British Airways Plc v Prosser  EWCA Civ 547,  All ER (D) 30 (Apr)
Personal Injury analysis: Frances Lawley, barrister at Zenith Chambers, explores the decision in British Airways Plc v Prosser, which found that a solicitor can recover VAT on a medical reporting organisation fee.
What are the practical implications of this case and some key learning points?
In a dispute about VAT charged on an invoice from a medical reporting organisation (MRO) in a personal injury matter, the Court of Appeal upheld the first instance District Judge’s decision that the very modest charges were reasonable and proportionate and therefore recoverable from the paying party.
This may not always be the case. Where the amounts in issue are more significant, it will be incumbent on solicitors representing the receiving party to make more probing enquiries about the VAT position.
The correct approach to whether VAT is chargeable on an MRO’s services will depend on the contractual relationship between the client, solicitors and MRO. Generally speaking, where the MRO acts as little more than a post box for the solicitors, VAT should be charged only on the MRO’s administration fees. Where the MRO carries out more detailed work, VAT will be chargeable on the whole of the MRO’s fees.
What was the background?
The respondent, an employee of the appellant, was injured in an accident at work for which liability was admitted and damages of just under £15,500 were agreed. The appellant paid the respondent’s fixed costs, but the parties were in dispute about the VAT element of charges made by the MRO, Absolute Medicals Limited (AML).
The appellant’s position was that VAT was not chargeable on the medical services provided (because the providers were not VAT-registered, or their supplies were exempt) and that VAT should only be charged by AML on the portion of the invoice which represented its administration fees.
Although the amount in dispute was extremely modest, there was a wider issue at stake and the respondent therefore issued costs only proceedings. At first instance District Judge Temple, sitting in Newcastle County Court, held that VAT was recoverable on the entire AML invoice, finding that it would be:
‘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.’ The appellant appealed.
What did the court decide?
Newey LJ, giving the leading judgment in the Court of Appeal, considered two issues, namely:
• was AML right to charge VAT on the full amounts it was billing, rather than just its
• 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
On the second of these two issues, it was held that the judge at first instance had been entitled to take the view that the sums claimed in the MRO’s invoices were both reasonably and proportionately incurred and reasonable and proportionate in amount. The sums therefore satisfied the requirements of CPR 44.3 and were recoverable.
Newey LJ summarised as follows:
‘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 (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’ (para ).
‘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’ (para ).
The appeal would therefore be dismissed on this basis alone, however, given the importance of the issues, the Court of Appeal went on to consider the first question. Guidance was given on when VAT could be charged in cases where solicitors used the services of an MRO.
The exact VAT position may differ depending on the precise contractual background between the client, solicitor and MRO. In general terms, where the MRO was effectively acting as a post box for the solicitor, VAT should be charged only on the MRO’s administration fee but where the MRO carried out a more active role and detailed work (examples given include vetting experts, providing input into how reports are prepared and checking the quality of draft work) the position would be different. The costs of reports and/or records in this latter situation would be incurred in the course of making its own supply of services and VAT should be charged on the whole invoice.
Interviewed by Varsha Patel.
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