2. Build the DBA so fee plus VAT fits within the cap: treat the capped percentage as the VAT-inclusive ceiling and carve the VAT out, never add it on.
  3. Apply the percentage to the correct base: the defined PI damages net of CRU for personal injury, the sums ultimately recovered for other matters.
  4. Recognise revenue only when recovery is probable and measurable under FRS 102 Section 23, not as time is spent.
  5. Carry DBA WIP conservatively, reflecting the contingency rather than full charge-out rates.
  6. Account for output VAT as the VAT fraction (1/6 at 20%) of the capped payment at the tax point, usually when you bill at recovery.
  7. Reserve for the lumpy profit, so a year of clustered recoveries does not create a tax-and-cash-flow shock.

If your firm runs damages-based agreements or other contingency work, the interaction of the VAT-inclusive caps, FRS 102 recognition and the lumpy tax profile rewards getting the systems right from the outset.

Speak to a Specialist

Damages-based agreements combine a statutory cap that few firms read correctly with a deferred revenue profile that complicates both VAT and partner tax. Every matter turns on its type, its recovery base and the precise DBA terms. Speak to a legal-sector-specialist accountant who can review how your firm accounts for contingency work, models the VAT-inclusive caps, and reserves for the resulting tax.