Kerry Underwood

CAPPED RECOVERABLE COSTS FIGURES FOR COSTS BUDGETING ARE EXCLUSIVE OF VAT

with 12 comments


The matters dealt with in this piece are examined in great detail in my three volume, 1,300 page book Personal Injury Small Claims, Portals and Fixed Costs – price £50 and available from Underwoods Solicitors here.

These principles, and the whole issue of Qualified One-Way Costs Shifting, is dealt with in my book – Qualified One-Way Costs Shifting, Section 57 and Set-Off – Available from me here for £15.

Kerry Underwood offers consultancy services in relation to this and other matters and details are here.

In

Marbrow v Sharpes Garden Services Ltd [2020] EWHC B26 (Costs) 

the Senior Courts Costs Office considered whether the figures for the caps on recoverable costs in relation to costs budgeting and assessment include VAT, or whether VAT should be added to them.

With the VAT rate being 20%, and almost certain to rise, this makes a significant difference.

The court held that the limits set out in the rules are exclusive of VAT, and therefore VAT can be added to those figures.

Paragraph 7.2 of Practice Direction 3E provides:

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 total of the incurred costs (as agreed or allowed on assessment) and the budgeted costs (agreed or approved); and

(b) all other recoverable costs of the budgeting and costs management process shall not exceed 2% of the total of the incurred costs (as agreed or allowed on assessment) and the budgeted (agreed or approved) costs.

In

Response Clothing Limited v The Edinburgh Woollen Mill Limited [2020] EWHC 721 (IPEC)

the court was concerned with the cap on costs in the Intellectual Property Enterprise Court of £50,000 in relation to the liability aspect of the claim.

In that case the court held that the £50,000 cap included VAT.

Here the court distinguished that case on the basis that caps provided by Paragraph 7.2 set out above cannot include VAT as they are expressed as percentages of figures which do not include VAT.

All of the figures set out in a budget exclude VAT, as Precedent H makes clear.

Thus 2% of £100,000 excluding value added tax, would be £2,000 excluding value added tax.

 

Comment

This is a difficult area, and, as ever, the Civil Procedure Rules are a mess.

Nevertheless, my view is that the decision is correct for the reason given by the Senior Costs Judge, that is that if costs are expressed as a percentage, rather than a cash sum, then if the fund on which the percentage is based is net of VAT, then so must the resultant costs be net of VAT.

In any event having a VAT inclusive figure can act unfairly, as the court itself recognised in the Response Clothing case.

As I said in my write-up of that case:

“This has a curious effect. A party which charges VAT, as it is over the VAT threshold of a turnover of £85,000 does not claim VAT from the other party as it can set off the VAT against VAT received from its customers or clients.

Thus for a VAT registered business where the costs are £50,000 plus VAT, the VAT will not be claimed from the other party and therefore the full £50,000 is recovered and is all costs, with no element being VAT.

For a non-VAT registered company, the calculation will be as follows:

                                                    £

Costs                                          41,667

VAT thereon at 20%                      8,333

Total                                           50,000

Thus, as the court here recognised, smaller enterprises are unfairly disadvantaged because their net recovery of costs will be lower than £50,000, whereas larger businesses can claim the full £50,000 in costs and recover the VAT on top of that.

The court described this as “an unfortunate anomaly.”

The court suggested that the Civil Procedure Rules be amended.

This issue does not arise in fixed costs as the fixed costs sum is always net of VAT, and therefore if, for example, the fixed costs were £50,000 then that is what the other side would pay in relation to a VAT registered company, whereas in relation to a non-VAT registered company they would pay £60,000, being £50,000 plus VAT.”

 

This is all dealt with in my blog –

CAPPED COSTS IN BUSINESS CASES: THREE NEW CASES

 

Written by kerryunderwood

July 15, 2020 at 3:58 pm

Posted in Uncategorized

12 Responses

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  1. It was a succinct and well written judgement, but really if the rules are silent on VAT then it should not be allowed on top of the cap. Any doubt is supposed to be decided in favour of the paying party.

    Anonymous

    July 17, 2020 at 12:37 am

    • But the percentage is based on a VAT exclusive figure of costs. Maybe the purer way to have done it was to grosss up the original coats figure to add VAT and then apply the percentage to that VAT inclusive figure. Either way the decision is unquestionably right.

      kerryunderwood

      July 17, 2020 at 8:40 am

      • Yes, but it doesn’t necessarily follow that because one is VAT exclusive then the other must also be. At the end of the day, the judge has applied a rule which wasn’t written in the Practice Direction.

        To be honest, I wouldnt allow any costs to be reclaimed for the Precedent H or budgeting exercise. The costs of accounting for costs and preparing bills are part of the inevitable cost of running a business and shouldn’t be passed onto the other side in litigation. I struggle to think of another business where so much time can be spent budgeting for costs with someone else being asked to pay. If I hired a builder, for example, I wouldn’t expect to have to pay for their time on estimating or preparing a bill.

        Anonymous

        July 17, 2020 at 5:15 pm

      • I disagree.

        If capped costs are to be expressed as a percentage of a sum, then if those capped costs are to include VAT, then VAT must also be added on to the sum on which they are based.

        Your second paragraph fundamentally misunderstands the process.

