THE CAP ON RECOVERABLE COSTS OF COSTS BUDGETING IS EXCLUSIVE OF VAT: JUDGMENT TODAY

In Marbrow v Sharpes Garden Services Ltd [2020] EWHC B26 (Costs) Senior Costs Judge Gordon-Saker considered the issue of whether the cap on recoverable costs of the costs assessment process are inclusive, or exclusive of value added tax. (There are other interesting aspects of this judgment that will be discussed in later posts). It was held that the limits stated in the rules are exclusive of vat.

“To my mind the caps provided by paragraph 7.2 cannot include value added tax because they are expressed as percentages of figures which do not include value added tax. All of the figures set out in a budget exclude value added tax – as Precedent H makes clear. 2% of £100,000 excluding value added tax, would be £2,000 excluding value added tax.”

THE CASE

The claimant was successful in a personal injury action.  The case had been costs budgeted. One of the issues on assessment was whether the limits on recoverable costs of completing Precedent H and the costs management process (1% and 2%) were inclusive or exclusive of value added tax.

THE JUDGMENT ON THIS ISSUE

The judge set out the Practice Direction and then considered whether these figures were to be inclusive or exclusive of VAT.
“Whether the caps on recoverable costs provided by sub-paragraphs 7.2(a) and (b) of Practice Direction 3E of the Civil Procedure Rules 1998 exclude value added tax
    1. Paragraph 7.2 of Practice Direction 3E provides:
Save in exceptional circumstances—
(a)    the recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 1% of the total of the incurred costs (as agreed or allowed on assessment) and the budgeted costs (agreed or approved); and
(b)    all other recoverable costs of the budgeting and costs management process shall not exceed 2% of the total of the incurred costs (as agreed or allowed on assessment) and the budgeted (agreed or approved) costs.
    1. The present case was subject to a costs management order. The Claimant’s budget was approved at a costs and case management conference and the Defendant’s budget was agreed. It is not contended by the Claimant that there any exceptional circumstances such as to enable him to escape the caps.
    2. The Defendant contends that the caps of £1,000 or 1% in sub-paragraph 7.2(a) and 2% in sub-paragraph 2(b) must be inclusive of value added tax because it is not expressly stated to be otherwise. Neither Miss Walton nor Mr Gibbs was able to point me to any decision directly on the point apart from my own decision in BP v Cardiff & Vale University Local Health Board [2015] EWHC B13.
    3. Mr Gibbs described that decision as “brave” because I had imported words into the rule which were not there, presumably, in each sub-paragraph: “excluding value added tax“. He preferred the approach taken by His Honour Judge Hacon in Response Clothing Limited v The Edinburgh Woollen Mill Limited [2020] EWHC 721 (IPEC). There the court was concerned with the interpretation of rule 45.31(1) of the Civil Procedure Rules which provides that, in certain proceedings in the Intellectual Property Enterprise Court, the court will not order a party to pay total costs “of more than … £50,000 on the final determination of a claim in relation to liability”. The issue was whether that sum included or excluded value added tax. It would appear that a factor in the learned judge’s decision was that the “total costs” capped by r.45.31(1) did not fall within the definition of “scale costs” provided by r.45.30(4). That r.45.31(5) provided that “VAT may be recovered in addition to the amount of the scale costs” but made no provision for value added tax on “total costs”, “coupled with the unambiguous wording of rule 45.31[(1)](a)” suggested that the £50,000 cap on total costs did not exclude value added tax.
    4. My decision in BP was not intended to be brave nor did I intend to import any words into the rule, because, quite simply, it was not necessary for me to do so. This is clearly not a case where there is an obvious drafting error and equally clearly it does not fall to me to exercise the court’s exceptional jurisdiction to put right any such error, as described in Inco Europe Limited v First Choice Distribution [2000] 1 WLR 586.
    5. Miss Walton submitted that value added tax does not fall within the definition of “costs” in r.44.1(1) and so, by that route, does not fall within the caps. I think that the difficulty with that argument is that if the value added tax paid by the claimant to his solicitors is not costs, how can it be recoverable? The definition provided by r.44.1(1) is clearly not intended to be exclusive, for it begins: “costs” includes.
    6. To my mind the caps provided by paragraph 7.2 cannot include value added tax because they are expressed as percentages of figures which do not include value added tax. All of the figures set out in a budget exclude value added tax – as Precedent H makes clear. 2% of £100,000 excluding value added tax, would be £2,000 excluding value added tax.
    7. Mr Gibbs sought to place greater emphasis on the figure of £1,000 in sub-paragraph 7.2(a). But it seems to me that the same reasoning must apply. If the percentages are exclusive of value added tax so must the £1,000 be exclusive of value added tax. Otherwise the sub-paragraph would read “shall not exceed the higher of £1,000 including value added tax or 1% excluding value added tax of the total of the incurred costs … and the budgeted costs”. That would require stating expressly.
    8. This reasoning may or may not be inconsistent with my conclusion in BP that additional liabilities are included in the cap even though they are excluded from the budget. The authors of Cook on Costs (at para 15.21) have described my decision on that point as “challenging”. However whether or not that conclusion was correct does not arise in this case.
    9. I obtain some support for my view, not only from the reasoning in Cook, but also more directly from Friston on Costs (3rd edition) at paragraph 12.133:
While there is no authority on the point, it is likely that the percentage limits are exclusive of VAT. This is because Precedent H is 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. Moreover, 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.
  1. If I am wrong in this analysis then I am thrown back to my reasoning in BP. My decision in that case was based on the approach taken by the Civil Procedure Rule Committee to the cap on the costs of provisional assessment. Initially r.47.15(5) provided that the court would not award more than £1,500 in respect of the costs of provisional assessment. When disputes arose as to whether that included value added tax the committee clarified its intention that the figure was net by an amendment in the same year as the introduction of the rule.”