VAT – Yet again

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My post on Tuesday, concerning the change in VAT rates, confirmed two things.  Firstly, how mind numbingly boring a topic it is.  Secondly, how much difficulty this is causing law costs draftsmen, solicitors and others.  The number of comments, both on the Legal Costs Blog and in emails I received, indicates that some readers are still not convinced by the analysis I gave.  Whether dealing with a high value claim or large volumes of low value claims, this extra 2.5% is important. 

I will therefore make one final attempt to set out the basic position as I understand it and hope never to have to write on the subject again. 

I am going to make one important assumption here (and readers may think this is sensible or not), namely, that the Law society and Bar Council have got the basic position right. 

I think the problem that many have with this issue is getting themselves bogged down in worrying over issues concerning the “basic” tax point and “actual” tax point.  These issues are no doubt important under ordinary circumstances, but a change in VAT rates results, at least on this occasion, in special “change of rate rules”.  This is the important issue to understand. 

The Law Society Practice Note is clear on this: 

“Under the normal rules, standard rated supplies with tax points created by payments received or VAT invoices issued on or after 01 January 2010 will be liable to the 17.5 per cent rate. However, there are optional change of rate rules that you may wish to apply: 

  • Where you issue a VAT invoice or receive a payment on or after 01 January 2010 for work that was completed before 01 January 2010 you may account for VAT at 15 per cent.
  • Where work commenced before 01 January 2010 but will not be completed until on or after 01 January you can apportion the supply between that liable to 15 per cent and that liable to 17.5 per cent.” 

Therefore, for a typical CFA funded case, with no interim invoices, you can charge VAT at 15% for the work done during the period the rate was 15%.   

The Bar Council has issued a Guide for barristers that deals with the matter in a similar manner: 

“There is, however, a special rule that applies on a change of rate. This applies where a service is provided before the change of rate but, under the special rules above, the tax point falls after the change of rate. The barrister may then elect for VAT to be applied at the original rate. In other words, a barrister who receives a fee on or after 1st January 2010 for work done before that date (but after 1st December 2008) can choose whether to charge 15% or 17.5%. A barrister paid after 1st January 2010 for work done before 1st December 2008 (the date on which VAT decreased to 15%) would have to charge 17.5%.            

In practice, this means as follows: 

(a)        Where the fee is received between the 1 December 2008 and 31 December 2009 in respect of work carried out during that period, VAT will be due at 15%. 

(b)        Where the fee is received between the 1 December 2008 and 31 December 2009 in respect of work carried out before the 1 December 2008, then VAT can be charged at 15% or at 17.5%. 

(c)        Where the fee is received on or after 1st January 2010, VAT will be due at 17.5% unless: 

i)        The relevant work was carried out before 1st January (and on or after 1st December 2008); and

ii)       The barrister so elects.”

Again, ignoring issues of tax points, if the work was undertaken between 1 December 2009 and 1 January 2010 it is possible to charge at 15% for that work, regardless of when the invoice is raised or paid.

Both the Law Society and Bar Council refer to being able to opt/elect as to which rate to apply.  This is where we come back to CPD 5.8: 

It will be assumed, unless a contrary indication is given in writing, that an election to take advantage of the provisions mentioned in paragraph 5.7 above and to charge VAT at the lower rate has been made. 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.”

This is no more than a reflection of the principle that a party should mitigate their losses.  If a lower rate can be charged, it normally should be.  It is hard to imagine where it would be reasonable to charge the higher rate.

One reader of the earlier post on this subject commented: 

“It’s interesting to note that this has only become an issue for defendants since the VAT rate has reverted to 17.5%!!!!!!!!  Nothing at all was heard about breaches of the CPD / defective bills etc whilst claims for costs were being presented to paying parties with VAT claimed at 15% throughout even when the work done covered pre and post 01.12.09!!!!!!!  Strange that!!!!"

