Judgment in the Court of Appeal case of British Airways Plc v Prosser.
1. The Court of Appeal has now handed down its decision in British Airways Plc v Prosser A2/2018/2840. The case finally addresses the vexed question of whether or not a medical agency (or more properly a Medical Reporting Organisation or “MRO”) should charge VAT upon the whole of its fee or simply upon the ‘administration’ element subsumed within its invoice.
Background
2. The Claimant was injured at work on 26th May 2014. His solicitors instructed an MRO to obtain medical records and reports for use in his personal injury claim. The MRO then invoiced for their services, charging VAT on the whole of their ‘supply’. As an example, where they had paid £50 to a GP practice for medical records and added a £30 fee for the work they did in obtaining those records, they charged VAT on the full £80. This was contentious because the £50 statutory charge paid to the GP is not itself subject to VAT .
3. The Claimant’s solicitors then paid the full amount of the MRO’s invoices. After settlement of the claim, the Defendant agreed to pay all costs save the for any VAT on the cost of reports or records obtained by the MRO. The Defendant did not object to paying VAT on the ‘agency element’ of the MRO’s invoice (i.e. the £30), but would not pay VAT on the underlying cost of the reports or records themselves.
The decision below
4. Costs were provisionally assessed and then reviewed at an oral hearing. On both occasions DJ Temple accepted the Claimant’s argument that the question on a standard basis costs assessment was whether or not the costs were reasonable and proportionate in amount and had been reasonably and proportionately incurred. She accepted that it was not for a Claimant’s solicitor (especially in low value fixed cost litigation) to start querying the VAT status of third party suppliers. As she put it:
“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.”
5. She added that, if it had been necessary to decide the question, she would have found that the MRO was correct to charge VAT on the whole of its invoice.
The appeal
6. HHJ Freedman gave permission to appeal and leapfrogged the point to the Court of Appeal. He also made a costs protection order, to reflect the fact that the Claimant had no financial interest in the point such as could justify exposing him to the costs of test case litigation. HMRC were invited, but declined, to intervene.
7. Two issues arose on the appeal:
a) Was the MRO right to charge VAT on the full amounts it was billing rather than just its administration fees?
b) Was the District Judge entitled to allow the costs claimed on the basis that, whatever the correct VAT position, the costs had been reasonably and proportionately incurred and were reasonable and proportionate in amount?
8. The Court of Appeal (Newey LJ, with whom Lewison and Coulson LJJ agreed) dealt with the issues in reverse order.
The reasonableness issue
9. The Appellant argued that the District Judge had been wrong to treat as a cost something that had never been a cost in the first place. The indemnity principle precluded recovery of the full VAT claimed because the Claimant could seek a refund from the MRO which could, in turn, adjust the position on its next VAT return. The Respondent argued that, as the MRO’s invoice had been settled in good faith, the indemnity principle had been satisfied. The decision was a discretionary decision within the wide ambit of permissible decisions open to the District Judge.
10. The Court favoured the Respondent’s arguments: As the invoices had been settled, they were a cost to Mr Prosser. Given that this was a low value fixed costs claim and that the amount involved (£189) was ‘tiny’, the Claimant’s solicitors had been reasonable not to investigate the VAT position. Moreover, the fact that there was a letter from HMRC dating from 2008 which appeared to justify seeking VAT on the full amount of the MRO’s invoice plus a (now withdrawn) Law Society Practice Note suggesting the same, meant that the District Judge’s decision was ‘readily comprehensible’.
11. The Court added a caveat, however, to say that a different result might arise in cases where the VAT bill was large and the receiving party’s solicitors ought to have been on notice that there was real doubt as to the VAT position. In such cases, a costs Judge might well conclude that the receiving party should not recover the VAT.
12. That was sufficient to dispose of the appeal but, given the importance of the point, the Court of Appeal went on to give guidance as to when VAT should be charged.
The VAT issue
13. The starting point was Article 73 of the Principal VAT Directive, which essentially provides that a supplier must charge VAT on the whole of its supply, subject (inter alia) to the exception set out at Article 79(c):
The taxable amount shall not include the following factors:
“…(c) amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer, and entered in his books in a suspense account…”
14. The Court reviewed the extensive European and domestic case law (much of the latter comprising first instance County Court or Tax Tribunal decisions), before giving the following guidance:
a) It is likely to be a rare case where the MRO acts as agent for the ultimate client. An MRO is more likely to act as agent for the solicitor (though ultimately that will depend upon the communications / contractual arrangements between the parties).
b) Where an MRO acts as a mere ‘post-box’, obtaining and forwarding documents for an identifiable fee, the actual cost of the reports and records will usually represent “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.
c) Where an MRO plays a more active role (e.g. by vetting experts, having input into how a report is prepared, quality checking etc.), it is less likely (subject again to relationship-specific factors) to have acted as a mere post-box. Where the MRO has done substantially more than act as a post-box, the “economic and commercial reality” 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. VAT will therefore be payable on everything that the MRO invoices, not just its own “fee”.
15. The Court then added what may prove to be a ‘sting in the tail’ for solicitors and provide a boost for HMRC’s coffers:
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.
16. The Court reviewed the authorities on solicitor disbursements and referred back to the decision of HHJ Grenfell in Makuwatsine v Trathens Travel Services Ltd (9 July 2010, unreported), in which the learned Judge detailed the ways in which a personal injury solicitor uses medical reports and records when providing its service to a client. The Court commented that it would be unusual for a personal injury solicitor in such circumstances to act as a mere ‘post-box’ for the client’s medical records and reports. Rather,
“…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…”
“…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…”
17. In other words, if the MRO did not charge VAT on the reports and records, the solicitor would probably have to do so because the solicitor is using the reports and records as an integral part of supplying its own service to the client.
Comment*
18. The decision provides welcome guidance as to the lengths solicitors are expected to go to when faced with a challenge to a VAT invoice from a third party supplier. The VAT issue is now at large and solicitors would be well-advised to seek clarity from their MRO’s as to whether the MRO considers that VAT has been properly charged. Provided the solicitor clarifies the position with the MRO, then (in most cases) that should prove sufficient to head off any challenge on a standard basis assessment.
19. The more general comments made in relation to VAT recoverability (and in particular the comments in relation to whether the solicitor should charge VAT on reports / records even if the MRO does not) are likely to be of more significance going forward. The comments are obiter, but they are strong obiter, and the argument that personal injury solicitors do no more than act as a post-box when obtaining reports and records for their clients seems untenable.
20. Given that both sides’ solicitors use reports and records as an essential resource when providing advice to their clients, it seems prima facie difficult to justify not charging VAT on such expenditure, given the narrow terms of the VAT exemption set out within Article 79(c) of the Principal VAT Directive.
Steven Turner
2nd April 2019
* The views expressed are those of the author. They should not be relied upon without taking independent legal advice.
Steven Turner was instructed by Phil Davison and Danny Milne at Sintons.
[1] Such fees are no longer payable under GDPR, but the point remains relevant to existing cases and report fees. The BMA are also campaigning to reintroduce the fee, due to the burden now falling upon GPs.
A pdf of the Judgment can be downloaded here.
