Solicitors can recover VAT on full MRO fee, says appeal court

VAT: Many thousands of affected cases

A solicitor does not have to investigate whether a medical reporting organisation (MRO) is right to charge VAT on the whole of its bill, the Court of Appeal has ruled in a case that it said affected “thousands” of others.

As it was, the court issued guidance that said an MRO should usually be able to charge VAT on the whole bill and not just its administration fee, and solicitors could do the same.

British Airways Plc v Prosser [2019] EWCA Civ 547 was a decision by District Judge Temple in Newcastle leapfrogged to the Court of Appeal, with insurer AIG telling the court that a decision on the point “may be applied to many thousands of cases”.

The claimant, John Prosser, was injured at work in 2014 and instructed Sintons Law to bring a claim against his employer, British Airways. Sintons commissioned Absolute Medicals Limited (AML), an MRO it owned, to obtain the medical reports and records.

Between December 2014 and June 2016, AML invoiced Sintons £1,278, £213 of which was attributable to VAT.

The claim settled for £15,425 and BA paid Mr Prosser’s fixed costs. But it argued that AML should only have charged VAT on its administration fee; the doctors, medical centre and hospitals would not have levied VAT and AML should not have done so either.

Mr Prosser issued costs-only proceedings and District Judge Temple ruled 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”.

She added that, if she had to make a decision on the point, VAT was properly chargeable on the totality of AML’s invoices and not merely its administration fees.

AML was 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”.

The Court of Appeal, with Lord Justice Newey giving the ruling, agreed. The district judge was “amply entitled” to take the review that 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.

“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.”

This was a letter from HM Revenue & Customs to Deloitte that said a claim-handling service provider “must account for VAT on the full amount charged to their client”.

There was also a now withdrawn Law Society practice note published in 2011 suggesting 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.”

Newey LJ said this would not always be the case: “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.”

Though this disposed of the appeal, the judge said the court should give such guidance as it could on when VAT should be charged “given the importance of the issue to insurers”.

Article 79(c) of the Principal VAT Directive provides that the tax is not chargeable “on amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer”.

Where the MRO was just acting as a postbox for the solicitor, it should charge VAT only on its own fee. But the court said an MRO may play “a more active role”, such as by vetting possible experts, having some input into how a particular report is prepared and checking the quality of a draft.

In such a situation, the “economic and commercial” reality would probably be that the cost of the report/records was not ‘expenditure incurred in the name of and on behalf of’ a customer, but incurred in the course of making its own supply of services”.

VAT would therefore be payable on everything that the MRO invoiced, not just its own fee.

Newey LJ continued: “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.”

In general, Newey LJ said, the solicitor contracted as a principal with either the doctor/provider or the MRO, rather than merely as an agent of the client, and considering the report/records was part of the broader supply of legal services.

“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.”


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