Not particularly strange, although no doubt true.  When the rate was 15%, a receiving party could elect to charge 15% on all work if the claim settled between 1 December 2009 and 1 January 2010, including work undertaken before 1 December 2009 (assuming no interim invoices).  Although a bill not drafted showing the split between the various periods was still, probably, technically defective, there was no point in complaining from a paying party’s perspective.  The issue that arises now is that bills wrongly claim VAT at 17.5% throughout but then fail to split between the relevant periods.  How is the poor Court meant to deal with this come assessment?  Count every letter to see what pre-dates or post-dates the various changes so as to apply the correct rate?  That is why the bill needs to be drafted properly and why defendants are now complaining when it is not.   

I’ve posted links to the various VAT guides on Legal Costs Central.

VAT – Again

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I previously tried to give a simple summary of the impact of the recent VAT change in an earlier post.

However, a regular reader of the Legal Costs Blog recently got in touch asking me to mention this issue again. As my patience is slowly disappearing over the number of defective bills of costs I keep seeing, I will oblige.

CPD 4.2(4) reads:

“Where value added tax (VAT) is claimed and there was a change in the rate of VAT during the course of the proceedings, the bill must be divided into separate parts so as to distinguish between;
(a) costs claimed at the old rate of VAT; and
(b) costs claimed at the new rate of VAT.”

CPD 5.9 mirrors this:

“All bills of costs, fees and disbursements on which VAT is included must be divided into separate parts so as to show work done before, on and after the date or dates from which any change in the rate of VAT takes effect.”

You will note these are mandatory requirements. If you prepare your bill in one part, where the work covers a change in VAT rate, the bill is defective.

The CPD deals with what rate should be claimed in more detail:

“5.7 Where there is a change in the rate of VAT, suppliers of goods and services are entitled by ss.88 (1) and 88(2) of the VAT Act 1994 in most circumstances to elect whether the new or the old rate of VAT should apply to a supply where the basic and actual tax points span a period during which there has been a change in VAT rates.

5.8 It will be assumed, unless a contrary indication is given in writing, that an election to take advantage of the provisions mentioned in paragraph 5.7 above and to charge VAT at the lower rate has been made. 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.”

This means that if a receiving party can take advantage of the lower rate then that is what they should do.

The Law Society has issued a detailed Practice Note on the VAT change (see link). I will repeat one of the examples they give in full:


You have been instructed by your client to undertake court proceedings to recover damages for clinical negligence. Instructions were received and your retainer commenced in early September 2006. The case is settled in December 2009 on the basis that the opposing party pay your client’s costs and a bill of costs is drawn up. The amount of the costs are not agreed or assessed until March 2010. How do you calculate the VAT?

Under the normal VAT rules, where one party is ordered to or has agreed under a settlement to pay the other’s costs, the settling of the costs in these circumstances is part and parcel of your overall supply to your client. In such circumstances, the basic tax point arises when the costs have been agreed between the solicitors or the assessment of costs procedure is complete and the costs will be liable to VAT at 17.5 per cent. Under the special rules, provided that that no interim invoices have been raised or payments received over the entire course of the supply, which would be the case if there was a conditional fee agreement, then you should apportion your costs so that:

• 17.5 per cent VAT is charged in relation to your costs for the period being due from September 2006 to 30 November 2008
• 15 per cent is charged for the period from 1 December 2008 to 31 December 2009, and
• 17.5 per cent is charged for the period from 1 January 2010 to March 2010.

If you have issued interim invoices to your client during the course of the supply, then the rate you charge to the other party will be the same as that on the invoices you have issued.”

Based on this advice, unless interim invoices have been raised (which would be highly unlikely with a claimant’s case funded by way of a CFA) you are not meant to claim VAT at 17.5% throughout. Please stop.

Compensation culture – Recount demanded

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The Legal Service Board’s recent report into referral fees revealed some interesting statistics.

It showed that the number of personal injury claims arising from RTAs has risen from the year 2000 to 2009 (see Figure 21 on page 96). This is despite the number RTA accidents involving personal injuries having decreased (see Figure 16 on page 83).

“In contrast to the decline of RTAs and RTA injuries, motor personal injury claims have been increasing from 400,000 in 2000-01 to 625,000 in 2008-09.”

The report concluded that:

“Overall therefore there is evidence that referral fees have facilitated a growth in the number of motor claims as individuals make claims that would not otherwise have arisen.”

