Precedent H for use when preparing costs budgets expressly states:
“This estimate excludes VAT (if applicable), success fees … (if applicable)…”
PD3E para.7.3 states:
“The court’s approval will relate only to the total figures for budgeted costs of each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure.”
It is therefore clear that a costs management order will provide a total figure for each phase of the budget and this will, where applicable, exclude VAT and success fees.
The problem that this creates is trying to determine what figure, in due course, attracts VAT and/or success fees.
Take the PTR phase. Let us take an example where the claimant has submitted a budget for this phase with future estimated profit costs of £6,000 and a listing fee of £1,090. The court makes a costs management order reducing this to a total of £5,000. At the conclusion of the case, the successful claimant submits a bill of costs claiming £7,000 profit costs, VAT on that of £1,400, a 100% success fee of £7,000, VAT on that of £1,400 and a listing fee of £1,090. In the absence of a “good reason”, the claimant’s recovery will be limited to £5,000 plus VAT and success fee. But what figure attracts the VAT and success fee? Does the claimant get VAT and success fee on the full £5,000? Or, should the court deduct the £1,090 court fee first (as this was an unavoidable costs and must therefore have been factored in when the court allowed a global total of £5,000), meaning VAT and success fee is limited to the balance of £3,910?
I suspect, in this example, it will only be the £3,910 that attracts VAT and a success fee. The original budget, as submitted, expressly allowed for the court fee, this is the only item within the bill for this phase that does not attract VAT/success fee, and it was clearly an unavoidable item. It would be artificial to pretend the £5,000 figure the court approved might have been intended to cover profit costs only simply because the Practice Direction provides that the court will only approve “total figures”.
However, take a less straightforward example. The claimant has submitted a budget for the Experts Reports phase with future estimated profit costs of £20,000 and experts’ fees of £10,000. The court reduces this to a total of £25,000. At the conclusion of the case, the successful claimant submits a bill of costs claiming £20,000 profit costs, VAT on that of £4,000, a 100% success fee of £20,000, VAT on that of £4,000 and experts’ fees of £20,000 which are free from VAT. Again, in the absence of a “good reason” what element of the £25,000 attracts VAT and a success fee? It would be artificial to apply it to the full £25,000 and ignore the fact that a significant amount of the total is attributable to disbursements that are free from VAT and success fees. Should it be applied on a pro-rata basis (profit costs to disbursements) to the original budget (ie to two-thirds of the £25,000). Or, should it be applied pro-rata (profit costs to disbursements) to the bill of costs for this phase (ie to half of the £25,000)?
Matters would become yet more complicated if there are profit costs that attract VAT and a success, counsel’s fees that attract VAT but no success fee, some disbursements that attract VAT and others than do not.
No easy answers.