Legal Costs Specialists – Gibbs Wyatt Stone

VAT and provisional assessment

I’ve commented before on Regional Costs Judge Middleton’s view that the £75,000 provisional assessment limit does not include VAT.

He expands on this in the White Book supplement Costs & Funding following the Civil Justice Reforms: Questions & Answers.

“Q8. Does the £75,000 limit for provisional assessment include or exclude VAT?

This is a purely procedural point. CPR 47.15 and its PD provisions describe the limit of £75,000 as being in respect of costs. The definition of ‘costs’ in CPR 44.1 does not include a reference to VAT – in fact, VAT is defined separately in the same rule. Accordingly, it seems that the £75,000 limit does not include VAT and refers to the total profit costs and disbursement sum.”

CPR 44.1 is actually headed ‘Interpretation and application’ rather than ‘Definitions’.

‘Costs’ is defined as:

“‘costs’ includes fees, charges, disbursements, expenses, remuneration, reimbursement allowed to a litigant in person under rule 46.5 and any fee or reward charged by a lay representative for acting on behalf of a party in proceedings allocated to the small claims track”

‘VAT’ is defined as:

“‘VAT’ means Value Added Tax”

It is actually rather a stretch to say this “defines” VAT. It does no more than explain, if it was not otherwise self-evident, what the abbreviation stands for.

This section also defines ‘fixed costs’:

“‘fixed costs’ means costs the amounts of which are fixed by these rules whether or not the court has a discretion to allow some other or no amount”

I believe this highlights Regional Costs Judge Middleton’s error. There can be no doubt that ‘fixed costs’ falls within the wider definition of ‘costs’ even if it is also given its own separate definition. ‘Fixed costs’ is simply a subcategory of ‘costs’. Equally, ‘VAT’ is also a subcategory of ‘costs’. The definition of ‘costs’ is not an exhaustive list, it simply states some of the subcategories it includes. ‘VAT’ clearly falls within ‘charges’ in any event. HM Revenue & Customs’ guides use the word ‘charge’ in relation to VAT (eg “You should charge VAT at the rate of 20 per cent on any sales of standard rated goods or services that you make on or after 4 January 2011”).

In any event, as previously mentioned, if I am wrong about this and VAT is not included within the definition of ‘costs’, on what basis can VAT be recovered on the back of an order for ‘costs’ alone?

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Simon Gibbs

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9 responses to “VAT and provisional assessment”

  1. Peter Burdge avatar
    Peter Burdge

    A similar point would seem to arise in relation to the costs of the budgetary process. PD 3E states at 2.2 ‘Save in exceptional circumstances – (1) the recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 1% of the approved budget; (2) All other recoverable costs of the budgeting and costs management process shall not exceed 2% of the approved budget.’

    If a budget has been set and the 3% allowed, when it comes to the preparation of the bill at the end of the case, if RCJ Middleton’s logic is followed, it would seem to be possible to claim VAT in addition. Maybe this argument is reinforced by the fact that the standard Precedent H specifically excludes VAT from the figures set by the budget.

    Does anyone have experience of what is allowed in practice in this situation?

    Reply
  2. Functus Officio avatar
    Functus Officio

    At the risk provoking the usual vituperative response from the usual quarter, I aired my views….. on VAT, being a Government Tax, is thus not an item of costs….on a previous Blog posting and replies on 11th May 2015 . Until this aspect is considered and finally resolved, then everyone will permanently pulling in all the wrong directions.

    Reply
  3. Simon Gibbs avatar
    Simon Gibbs

    Functus Officio, I did try to deal with this point previously. Even if you are correct, the problem remains: by what route is VAT therefore recoverable between the parties if VAT is not an item of costs?

    There are three issues to consider:

    1. What taxes (eg VAT) is a solicitor obliged to charge his client for services rendered?
    2. What does the final order (ie the order for costs) cover?
    3. What items can a judge carrying out an assessment of “costs”, of the order made under 2 above, allow or disallow?

    If VAT is included within “costs”, there is no difficulty: a solicitor is obliged to charge his client VAT, an order for costs includes any applicable VAT payable by the client and a judge on assessment can allow the VAT element between the parties.

    However, if VAT is not an item of costs (because, as you say, it is a Government Tax, or because, as RCJ Middleton says, it is not included within the definition of “costs” in the CPR), then it follows that a normal order (made under 2 above) that Party A pays Party B’s “costs of the action” does not include an order for payment of any VAT. So what, if, by virtue of 1 above, the solicitor is obliged to charge his client VAT? A judge on assessment can only allow that which is covered by the order made under 2. A costs judge has not separate powers to order Party A to pay Party B’s tax liabilities or Party B’s solicitor’s tax liabilities.

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  4. Peter Burdge avatar
    Peter Burdge

    Sorry (a) to have reopened old wounds and (b) to have missed the earlier exchange of 11 May (my excuse being that I was on holiday at the time, which included having a holiday from costs).

    As those who draft the rules sometimes give the impression of having little interest in seeing that they work, there’s not much point in waiting for official clarification. I think I’ll just try adding VAT to the budgetary costs and see what happens.

    Reply
  5. Functus Officio avatar
    Functus Officio

    Simon 12/08/15 @ 6.07pm.
    I would hate to add to my ( I think ) 7 replies posted on 12th and 13th May. but if you re- read them and take them as a whole, I think they deal with your points overall, but in a possibly different order as they were answering points as they arose then.

    Reply
  6. King of Costs avatar
    King of Costs

    The PA limit doesn’t really matter anyway, more and more points of dispute pleading ‘The paying party is very concerned with the level of costs sought and requests this matter is listed for a detailed assessment’.

    Reply
  7. avatar
    Anonymous

    who cares? fixed costs and J-codes will put you all out of a job soon anyway, so you will have all the time you like to reminisce over how you endlessly arguing over irrelevant minutiae like this meant the Powers that be eventually got rid of you

    enjoy your dotage

    Reply
  8. Peter Burdge avatar
    Peter Burdge

    Enjoyment of my dotage has been augmented by a helpful judgment of the Chief Costs Judge in BP v Cardiff & Vale University Local Health Board, which can be found on BAILII. He answers my question about whether the capped costs of the budgetary process are inclusive or exclusive of VAT as follows:

    ‘The costs of the budgeting and costs management process

    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.
    Although the present, non-exhaustive, definition of costs (CPR 44.1(1)) does not expressly include additional liabilities it seems to me that any success fee claimed on work done in relation to the budgeting and costs management process must be part of the “recoverable costs” for the purposes of paragraph 7.2. For, if it is not part of the recoverable costs, what is it?
    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.’

    No doubt Simon will wish to comment on the other aspects of the judgment.

    Reply
  9. Cost of drafting Precedent H | Legal Costs Blog

    […] Hurst does share my views that VAT is an item of costs (thus making the £75,000 provisional assessment cap inclusive of any […]

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