On the other hand, there had been no corresponding increase in EL claims during the same period. The report commented on this apparent anomaly in this way:

“there is no evidence of a trend in the level of referral fees (or their equivalent) among trade unions, hence we would not necessarily expect to see an increase in the number of employer liability claims. Indeed, interviewees believed that the employer liability area was not facing a similar trend to the RTA sector because the employer liability sector had not seen as great an increase in marketing activity that had occurred in the RTA sector. Interviewees indicated that the increase in the number of claims in recent years was related to the economic cycle rather than referral fees.”

None of this seems a particularly convincing explanation for the lack of an increase in EL claims, with the possible exception of the economic cycle. It’s hard to have an accident in a factory when we don’t have any left in this country.

The report firstly seems to assume that EL referrals come mainly from trade unions. Although these are naturally significant, only a minority of employees are members of trade unions. Secondly, whenever I see a claims management company advertisement on television it is almost invariably focused on EL/trippers/slippers claims rather than RTA claims. I have seen very little indication of an increase in RTA marketing for claims in recent years, although I recognise that does not exactly amount to a comprehensive review of the subject.

However, assuming the figures for the rising level of RTA claims are accurate, this raises another issue.

Readers may remember the Better Regulation Task Force report on the “compensation culture” back in 2004. This concluded that the “compensation culture” was a myth and that the number of personal injury claims was going down. Looking back on the report it seems this conclusion was based on a graph showing a reduction in claims for the year 2003/04 (Table 1 on page 12). Since this report was published, it hasn’t been possible for a claimant lawyer to open their mouth without them repeatedly banging on about this conclusion.

However, looking at the figures contained in the Legal Services Board report, it appears that the 2003/04 figures quoted by the Better Regulation Task Force were an anomaly, if they were even accurate. Given the majority of personal injury claims are RTAs, and there are an increasing number of RTA claims despite the number of accidents decreasing, the “compensation culture” begins to look less and less like a myth.  The Legal Costs Blog demands a recount.

Recoverability of costs of funding

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A regular reader of the Legal Costs Blog recently got in touch to ask whether the decision in National Westminster Bank v Kotonou [2009] EWHC 3309 (Ch) was a useful one when challenging the costs associated with the funding of a claim.

Before turning to the case itself, it is useful to remind ourselves of the case law surrounding this area.

Dr Mark Friston’s definitive new work, Civil Costs: Law and Practice summarises the position in this way: “There is no binding authority on the recoverability of the costs of funding advice; there is a significant divergence of judicial opinion on the topic”.

The starting point is perhaps the decision of Master Hurst in Claims Direct Test Cases [2002] EWHC 9002 (Costs):

“It has long been held that the cost of funding litigation is not a recoverable cost as between the parties:

‘… by established practice and custom funding costs have never been included in the category of expenses, costs or disbursements envisaged by the statute or RSC Order 62. To include them would constitute an extension of the existing category of “legal costs” which is not under the prevailing circumstances warranted.’

(per Lord Justice Purchas, Hunt v R M Douglas (Roofing) Ltd, 18 November 1987, CA, unreported. This point was not taken in the subsequent House of Lords Appeal.)

It follows from this that the only costs of funding litigation which are recoverable are those permitted by statute, in this case Section 29 of the Access to Justice Act 1999. Section 29 is specific and has been interpreted by the Court of Appeal in Callery v Gray. Anything falling outside the scope of the Section is not recoverable.”

Master Seager-Berry in Ghannouchi v Houni Ltd (SCCO, 12 January 2004) allowed the costs associated with funding and this case is routinely relied on by receiving parties:

“the work of providing detailed advice and drafting the CFA and the risk assessment and making enquiries about insurance are recoverable.”

I’m sure I have seen a copy of this judgment at some stage but it is not available through any of the normal sources.

His Honour Judge Cockcroft, in the case of Masters v Hewden Stuart Heavy Lifting Ltd (Leeds Civil Hearing Centre, 18 March 2005), having analysed the case law, held:

“Without being qualified by any subsequent authority drawn to my attention, they seem fairly and squarely to preclude recovery from the other party, the defendant, of the claimant solicitors funding costs. … I am driven here to conclude that [the judge below] was wrong to allow one hour’s costs, or indeed any costs against the defendants in respect of work done concerning the funding of the claim.”

