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VAT doesn’t count for costs

15 July 2020
Issue: 7895 / Categories: Legal News , Costs , Profession
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The costs of budgeting and costs management do not include VAT, the Senior Costs Judge has held in an important decision for costs lawyers

The issue of VAT arose in Marbrow v Sharpes Garden Services Ltd  [2020] EWHC B26 (Costs), a personal injury claim for a workplace accident with a hedge cutter that settled shortly before trial. The defendant agreed to pay the claimant’s costs.

According to para 7.2 of Practice Direction 3E, ‘save in exceptional circumstances, the recoverable costs of initially completing Precedent H (the costs budget) shall not exceed the higher of £1,000 or 1% of the total of the incurred costs and the budgeted costs’, and ‘all other recoverable costs of the budgeting and costs management process shall not exceed 2%’.

The defendant argued the caps must include VAT because they were not expressly stated to be otherwise.

However, Senior Master Gordon-Saker disagreed.

‘To my mind the caps provided by para 7.2 cannot include VAT because they are expressed as percentages of figures which do not include VAT,’ he said.

‘All of the figures set out in a budget exclude VAT―as Precedent H makes clear. Two per cent of £100,000 excluding VAT, would be £2,000 excluding VAT.’ To be otherwise would require ‘stating expressly’, he said.

He noted the leading textbooks, Cook on Costs and Friston on Costs, with Friston stating Precedent H was ‘designed in such a way as to discourage VAT being recorded therein, so it would seem odd if the costs were payable on a VAT-inclusive basis’. He cited Friston’s point that ‘if it were not a VAT-exclusive limit, then a VAT-registered litigant would have the advantage over a non-VAT registered litigant―and that would be a curious state of affairs’.

Claire Green, chair of the Association of Costs Lawyers, said: ‘From a common-sense perspective, this is the right decision.

‘It is inconceivable that the sum allowed would vary with any change in VAT. This is a significant decision for costs lawyers working both independently and in-house at law firms. The budgeting work our members do is invaluable to their clients and this ruling will ensure that it is properly remunerated.’

Issue: 7895 / Categories: Legal News , Costs , Profession
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