British Airways Plc v Prosser

On a standard-basis assessment, a claimant is not automatically barred from recovering VAT included in a paid invoice merely because the supplier may have charged VAT incorrectly. The question is whether the cost was reasonably and proportionately incurred and reasonable and proportionate in amount. Where the VAT element is modest and apparently supported by authoritative materials, solicitors may reasonably accept the invoice without investigating the supplier’s tax treatment. The Court nevertheless gave obiter guidance on VAT disbursements. An intermediary acting as a mere postbox may charge VAT only on its own fee. An organisation supplying a more active service will generally charge VAT on the whole amount. The contractual arrangements and economic and commercial reality are decisive.

Mr Prosser, an employee injured at work, brought a personal injury claim against British Airways plc. Liability and damages were agreed, but British Airways disputed VAT included in invoices from Absolute Medicals Limited, a medical reporting organisation owned by Mr Prosser’s solicitors.

District Judge Temple ordered British Airways to pay reasonable disbursements, including the disputed VAT. Permission to appeal was granted and the appeal was transferred to the Court of Appeal because it raised an important point of principle. The appeal concerned whether VAT was properly chargeable on the medical reporting organisation’s full invoices and, alternatively, whether the costs were reasonably and proportionately incurred and reasonable and proportionate in amount.

1. Disposition. Lord Justice Newey delivered the judgment. Lord Justices Coulson and Lewison agreed. The appeal was dismissed.
2. Standard-basis assessment. Under rule 44.3 of the Civil Procedure Rules 1998, costs must not be unreasonably incurred or unreasonable in amount, only proportionate costs may be allowed, and doubt is resolved in favour of the paying party. The fact that VAT has been charged and paid does not automatically make the VAT irrecoverable. The assessment concerns the reasonableness and proportionality of the actual expenditure in its circumstances.
3. In this low-value claim, the disputed VAT was only £189, the solicitors could recover only modest fixed costs, and apparently authoritative HMRC and Law Society materials supported charging VAT on the whole invoice. It was therefore reasonable and proportionate for the solicitors to accept the medical agency’s invoices without investigating the supplier’s VAT position. The District Judge was entitled to allow the sums claimed, regardless of whether the medical agency had been obliged to charge VAT in that way.
4. VAT guidance. That conclusion disposed of the appeal, but the Court gave further guidance obiter. Article 73 of the Principal VAT Directive establishes the general taxable-amount rule, qualified by article 79(c). The latter is an autonomous EU VAT concept and is not determined by domestic agency law. Contractual documentation should first be characterised, then tested against economic and commercial reality, before applying the relevant VAT provision. The distinction in Nell Gwynn House Maintenance Fund Trustees v Customs and Excise Commissioners [1996] STC 310 was adopted as the relevant framework.
5. An MRO acting as a mere postbox may be acting as agent for the solicitor, so that VAT is chargeable only on its own fee. Where it performs substantially more, such as vetting experts or checking reports, the expense will probably form part of its own supply and VAT will be chargeable on the whole invoice. In a typical case, the solicitor likewise acts as principal and uses the reports or records to provide legal services, rather than merely forwarding them to the client. The Court did not express a final view on the separate position where solicitors obtain medical material directly without an MRO.

1. Court of Appeal (Civil Division): Dismissed British Airways plc’s appeal and held that the disputed VAT was recoverable on the facts, while giving obiter guidance on the VAT treatment of medical reporting disbursements.
2. County Court at Newcastle upon Tyne: District Judge Temple ordered British Airways to pay Mr Prosser’s reasonable disbursements, subject to assessment if not agreed, and later allowed the disputed VAT on the medical agency’s invoices.
3. Permission and transfer: His Honour Judge Freedman granted permission to appeal and transferred the appeal to the Court of Appeal on the ground that it raised an important point of principle or practice.