Contingency fees and third party consideration

Do statutory payments made by the losing party in litigation to the lawyer of the successful party amount to third party consideration for VAT purposes? For payments to amount to consideration, they must be a direct link between the service and the payment. This normally requires some contractual or other mutual obligation for payment between the recipient of the service and service provider, but in the case of TPT v Financial Bulgaria EOOD (Case C-744/23) the lawyer had provided their services to the successful litigant on a pro bono basis. Nevertheless, the Bulgarian statutory rules included a provision entitling the lawyer to be paid a fee by the losing party in these circumstances. Was this payment consideration for the lawyer’s services provided to the successful litigant?

The CJEU has held that the payment was consideration for those services and, as such, subject to VAT. TPT’s lawyer was a taxable person, provided services to TPT under a contract providing for reciprocal performance and received a payment calculated by reference to those services from the losing party under the Bulgarian statutory provisions. Therefore, the situation clearly met the definition of a supply for consideration. Neither the fact that the payment was required by legislation, came from a third party or was contingent on the outcome of the litigation prevented the existence of the necessary direct link.

FBE had argued that the uncertainty around the payment (which depended on the outcome of the litigation) prevented there being the necessary direct link between the payment and the services for it to amount to consideration. In doing so, it had relied on the CJEU decision in Bastova (Case C-432/15) concerning whether the entering of a horse by its owner in a horse race amounted to a taxable service. In particular, the Court had indicated that the award of any prize money could not be consideration for such a supply on the basis that the award of the prize is subject “to a degree of uncertainty”. The CJEU has now clarified that aspect of the decision in Bastova (Case C-432/15), noting (in line with the AG’s opinion) that “prize money paid out due to the placing of the horse at the end of the race cannot be regarded as consideration for the entry of the horse into the race as it is not the provision of the horse that leads to the payment of the prize money, but the achievement of a particular result at the end of the race. In effect, the payment of the prize is not made for any service, but for winning (and winning is not a service).