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Budgeting costs cap excludes VAT, rules Senior Costs Judge

Green: Significant decision for costs lawyers

The Senior Costs Judge has ruled that the costs of budgeting and costs management do not include VAT.

The Association of Costs Lawyers (ACL) said the decision was important in ensuring that costs lawyers were properly remunerated for “the skilled and detailed work that they do”.

Marbrow v Sharpes Garden Services Ltd [2020] EWHC B26 (Costs) [1] was a personal injury claim for an accident at work that settled shortly before trial, with the defendant agreeing to pay the claimant’s costs on the standard basis. At the detailed assessment, one of the issues was that of VAT.

Paragraph 7.2 of Practice Direction 3E provides that, save in exceptional circumstances, the recoverable costs of initially completing Precedent H (the costs budget) shall not exceed the higher of £1,000 or 1% of the total of the incurred and budgeted costs, and all other recoverable costs of the budgeting and costs management process shall not exceed 2%.

The defendant contended that the caps must include VAT because they were not expressly stated to be otherwise.

Senior Master Gordon-Saker disagreed. He said: “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.”

To be otherwise would require “stating expressly”, he said.

The judge took “some support” from the leading textbooks Cook on Costs and particularly Friston on Costs, with the latter noting that Precedent H was “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”.

Friston adds: “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.”

Master Gordon-Saker said that, if this analysis was wrong, then he was “thrown back” to his reasoning in BP v Cardiff & Vale University Local Health Board [2015] EWHC B13 [2].

He said: “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 rule 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 VAT, the committee clarified its intention that the figure was net by an amendment in the same year as the introduction of the rule.”

ACL chair Claire Green said: “From a common-sense perspective, this is the right decision. It is inconceivable that the sum allowed would vary with any change in VAT. This is a significant decision for costs lawyers working both independently and in-house at law firms.

“The budgeting work our members do is invaluable to their clients and this ruling will ensure that it is properly remunerated.”