Is VAT included in provisional assessment cap?


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At the panel session of last week’s Association of Costs Lawyers’ Annual Conference I was surprised when one delegate seriously asked if the £75,000 figure for provisional assessment included or excluded VAT.

However, my gast was truly flabbered when Regional Costs Judge Simon Middleton expressed the firm view that it excluded VAT (meaning he provisionally assesses bill well in excess of £75,000) and none of the other panel members contradicted him.

His reasoning appeared to be by reference to the definitions under CPR 44.1:

“‘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”

As VAT is not mentioned, he concludes it is therefore not an item of costs.

If this is true, on what basis does a party who has a successful costs order in their favour recover VAT? Surely you would also need a specific order awarding VAT in addition to costs. Where a deemed order for costs is made (following acceptance of a Part 36 offer, for example) there would never be such an order for VAT in addition (CPR 44.9 is entirely silent as to any entitlement to VAT).

I’ve been known to advance some optimistic arguments in my time, but even I would struggle to keep a straight face defending Points of Dispute that read:

“The Defendant notes the claim in the Bill of Costs for VAT. The final order is: ‘The Defendant do pay the Claimant’s costs of this action to be assessed if not agreed’. There is no separate order for the Defendant to pay VAT and the Court accordingly has no jurisdiction to assess or allow VAT. Disallow VAT.”

It also makes a nonsense of certain parts of PD 44:

“2.2     The number allocated by HMRC to every person registered under the Value Added Tax Act 1994 (except a Government Department) must appear in a prominent place at the head of every statement, bill of costs, fee sheet, account or voucher on which VAT is being included as part of a claim for costs.

2.3       VAT should not be included in a claim for costs if the receiving party is able to recover the VAT as input tax. Where the receiving party is able to obtain credit from HMRC for a proportion of the VAT as input tax, only that proportion which is not eligible for credit should be included in the claim for costs.”

Why the express reference to VAT being included “as part of a claim for costs” and “included in the claim for costs” if VAT is separate from costs?

I also note that Cook on Costs 2015, that DJ Middleton co-authors, states:

“Form H also stipulates that certain costs are specifically excluded from the budget. These are set out on page 1 of Precedent H and are VAT (where applicable)…”.

Why would this need to be mentioned if VAT is not a head of “cost”?

I’m sorry, but VAT is an element of costs (CPR 44.1 containing a non-exhaustive list of elements included within the definition, not an exhaustive one) and the £75,000 provisional assessment cap includes any VAT claimed.


21 thoughts on “Is VAT included in provisional assessment cap?


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    Anonymous on said:

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    cheers Simon, just amending my firms completely standard template PODs now…….


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    JP on said:

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    Simon, the Regional Costs Judge in our area will only proceed with a Detailed Assessment if the costs claimed are £75,000.00 PLUS vat!


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    Money for Nothing on said:

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    Ah well, at least we know that we can rely on the consistent inconsistency!!


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    Charles Wheatcroft on said:

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    Whilst your conclusion is undoubtedly correct it is a nonsense to be inclusive of VAT.

    Let us take two identical claims for costs of £75k.

    In the first instance the client cannot reclaim VAT therefore VAT is added to the £75k. In the second instance the client can reclaim VAT therefore the bill is for only £75k.

    Does it make sense for one bill to be provisionally assessed and the other to go to detailed assessment?

    If a party cannot reclaim VAT there can be no possible point of dispute against claiming VAT. Unless, that is, you wish to bring up proportionality in which case should VAT figure in proportionality arguments?

    It would be grossly unfair if a non VAT registered person were to embark upon successful proceedings yet be caught clobbered by disproportionate costs due to VAT whereas the registered person/company would not (yet still be able to recover the VAT but from a different source).


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    Paul on said:

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    I’ve never had this come up at the Costs Office!

    There it’s always been (in my experience anyway) the total sum on the N252 that decides it.

    It does raise an interesting point about VAT registered receiving parties though. If a party cannot claim Vat because they are registered should the limit be different in those cases?


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    Timothy P on said:

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    Regional Costs Judge Simon Middleton expresses the same view in his response to “Q8″ at paragraph 9-24 on page 162 of a book entitled “Costs & Funding following the Civil Justice Reforms: Questions and Answers” that was recently published by Practical Law and distributed (free of charge) with “Civil Procedure” (The White Book) 2015.


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    Functus Officio on said:

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    I suggest that as VAT is a Government Tax it cannot be deemed to be included in the definition of ” costs ” mentioned. A Costs Judge has no discretion on VAT. To coin a phrase, VAT ” follows the event “. If a party can recoup it via the usual route of input/output tax and no objection is made, then the present practice applies and vice versa. All this is confirmed in the very early ( old, but still good ) Practice Directions which state that any dispute as to the chargeability of VAT must be referred to HMRC ( as they are now ) for adjudication/decision with the Costs Judge merely rubber stamping that ruling.
    It must follow that £75,000 excludes VAT


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    Simon Gibbs on said:

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    A judge certainly has discretion over VAT. For example, PD 44 para. 2.8: “In any case in which an election to charge at the lower rate is not made, such a decision must be justified to the court assessing the costs”.

