July 23, 2025
Article
In May 2025 the Legal Aid Agency (LAA) was the victim of a cyber-attack. As a result their digital services were taken offline so the LAA cannot access and pay Legal Aid claims in the normal way. Instead contingency payments can be claimed by Legal Aid Providers and counsel..
There is some uncertainty over the VAT treatment of contingency payments from the LAA. VAT is normally due on fees when payment is received or when a VAT invoice is issued - whichever comes first.
The crux lies in whether these payments are considered loans or advance payments for legal services. If treated as advance payments, VAT becomes due as soon as a contingency payment is received.
There are some factors which suggest these could be treated as loans, if they are not directly related to an ongoing service and will be repaid once the system outage is resolved, with no VAT payable on receipt.
There are other factors which suggest the contrary, e.g. VAT is included when calculating the value of the payment and it should only be claimed if there are sufficient claims to justify the contingency payment.
It is understood HMRC currently view these as payments for services and VAT should be accounted for on them. Presumably HMRC expect a VAT invoice to be issued in respect of each payment received and an adjustment made when the correct fees are calculated in due course
Ultimately, the contingency payments will be repaid and replaced by a final payment under the Legal Aid scheme. The VAT issue should only be a matter of timing.
If you’d like help reviewing contingency payment treatment in your practice, we are here to support.