Shmuel Moller & Ors v One Touch Solution Limited & Anor

For assessing VAT recoverable on legal costs, the relevant question is whether the insured receiving party can recover the VAT as input tax. The insurer’s ability to recover VAT is irrelevant. Liquidation does not necessarily prevent recovery: under Value Added Tax Regulations 1995, regulation 111(5), the estate of a former taxable person may recover VAT on qualifying services through the liquidators. Where the estate can recover the VAT, neither the insured nor its insurer has suffered a loss that may be included in the costs statement. The successful party on the issue will ordinarily receive its reasonable and proportionate costs under Civil Procedure Rules 1998, Part 44.

The claimants amended their Particulars of Claim pursuant to an order permitting consequential amendment of the first defendant’s defence. The claimants were ordered to pay the first defendant’s reasonable costs of that amended defence, subject to assessment if not agreed.

The court assessed those costs net of VAT at £25,000 and directed written submissions on whether VAT was recoverable. The first defendant was in creditors’ voluntary liquidation, and the second defendant was joined as its insurer under the Third Parties (Rights Against Insurers) Act 2010. The central issue was whether the liquidation prevented recovery of VAT and whether the insurer’s payment of VAT affected the assessment.

1. VAT recovery. The relevant consideration was the ability of the insured party, rather than the insurer, to recover VAT on the legal services. The insurer’s payment of the VAT did not itself create a right to recover input tax.
2. Effect of liquidation. Regulation 111(5) of the Value Added Tax Regulations 1995 supported recovery by the estate of a former taxable person. The first defendant’s liquidators could file the necessary VAT returns and recover the VAT attributable to the relevant services. The contention that liquidation necessarily prevented recovery was inconsistent with the regulation.
3. Costs consequence. Since the first defendant’s estate could recover the VAT, neither defendant had suffered a loss in that amount. The VAT was therefore excluded from the costs statement.
4. Costs of the VAT issue. The claimants succeeded on the issue. Applying the usual principle under Civil Procedure Rules 1998, Part 44, the court ordered the defendants to pay £1,000 for the preparation of the claimants’ submissions. The order was subject to written applications to set aside or vary it, determined without a hearing.