    The definition of “costs” includes “charges”. If a client asks me what my charges are, I might say £x plus VAT or £x inclusive of VAT. The fact I have to charge VAT (because it is a Government tax) does not mean it is not a charge.


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    Functus Officio on said:

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    Simon@2.09pm.
    We must not confuse an administrative convenience ( to be commended ) with a legal jurisdiction. A Costs Judge, to repeat, has no authority/ discretion over Government Taxes


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    Simon Gibbs on said:

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    A judge also has no discretion over the level of court fees that have to be paid. That does not mean court fees are not “costs”. But, regardless of that, if VAT is not an item of “costs”, on what basis is it recoverable following a costs order?


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    Functus Officio on said:

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    Simon@2.48pm
    By Tax Legislation. The Costs Judge merely acts in the collection process to enable a registered / non registered entity to complete that process


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    Anonymous on said:

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    This appears to be the same issues which caused confusion as to what was and what was not included in the £1,500.00 cap for Provisional Assessment (see Simon’s post dated 16/08/13). If it is not spelt out clearly, people will always seek to impose their own interpretation where ambiguity exists. A further alteration to the Practice Direction needed perhaps?

    Did anyone else who attended the conference feel that the female judges sat at either end of the panel were not given an opportunity to say much during the debate?


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    Simon Gibbs on said:

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    Functus Officio, what “Tax Legislation” states, for example, that a deemed costs order is also deemed to include an order for VAT? The fact that a solicitor is required to “charge” his client VAT on his fees does not make it payable between the parties if VAT is not part of the “costs”. A costs judge is not a tax collector. He simply determines what “costs” are recoverable between the parties. This is what is at the heart of the problem with DJ Middleton’s interpretation. If VAT is not part of the recoverable “costs”, how does a liability to pay VAT between the parties arise (as opposed to any obligation by the client to pay his solicitor VAT)?


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    Functus Officio on said:

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    In short, VAT is incurred by anyone providing services, subject to being registered etc…It matters not if there is a deemed order or an actual order. The liability arises under the relevant Goods and Services / VAT legislation. The inter partes costs are merely a contribution to the client’s liability to his own Solicitor. The Costs Judge is not a tax collector; I said he acts in the collection process by virtue of his role in determining the costs payable by the losing party; he has no legal jurisdiction over VAT.


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    Anonymous on said:

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    Functus Officio, you make a very bad point. I have had VAT disallowed in bills and on disbursements, simply because the fool on the other side didn’t supply a VAT number (that’s where the real legislation lies). The Judge has complete discretion as to costs, and what it allows (using an example of Simon’s re: Court fees, they are fixed; doesn’t mean just because they are paid, they get recovered as claimed); the fact a VAT registered entity or person may have to account to HMRC for VAT, does not mean the Court has to allow it, and therefore it must be an item of costs which the £75k cap fits


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    Functus Officio on said:

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    Simon@5.37pm May 12th
    I did post/blog in reply but there must have been a hitch………so for brevity. VAT on costs ” follow the event ” as stated. They are incurred under the various Goods and Services/VAT enactments wherever a registered person provides services etc….Thus VAT is not an award by the Court; this therefore deals with your point on deemed orders.
    The inter partes costs are a contribution to the client’s liability to his own solicitor’
    Back to Basics ?


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    Northern costs monkey on said:

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    CPR 47.15 applies when the costs claimed are the amount set out in PD 14.1 which in turn says it applies when costs are £75,000. PD 5.10 states if VAT is to be claimed as part of the costs, then the VAT number must be specified. As such, £75,000 is inclusive of VAT as it is a head of costs. One must remember that the Defendant is not paying VAT but is indemnifying the costs to which the Claimant is liable to pay. Where C is liable to pay VAT as part of the costs, D has to indemnify them. I agree with Simon.


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    Functus Officio on said:

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    Anonymous @9.37am
    The VAT you mentioned was seemingly disallowed because of a breach of the relevant PD and not because of the merits of its’ chargeability. That is not a discretion being discussed.
    The complete discretion as to costs you mention predicates that VAT is an item of ” costs” as defined in P47. You know my position on that ( above )
    Court Fees are a ” disbursement ” in the latter definition and so are covered.
    As to the Court “allowing ” VAT ( as you mention) tells me you have not followed my central point. The Court does not allow ( or disallow ) VAT ; it is a mandatory Tax under the legislation mentioned.
    The “item of costs “you mention….ditto my previous points.


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    Anonymous on said:

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    @Functus Officio
    No, it was disallowed for breach of VAT regulations, not any PD.
    I follow your points very well, just do not agree with them.
    Perhaps you might fare better understanding others viewpoints, if you stepped off of your soapbox and stopped attempting to preach… or is that mandatory with you too?


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    I'm just 'Form H'appy on said:

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    I will always be amazed by the Costs profession’s ability to argue about nothing forever…..

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    VAT and provisional assessment | Legal Costs Blog

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