We then have the case of Woolley v Haden Building Services (No 2) [2008] EWHC 90111 (Costs) where Master Rogers held:

“In my judgment, the costs of funding have never been recoverable and nothing has changed as a result of the introduction of CPR or, indeed, as a result of the introduction of the CFA Regulations, and therefore that element of this bill in which the Claimant seeks to recover its funding costs, fails.”

However, we then have a further decision from Master Rogers on the same point. Here he managed to muddy the waters compared with his earlier decision. This is the case of Bollito v Arriva London [2009] EWHC 90136 (Costs):

“There has been considerable disagreement at costs judge and district judge level as to whether or not costs of funding are recoverable as between the parties in a detailed assessment.

On the basis of what I said in [the case of Woolley] Mr Cooper submitted that the costs of funding should not be recoverable by the Claimant from the Defendant in this case. Mr Cooper however accepted that, as always, I have a discretion in these matters and there was no hard and fast rule laid down by a court which is binding on me.

Mr Walton submitted that this was not a usual case where a couple of letters were written to set up a CFA where the costs of funding were de minimis. On the contrary, there were three separate retainers and much work needed to be done in relation to matters not least because the Claimant was not able to deal with matters directly and of course was not English speaking anyway.

Equally important was the fact that when the £50,000 limit of cover was reached under the BTE insurance offered by DAS substantial efforts had to be made by the Claimant’s solicitors to find an alternative source of insurance or cover.

I was told that at a rough estimate the costs of funding in this case came to about £5,000.

It seemed to me that even in a bill of this size this was not a negligible sum and that in my discretion it would be right to award those costs to the Claimant which is what I did.

I refused Mr Cooper’s application for permission to appeal. I said in the quotation from Woolley mentioned above that it would be nice to have authority from a higher level as to whether the Senior Costs Judge is right as set out in Claims Direct Test Cases or whether the decision of Master Seager-Berry in Ghannouchi v Houni Ltd and others is to be preferred.

However, I do not think this is an appropriate case for such a decision because in my discretion I decided that the costs of funding in this case were sufficiently large to justify ordering them to be paid by the Defendant to the Claimant.

As this was a decision taken by a specialist judge in his own field I do not think that there is any reasonable prospect of that decision being reversed on appeal and that is why I refused permission.”

I find this decision somewhat odd, even ignoring the difficulty it throws up for practitioners advising their clients when the same costs judge can reach different decisions on exactly the same issue. If, having held in the case of Woolley, that well established law did not allow this category of work to fall within that which is recoverable, how can there then be a general discretion on a judge to allow it in a particular case? This is not an issue such a photocopying where a general discretion is allowed in the rules for such costs to be “exceptionally” allowed. If a category of work is not recoverable, the fact that is unusually large in amount should make no difference (although the photocopying example does work the other way).

So, then we come to the decision in National Westminster Bank v Kotonou. This was a decision by Mr Justice Briggs. The facts of the case were unusual and need not trouble us for current purposes. However, the relevant section of the judgment was as follows:

“Turning to ground two, it was common ground both before Master Campbell and on this appeal that there is a general principle that the costs of a claim do not include costs incurred by a party in seeking funding either for the prosecution or for the defence of that claim. Nothing in this judgment is intended to cast doubt on that general principle.”

Therefore, although the point was not argued, it was accepted by all concerned that funding costs are not recoverable. These comments might be easier to dismiss in other circumstances but for a number of issues:

1. This is a High Court decision (although the point itself was not argued) where there has previously been none.
2. Both sides were represented by experienced specialist costs counsel (Mr Andrew Post and Mr Simon P Browne). It does not appear to have been taken as even in doubt as to whether the law was otherwise.
3. The Senior Costs Judge, Master Hurst, sat as one of the two assessors; the other being Mr Martin Cockx (partner in Amelans and therefore no suggestion that the claimant side of the argument could not be put before the judge). The fact that there is no suggestion in the judgment of Mr Justice Briggs that he thought there was any doubt over the law implies that the Senior Costs Judge did not advise him to the contrary.

So, on balance, this case is certainly helpful to paying parties even if not definitively the last word on the matter.

