The High Court, Gauteng Local Division, considered in a recent case (case No 2012/21359, 31 August 2016) whether an agreement in terms of which a legal practitioner charged contingency fees to a client under the Contingency Fees Act, No 66 of 1997 (the “CFA”), is valid. The court also considered whether the practitioner was entitled to levy value-added tax (“VAT”) in addition to the maximum fee of 25% provided for in the CFA.
The case involved an attorney who assisted his client with a claim against the Road Accident Fund. The attorney entered into an agreement with the client which stipulated that if the client is successful with his claim, the client shall pay a fee calculated at 25% (exclusive of VAT) of the total amount awarded or obtained by the client in consequence of the legal proceedings. The agreement further stipulated that the total amount charged will therefore be 25% on all amounts awarded or recovered, that VAT at 14% and disbursements will be added to the fee, and that the balance of the amount awarded or recovered will be paid to the client.
Section 2(2) of the CFA provides for a legal practitioner to charge a fee in excess of the normal fees which shall not exceed 100% of such normal fees. The proviso to section 2(2) stipulates that, in the case of claims sounding in money, the total of any such excess shall not exceed 25% of the total amount awarded or obtained by the client in consequence of the proceedings concerned, and which amount shall not, for purposes of calculating such excess, include any costs. The CFA is silent on VAT.
Firstly, the court considered whether the agreement with the client in terms of which the attorney charged a fee of 25% of the capital amount awarded to the client was lawful and a valid agreement in terms of the CFA. Having considered the provisions of the CFA, and various principles and authorities, the court concluded that the agreement between the attorney and his client was unlawful and was therefore invalid.
The court also considered, in the event that its conclusion regarding the validity of the agreement was incorrect, whether the attorney was entitled to charge VAT in addition to the 25% fee. A number of important VAT principles were highlighted by the court in considering this aspect, which can also be applied in determining whether fees provided for in other statutes are inclusive or exclusive of VAT.
The court considered the provisions of section 64 and 65 of the Value-Added Tax Act, No 89 of 1991 (“the VAT Act”). Section 64 provides that any price charged by a vendor in respect of a taxable supply of goods or services, is deemed to include VAT, whether or not the vendor has included VAT in the price. Section 65 stipulates that any price advertised or quoted by a vendor for a taxable supply of goods or services shall include VAT and the vendor shall state in his advertisement or quotation that the price includes VAT, unless the amount excluding VAT, the VAT amount and the amount inclusive of VAT is advertised or quoted by the vendor.
Mojapelo DJP stated in his judgment that section 65 of the VAT Act makes it clear that any price advertised or quoted by a vendor includes VAT. The only situation where the price advertised or quoted does not include VAT, is when the three components of the price are specified separately, ie the amount excluding VAT, the VAT amount and the amount inclusive of VAT.
The court also referred to section 7(2) of the VAT Act, which provides that VAT levied in terms of section 7(1)(a), is payable by the vendor that makes the taxable supply, and concluded that VAT is a tax on the supplier and not on the client. The court stated that the price may be structured to account for the VAT payable by the supplier, but the client does not pay VAT. The price charged by a vendor is, therefore, always inclusive of VAT, irrespective of how the price is structured or quoted.
As further support that the price always includes VAT, Mojapelo DJP referred to section 10(2) of the VAT Act, which stipulates that the value to be placed on a supply of goods or services, is the consideration for the supply less so much of the amount that represents VAT. The VAT portion included in the consideration payable by the client therefore only represents VAT, but is not in fact VAT. It is the obligation of the supplier to pay such VAT to the South African Revenue Service (“SARS”), less any input tax to which the supplier may be entitled to. The relationship between the supplier and SARS is one of debtor and creditor, and not one of agency where the supplier collects VAT on behalf of SARS, as confirmed in the case of Director of Public Prosecutions, Western Cape v Parker.
The court further referred to the judgment in Mofokeng v Road Accident Fund in which it was held that only out-of-pocket expenses may be recovered above and beyond the 25% cap provided for in the CFA. The court made it clear that VAT is not an out-of-pocket expense for the supplier, because the consumer ultimately bears the burden of VAT. In this case, the attorney does not bear any VAT as the VAT is included in the fees that the attorney is entitled to recover from the client.
Based on this analysis, the court held that, even if it was lawful in terms of the CFA to charge a fee equal to 25% of the total amount awarded to the client, the attorney was not entitled to levy VAT in addition to the 25% cap imposed by the CFA, notwithstanding the agreement between the attorney and the client.
This judgment provides important guidelines as to whether any fees prescribed or limited by statutes or regulations are VAT inclusive or exclusive, and also generally whether a supplier is entitled to levy VAT in addition to a price stipulated in an agreement, a price advertised or quoted.