COSTS, MEDICAL AGENCIES, VAT: SOLICITORS CAN RECOVER VAT PAID TO MEDICAL AGENCIES ON ASSESSMENT

In British Airways Plc v Prosser [2019] EWCA Civ 547 the Court of Appeal considered whether it was appropriate for a claimant’s solicitor to recover the costs of VAT paid to medical agencies.

THE CASE

The claimant succeeded in a personal injury case.  His solicitors had used a medical agency and that agency charged the claimant’s solicitors VAT.   The defendant argued that the agency should not have charged VAT on part of the invoices.

  1. BA’s position was that AML should in fact have charged VAT only on the element of each invoice that represented its administration fee. As to the remainder, the doctors, medical centre and hospitals would not have levied VAT (because the providers were not VAT-registered or their supplies were exempt), and AML (so it was argued) should not have done so either. In the circumstances, BA should not be required to meet the excess (viz. £189).

THE DECISION ON ASSESSMENT

On assessment the District Judge preferred the arguments of the claimant that VAT was recoverable.

    1. District Judge Temple did not accept BA’s contentions. She said that, if she had to make a decision on the point, it was her view that VAT was properly chargeable on the totality of AML’s invoices and not merely AML’s administration fees. She considered that AML “is not simply a direct agent or post-box … for the solicitor/client” but “provides services whereby it obtains records and reports and passes those back on to the solicitor” (paragraph 18 of the judgment). However, she saw the question that she had to ask as being, “was it unreasonable and disproportionate for the claimant’s solicitors to incur these fees and was it unreasonable and disproportionate for the claimant’s solicitors not to investigate and ask questions of their supplier in relation to the VAT status” (paragraph 22). The District Judge went on:
“My view is that it would have been entirely unreasonable and disproportionate to expect the claimant’s solicitors to start questioning the VAT status of the invoice that was provided to them by the medical agency. That, in my view, is going way too far on the expectations that are to be placed on a claimant’s solicitor.
It is not, under a standard basis of assessment of costs, the job of a claimant solicitor to take every step necessary or possible to investigate whether or not a cost has been properly incurred. The issue is whether or not the claimant’s solicitors have acted reasonably and proportionately, and whether or not those costs have been reasonably and properly incurred. My view is that it was perfectly reasonable and proportionate for the claimant’s solicitors to accept the bill as it was presented to it on the face of it, including the VAT that was charged. It is not for the claimant’s solicitors to start investigating with their supplier and with the tax authorities, whether or not the supplier should or should not be charging VAT on particular aspects of their bill. That is a matter between the supplier and the taxman.”

THE APPEAL TO THE COURT OF APPEAL

The Circuit Judge held that the case was suitable to be transferred to the Court of Appeal.  The case was of wider interest.

THE COURT OF APPEAL DECISION 1: REASONABLENESS AND PROPORTIONALITY

The Court of Appeal upheld the District Judge’s decision that charging VAT was reasonable and proportional.

  1. The question then arises whether the sums claimed in the invoices were “reasonably and proportionately incurred” and “reasonable and proportionate in amount”, so as to satisfy the requirements of CPR 44.3. District Judge Temple considered that they were, and it seems to me that she was amply entitled to take that view. This was a low value claim in which Sintons could recover no more than the relatively modest fixed costs prescribed by CPR 45.29E by way of remuneration. The amount at stake with which Mr Prosser should, on BA’s case, have taken issue was, moreover, tiny: just £189. On top of that, whether or not Sintons were aware of them at the time, there were seemingly authoritative materials appearing to confirm that VAT was chargeable. In a letter to Deloitte & Touche LLP dated 29 April 2008, HMRC stated that a claim handling service provider (or “CHSP”) “must account for VAT on the full amount charged to their client” so that, “where the total charge made comprises the £50 fee charged by the doctor or hospital, plus a further charge made by the CHSP of, say, £30, the total value of the CHSP’s supply for VAT purposes will be £80, and it is this amount on which VAT must be calculated”. Again, a (now withdrawn) practice note published by the Law Society in 2011 suggested that VAT was probably payable on the totality of what an MRO charged. In all the circumstances, it is readily comprehensible that the District Judge did not think that it was incumbent on Sintons to investigate the VAT position.
13. That is not to say that the fact that VAT was charged on a bill that a receiving party has paid will always mean that the cost was reasonable and proportionate. If, say, the VAT element were substantial, VAT should not in fact have been imposed and the receiving party or his lawyers ought to have been aware that there was real doubt as to the VAT position, a costs judge might well conclude that the receiving party should not recover the VAT.
  1. On the facts of the present case, however, I would answer the question posed in paragraph 7(ii) above in the affirmative. In other words, it appears to me that District Judge Temple was entitled to allow the costs claimed, including the VAT, regardless of whether AML was actually obliged to charge VAT as it did.