        Along with every lawyer in the land, I would more than happily jettison budgeting. This is not budgeting for one’s own client – this is a budget so that the other side can see, and challenge, the level of costs.

        It is totally different from a builder preparing a quote for his own customer.

        Uniquely, every single client can always challenge a solicitor’s bill for any or no reason by bringing Solicitors Act 1974 proceedings. That is an absolute right, even if there is no suggestion at all that the solicitor has done anything wrong.

        No other profession or trade is subject to that discipline.

        For that exercise – that is preparing a budget and quote for one’s own client, we cannot make a charge.

        Personally, I would bring in fixed recoverable costs for everything, which would take out the time and expense of budgeting. I do agree with you to the extent that this is an additional and unnecessary layer of expense in litigation.

        Kerry

        kerryunderwood

        July 23, 2020 at 11:50 am

      • It could be argued in theory that VAT should be added to recoverable costs, but the problem is that the rules are silent on this point. If a judge then decides that VAT can be recovered in addition, they are adding something to the rules which isn’t there. The proper way to remedy this, if remedy is needed, would be for the rules to change.

        On the costs of budgeting, in practice what this involves is the receiving party formalising and attempting to justify the maximum amount it can recover. The benefit is to the receiving party and it should be to them, or their client, that the cost falls.

        Agree that fixed costs would go a long way to resolving things though, although I’d probably go further and have the ‘fixed cost as a maximum recoverable cost.

        Anonymous

        August 5, 2020 at 8:33 am

      • I disagree. I think that the context of the sum on which the percentage is based is determinative. For example, the success fee percentage in personal injury matters, that is the capped percentage of damages to be taken into account, is specifically stated to include VAT, even though the amount that it is levied on does not include VAT.

        Where the rules are silent, as they are here, then, in my view, it is entirely reasonable to look at the original fund and if that includes VAT, then so should the costs, but if the fund is VAT-exclusive, then the costs should be as well.

        The problem with what you say about budgeting is that there is no reason why a successful client in litigation should be forced to pay the costs of something forced upon it by the court, and something that the client did not want.

        I disagree with capped costs, as compared with fixed costs. Capped costs rarely work as fees simply rise to meet the cap, whereas fixed costs encourage and reward efficiency.

        Kerry

        kerryunderwood

        August 6, 2020 at 3:09 pm

      • There is definitely an argument (although not one that I would necessarily agree with) that VAT should be added to recoverable costs here. The problem is that the rules don’t say this, and in my view a judge is going beyond their powers in adding something to the rules which isn’t there, doubly so if it is to favour a receiving party. It could be the rules need changed, but the existing rules don’t mention VAT.

        With regards to budgeting, if the client doesn’t want it and the opposite side doesn’t want it, then it ought to be absorbed by the solicitors. This is a ‘sunk’ cost which is part of running a business and provides no service to the client or opposing party. The client or the opposing party wouldn’t be expected to pay for the solicitor’s filing of a tax return or annual accounts, and it is a basic fairness that anyone being asked to pay for something is provided free of charge with a breakdown of costs. Law is almost unique in charging (sometimes large amounts) for providing a bill.

        While fixed costs would be more efficient than what we have now, capped costs would be more efficient still, as there would be an incentive to reduce costs further via looking at ways to reduce costs or via technological innovation. Fixed costs could also in some cases be unfair, for example, if a piece of work had an attached fixed cost of £100 but could be completed for £50, it would be unfair for the paying party to have to pay the higher amount.

        Anonymous

        August 9, 2020 at 9:13 am

      • I agree that the Rules need clarifying; that applies to a significant number of the Civil Procedure Rules.
        Budgeting is compulsory; the parties cannot opt out. There is a world of difference between preparing a quote for a client, for which no charge can be made, and going through the court budgeting exercise, which includes a court hearing.
        You can’t have it both ways; capping costs but not fixing them is a bit like ordering a suit for a fixed price and then expecting that price to be cut if the tailor has been efficient.

        Kerry

        kerryunderwood

        August 9, 2020 at 10:51 am

      • I agree that the budgetary process is more involved than providing a quote to a client, but nonetheless in my view the cost of this process should be borne by the solicitor, ot if they agree, the client, not in any circumstances by the other side.

        A main difference between fixed costs and recoverable costs is that with the latter any efficiency savings are enjoyed by the paying, rather than the receiving party. The analogy I would use is that of a builder who is given a maximum budget for a project, but if they come in under budget then the cost is reduced accordingly. I recognise though that while capped costs are cheaper for the paying party they involve less certainty. I should say that I propose capped costs in relation to what can be recovered from the other side – solicitors and clients should be able to agree a fixed cost if they so wish, as in your tailor analogy.

        Anonymous

        August 10, 2020 at 8:16 am

      • Lawyers are deserting this work in droves because of the low fixed costs – let alone capped costs.
        Kerry

        kerryunderwood

        August 10, 2020 at 8:22 am

      • There is an over-supply of lawyers so any slack would be picked up. Successful lawyers would still be able to earn a good income with capped costs, it would just be more closely aligned to work done.

        Anonymous

        August 10, 2020 at 8:56 am

      • Disagree.

        kerryunderwood

        August 10, 2020 at 10:01 am


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