This case was also interesting for those who undertake appeals. Mr Justice Briggs held:

“In my judgment the fact that, unless the court orders otherwise, an appeal is by way of review does not necessarily preclude the consideration of fresh legal argument. In the present case, all the factual material upon the basis of which the first ground of appeal is sought to be advanced was available to the Costs Judge, and no unfair prejudice would be occasioned to the Kotonous by permitting the Bank to raise this additional argument.”

Specialist costs counsel

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A further definition from The (Alternative) Legal Costs Dictionary:

Specialist costs counsel n. counsel who was once given a brief by his clerk at 7.30pm to appear in Taunton County Court at 10.00am the next morning in relation to the detailed assessment of a bill of costs totalling £3,241.14 but received a text message at 8.30am on the day of the hearing (3 hours into his journey to court) informing him that the matter had been compromised at £2,900.

Jackson hung out to dry?

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I had prepared a detailed post advising readers of the Legal Costs Blog which party they should vote for in the General Election. Unfortunately, due to a technical problem, the post did not appear. Readers will now have to wait for the next election before discovering my political views.

Professor Dominic Regan, in his blog, the day before the Election, wrote:

“I had a thoughtful note from Dominic Grieve QC last night. A Conservative administration is committed to serious costs reform and is interested in but not committed to the Jackson report. The Conservatives would move quite quickly on this.

Whatever happens tomorrow the reform of costs will not go away.”

So, where does the coalition leave the future of the Jackson Costs Report? Has a hung parliament left Jackson hung out to dry?

On Saturday, Regan posted an update confirming his view:

“The 219 distinct recommendations made by Sir Rupert Jackson are not going to be ignored by the new administration. … Reform will come.”

The political element was always the great unknown in the Jackson Report. At the moment, all bets are off.

Oh, OK then. My current prediction is the fixed costs proposals for fast track matters will make it through but not an end to recovery of additional liabilities.

Portal of Doom runs into problems

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The Law Society Gazette has reported problems on the launch of the new RTA Claims Process portal.  If only there had been some way to predict this.

Exclusive RTA Protocol Article

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We are always looking for interesting content for our readers and the Legal Costs Blog is absolutely delighted to have obtained an exclusive article from specialist costs counsel Kevin Latham and Mark Friston of Kings Chambers.

This article covers the new Road Traffic Accident Protocol.

This is the most comprehensive review of the scheme we have seen (and it is clear from a number of readers’  comments how much assistance is urgently required on these muddled new rules). 

Not only does this provide an excellent run through of the new scheme, but it identifies a number of problem areas which are likely to form the basis for the next round of the Costs Wars.  For example:

"There is a risk that less scrupulous claimants will make offers which are unlikely to be accepted by defendants, only to withdraw them following the total consideration period and thus obtain costs assessed on the standard basis when Part 7 proceedings are issued. It seems that the new regime offers the defendant very little protection from this potential abuse. The point is re-enforced as the defendant’s offer in the S2SP would appear not to attract Part 36 status (as an RTA Protocol Offer) until proceedings are issued under PD 8B and offers made within the S2SP are unlikely to comply with the formal requirements of CPR 36.2. It would thus seem that the only way in which a defendant can protect himself against this unsatisfactory position, is to replicate every offer made within the S2SP and subsequent total consideration period in correspondence as a fully compliant Part 36 offer in the event that the claim falls outside the Protocol at some future point."

This is invaluable reading for those dealing with RTA claims.  Read and circulate: RTA Protocol Article

Champertous arrangements

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A firm of solicitors offers to indemnify its client against an adverse costs order as part of its CFA.

In Dix v Townend [2008] EWHC 90117 (Costs) Deputy Master Williams held such an agreement to be contrary to public policy and to invalidate any retainer.

MacDuff J in Morris v London Borough of Southwark [2010] EWHC B1 (QB) held that such an agreement might be unlawful but the particular one he was considering was lawful.

The matter is now headed off to the Court of Appeal.  Until the Court gives a definitive ruling, solicitors would be foolish to continue to offer such indemnities.  

Proportionality post-Jackson

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Readers may be interested in the recent article I wrote for the New Law Journal (see link) on Lord Justice Jackson’s proposals in relation to redefining the concept of proportionality in legal costs.