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VAT on legal costs

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The recent Court of Appeal decision in BA Plc v J Prosser [2019] EWCA Civ 547, in which a mere £189 of VAT was in dispute, could have wider cost implications for insurers, solicitors, claimants and defendants in personal injury cases.

The appeal concerned the VAT treatment of costs incurred by Mr Prosser, in the course of making a personal injury claim against BA. The court found in favour of Mr Prosser in the original case, for which Mr Prosser was entitled to receive damages and reimbursement of his ‘reasonable disbursements’.

The dispute centred on the VAT treatment of the disbursements. Mr Prosser, as a private individual, was not able to recover the VAT, nor was BA or its insurer. Any settlement would therefore be on a VAT-inclusive basis.

In the course of establishing Mr Prosser’s claim, his solicitor obtained his medical records and commissioned a medical report, facilitated by a medical reporting intermediary. Although the medical experts preparing these reports did not charge VAT, the costs were passed through the intermediary with VAT added, on the basis that the intermediary had used the reports to supply a broader service to Mr Prosser and his solicitor. BA objected to this ‘extra’ VAT.

The Court of Appeal was asked to consider two points:

  • Was the claim for disbursements ‘reasonable’ if it included VAT that was not properly chargeable? In this regard, the court concluded that it would be excessive to require the claimant’s solicitor to investigate the VAT treatment of each supply – unless the VAT amount was large and there was ‘significant’ uncertainty regarding the VAT treatment; and
  • Was the medical reporting company acting as more than an agent/postbox in commissioning the reports? Here the decision followed earlier cases – the solicitor/claims handler incurred the expenses in order to inform their advice to the client – making it all subject to VAT.

In summary, the Court of Appeal found that VAT had been charged correctly by the medical intermediary. However, even if it had not, the defendant could not use the reasonableness test for cost settlement to compel the claimant’s solicitor to investigate and challenge the VAT treatment applied – unless the VAT at stake was significant and there was material uncertainty regarding the liability.

Although this case did not involve HMRC, it shines a light on the growing complexity of the claims-handling and accident-management sector, which has seen increasing levels of scrutiny from HMRC in recent years. With thousands of claims being made each year, it will be of interest to insurers, solicitors and those taking and defending claims.

This decision will increase the irrecoverable VAT in the supply chain and the cost to insurers. It also confirms that there is limited opportunity for a third party to use the claims settlement legislation to challenge the VAT treatment of a supply it did not receive but is obliged to pay for.

Rowena Clifton, RSM UK (RSM’s Weekly Tax Brief)

Issue: 1440
Categories: In brief , VAT