CHARGING VAT

The Court of Appeal went on to give some general guidance in relation to the charging of VAT.
  1. I suspect that it will be a rare case in which an MRO acts as agent for the ultimate client, so that a direct contractual relationship arises between the client and the doctor/medical centre/hospital producing the report or records. The client will obviously have to consent to disclosure of medical records relating to him, and the doctor or other provider of the report/records can be expected to be aware that what he is being asked to do is for the benefit of the client. It by no means follows, however, that the doctor or other provider should be taken to be contracting with the client rather than either the MRO with which he is in contact or the solicitor from whom the MRO is taking instructions.
  2. An MRO is more likely to have acted as agent for the solicitor. Subject to any light that might be cast on the point by communications between the parties, it seems to me that that might well be the correct analysis in a case where an MRO had in effect acted as a mere postbox, obtaining and forwarding documents as asked for an identifiable fee. In any event, the “economic and commercial realit[y]” in such a situation will usually, I think, be that the cost of a report or records represents “expenditure incurred in the name of and on behalf of” a customer (viz. the solicitor) within the meaning of article 79(c) of the Principal VAT Directive. On that basis, the MRO should charge VAT only on its own fee, not on the totality of the amounts invoiced.
  3. An MRO may, however, play a more active role. It might, for example, be expected to vet possible experts, to have some input into how a particular report is prepared and to check the quality of a draft. Once again, communications between the parties may be crucial to the nature of the contractual relationships, but the MRO is less likely to have acted as a mere agent from a contractual point of view. More importantly for present purposes, where an MRO has done substantially more than act as a postbox, the “economic and commercial realit[y]” will probably be that the cost of the report/records is not “expenditure incurred in the name of and on behalf of” a customer. The expense will instead have been incurred by the MRO “in the course of making [its] own supply of services … and as part of the whole of the services rendered by [it]” (to adapt words of Sir Christopher Slade in the Nell Gwynn House Maintenance Fund Trustees case). VAT will therefore be payable on everything that the MRO invoices, not just its own “fee”.
    1. Even supposing, however, that the circumstances are such that an MRO does not need to charge VAT on anything but its own fee, the client will not necessarily escape VAT on the cost of medical reports/records. That will depend on whether the solicitor is himself obliged to impose VAT when passing on the cost to the client.
  4. As I have already indicated (paragraph 31 above), I doubt whether a client will often have entered into a direct contractual relationship with the doctor or other provider of a medical report or records obtained via a solicitor and MRO. If that is right, the solicitor will generally have contracted as a principal with either the doctor/provider or the MRO. As a matter of domestic law, he will not have acted merely as an agent of his client.
  5. The “economic and commercial realit[y]” may nonetheless be that the solicitor has incurred the cost of the report/records “in the name of and on behalf of” the client if his role has essentially been that of a postbox. That, however, must surely be unusual. It can be seen from the Makuwatsine case that a client is unlikely even to be provided with medical notes and that, whilst a client might be given a copy of a medical report, “in the ordinary way the report would not be used by the client outside the service of the solicitor”. The solicitor will have obtained the report/records in order to advise the client on the merits of the claim and/or to facilitate his pursuit of the client’s claim. Consideration of the report/records will have been part of the solicitor’s broader supply of legal services to his client. The solicitor’s role will not merely have been to forward the report/records to the client.
  6. In the circumstances, it seems to me that in a typical case in which a solicitor commissions an MRO to obtain a medical report/records the solicitor will neither be acting as the client’s agent in contractual terms nor incurring the expenditure “in the name of and on behalf of” the client for the purpose of article 79(c) of the Principal VAT Directive. The report/records will be “supplied to the solicitor … to enable him effectively to perform the service supplied to his client” (in the words of Bridge J in the Rowe & Maw case).
  7. While I would not endorse all of the reasoning in Kellett v Wigan & District Community Transport, the outcome would appear to have been correct if the MRO in question was fairly to be seen as a postbox. As regards the Barratts case, that did not involve an MRO: Barratts obtained medical reports and records themselves, without using an MRO. That distinction could potentially affect the contractual analysis: it is easier to conceive of a solicitor who obtains reports and records direct acting merely as his client’s agent, although there is plainly scope for argument to the contrary (see paragraphs 27-29 above). I can see a strong case for saying that, whatever the true contractual position, as a matter of “economic and commercial realit[y]” a solicitor who is more than a postbox does not incur the cost of the reports/records “in the name of and on behalf of” his client. The point was not, however, squarely before us and I prefer not to express a final view on it.