Cost of drafting Precedent H
PD 3E para.7.2 is a deceptively simple provision:
“Save in exceptional circumstances-
(a) the recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 1% of the approved or agreed budget”
Without any further qualification, the £1,000 figure must be taken to be inclusive of any success fee or VAT claimed. (Readers will recall a similar issue arose with the first version of the rules concerning the £1,500 provisional assessment cap. It required an amendment to allow for VAT in addition but remains inclusive of any success fee.) This means that for a costs budget of up to £100,000, the base costs recoverable (assuming a 100% success fee and VAT are claimed) would be limited to £416.67 for preparing Precedent H.
The 1% figure is more problematic.
Again, without qualification, this must be taken to include VAT and any success fee. However, Precedent H expressly excludes VAT and success fee. This would appear to mean, for example, that for an approved or agreed budget totalling £150,000 the recoverable costs are limited to £1,500 fully inclusive, even if with success fee and VAT the recoverable costs at the end of the case (once VAT and success fee is allowed) might be well in excess of £300,000.
The problems do not stop there. What is the total of the approved or agreed budget?
As explained in Cook on Costs 2015:
“There appears to be some confusion as to what constitutes the ‘approved budget’ for the purposes of the percentage calculation. As the court may only budget costs to be incurred, it seems clear that the percentage is only of the sum approved by the court/agreed by the parties as the ‘to be incurred’ costs within those phases budgeted. This view is supported by the fact that CPR PD 3E, para 7 refers back to CPR 3.15. CPR 3.15(1) makes it clear that a costs management order may only be made in respect of costs to be incurred and CPR 3.15(2) makes it clear that budget for these purposes relates to the agreed or court approved figure after revision by the court. As the court cannot revise ‘incurred’ costs’, then the agreed or approved budget seems to be “only the figures included in any costs management order.”
So, for example, a budget is prepared totalling £200,000 (excluding VAT and success fee). Of this, £50,000 represents costs already incurred and £150,000 costs to be incurred. If the budget is approved/agreed in full, the 1% is calculated on the £150,000. This equates to base costs recoverable (assuming a 100% success fee and VAT are claimed) limited to £625. All the work undertaken calculating the incurred costs is irrecoverable.
Since writing the above post, but before posting, the Senior Costs Judge Master Gordon-Saker handed down judgment in BP v Cardiff & Vale University Local Health Board  EWHC B13. In relation to the above issue, he stated:
“In my view the caps imposed by paragraph 7.2 of Practice Direction 3E include additional liabilities but do not include value added tax. In practice the only additional liability that will be relevant is a success fee.
It seems to me that value added tax also falls within the expression ‘recoverable costs’. As between the receiving party and its solicitor value added tax is tax for which the solicitor must account. As between the paying party and the receiving party it is not tax but a sum recoverable by the receiving party under the indemnity provided by the costs order (i.e. costs).
On that basis the capped ‘recoverable costs’ would include both success fees and value added tax. However it would seem highly unlikely that the intention of the Civil Procedure Rule Committee was not to follow the only other example where a cap is imposed: CPR 47.15(5). The cap on the costs of provisional assessment is £1,500, including additional liabilities, but excluding value added tax and any court fee.”
Although Master Gordon-Saker may well be correct as to what the intention of the Rules Committee would have been if they had given any thought to the issue, the fact remains that the wording of the rules is silent as to VAT being payable in addition and has not, yet, being amended to mirror the wording of the rules concerning the provisional assessment costs cap.
Master Gordon-Saker does share my views that VAT is an item of costs (thus making the £75,000 provisional assessment cap inclusive of any VAT).