England and Wales High Court (Senior Courts Costs Office) Decisions

IN THE HIGH COURT OF JUSTICE
SUPREME COURT COSTS OFFICE

		Clifford's Inn, Fetter Lane London, EC4A 1DQ
		26  May 2006

Master O'Hare

1. In this case I was asked to give a preliminary ruling on the recoverability of the Value Added Tax ("VAT") claimed in three bills.  The bills total just over £1 million and the VAT totals just over £151,000. Each bill contains a certificate by the solicitors whose costs they are that the receiving party is not entitled to recover VAT on these costs as input tax.  The point was argued before me at a hearing on 4 April 2006 when both sides were represented by counsel.  I ruled that the VAT was not recoverable from the paying party because it was recoverable by the receiving party as input tax.  Because this matter might be taken further by way of an appeal or by way of an application to re-open VAT accounts, I was asked to supply a written decision, which this is.  It is made with the advantage of re-reading the skeleton arguments prepared by both counsel, the notes I made at the hearing and a transcript of the hearing.

BACKGROUND FACTS

2. The receiving party in each of the three bills now before me is Mr Andrew Foyle who is a litigation/arbitration partner at Messrs Lovells, a well known firm of solicitors based in London.  For about twenty years Mr Foyle and Messrs Lovells have been retained by British American Tobacco (Investments) Ltd ("BATCO") to provide legal representation in respect of some of their business interests both here and abroad.  In 1999 the Claimant in these proceedings, the United States of America, commenced, in the United States Courts, a colossal claim for damages against BATCO and several other tobacco companies.  In that litigation it is alleged that the tobacco companies engaged in an unlawful enterprise to deceive and defraud the American public and consumers of cigarettes about the health risks of smoking and about their knowledge and attitude towards them.
3. In 2002 the Claimant took proceedings in the United States action which enabled them to apply for an order in the English Courts for the examination of Mr Foyle as a witness.  The three bills before me relate to the order for examination that was made in the English Commercial Court in December 2003 and the costs of two consequential applications to that Court in 2004.
4. Because these proceedings were brought against Mr Foyle personally, he was represented not by his own firm, Lovells, but by Messrs Norton Rose.  Messrs Norton Rose delivered bills which were addressed to him personally but were sent "care of Lovells".  The English proceedings were, of course, of importance to BATCO and they were actively represented in them by Lovells, but not of course by Mr Foyle.  BATCO also agreed to indemnify Mr Foyle for his costs relating to these proceedings, and they have in fact paid Messrs Norton Rose's bills including the VAT thereon.
5. Messrs Norton Rose's certificate that VAT is not recoverable by Mr Foyle is based upon, amongst other things, an exchange of letters between Messrs Lovells and HM Customs and Excise.  By letter dated 20 February 2003 a Mr Chris Rees, the financial controller at Messrs Lovells wrote to a Mr Tomaschek at HM Customs and Excise in these terms:

"I enclose a copy of a letter dated 19 December 2002 from British American Tobacco ("BAT") to Andrew Foyle, one of our partners, agreeing to indemnify Andrew for certain legal costs and a copy of an invoice dated 30 January 2003 from Norton Rose which BAT will be asked to pay under the indemnity.  I set out further details below.  I would be grateful for your views on the correct VAT treatment of the payments by BAT and to Norton Rose.

As is clear from the BAT letter, there is litigation in the United States between the U.S Government and BAT.  In October 2002, the Judge in the U.S signed a letter of request addressed to the High Court in England seeking its assistance to obtain evidence from Andrew Foyle for the purposes of the litigation.  This was based on allegations in relation to work undertaken for BAT Group companies by Andrew as partner.  It was agreed that Andrew should obtain legal advice and representation in relation to the letter of request and any consequential proceedings.  It was also agreed that the advice and representation should not be provided by Lovells but by an independent firm and counsel.  BAT agreed to provide an indemnity (see enclosed letter).  Norton Rose was instructed to advise and they subsequently instructed counsel (see enclosed invoice).

This is an unusual situation for us.  It seems to me that there are (at least) two ways we could treat the payments in this case.  I would be glad of your views on what is the correct treatment.

The first possibility is that the indemnity could be seen as personal to Andrew and nothing to do with Lovells.  In that case, Lovells simply passes the Norton Rose invoice to BAT and asks BAT to pay Norton Rose direct.  The VAT shown on the Norton Rose invoice is not input tax of Lovells so Lovells cannot recover that VAT but equally Lovells does not invoice and charge any VAT to BAT.

The second possibility is the indemnity is seen as given to Andrew in his capacity as a partner in Lovells.  In that case, Lovells treats the VAT on the Norton Rose invoice as input tax and recovers it in the normal way.  The consequence of that, it seems to me, is that Lovells must invoice and charge VAT to BAT.

In favour of the first possibility is the fact that Norton Rose is advising Andrew rather than Lovells in relation to the letter of request.  Also, in giving evidence, Andrew is not supplying legal services to BAT.  In favour of the second possibility, the evidence requested by the U.S Court relates to Andrew's role as legal adviser to BAT which he performed in his capacity as a partner in Lovells. Also, whether or not Andrew gives evidence and the content of his evidence are all matters which potentially have an impact on the business of the firm.  The firm's view is that the second analysis is correct and that Lovells should recover the VAT on the Norton Rose bill but issue a bill to BAT charging VAT.  Please let me know if you have any questions or require any further information."

6. The answer to that letter came not from Mr Tomaschek but from Matt Clarke (VAT written enquires, HMCE) and is dated 12 May 2003:

"Thank you for your letter dated 20 February 2003 in which you requested confirmation of the correct VAT treatment of services provided by Norton Rose.

From the information provided in your letter, I am of the understanding that the supply is to Andrew Foyle and not a business supply to Lovells. As stated in your letter, the input tax is not Lovells' to recover and not a supply to/by them therefore they should not charge VAT on.

It follows that due to the above, the first possibility stated in your letter summarises the correct VAT treatment.

If you have any further queries relating to the above then please write to me quoting our reference number.  If you have any other queries please either telephone the National Advice Service Helpline or write to the above address."

REVELANT AUTHORITIES

7. As is well known in each accounting period a taxable person must declare the output tax he has received but may deduct from it as input tax any VAT which was paid:

"on the supply to him of any goods or services … used or to be used for the purpose of any business carried on … by him …" (Value Added Tax Act 1994, s.24(1)(a)).

8. In order to claim VAT paid as input tax, the supplies of goods or services to which the VAT relates must have been supplied in the course or furtherance of his own taxable supplies (Section 26(2)(a)) and not, for example, in the course or furtherance of supplies by him which were themselves exempt from VAT or outside the scope of  VAT.
9. In reaching the decision I did I sought to follow the guidance available to me in two cases. The first is Customs & Excise Commissioners v Redrow Group [1999] STC 161 HL.  In that case a well known builder of new houses for sale in the private sector devised a scheme under which it assisted buyers of its houses with their estate agency expenses in selling their existing houses.  The builder hoped to increase its own sales by taking away from its prospective customers the worry and expense of arranging their linked sales.  The builder was allowed to recover the VAT paid to the estate agents as input tax even though, of course, the houses the estate agents were selling were not the builder's houses:

"The estate agents received their instructions from Redrow and, so long as the prospective purchasers completed with Redrow, it was Redrow who paid for the services which were supplied.  I do not see how the transactions between Redrow and the estate agents can be described other than as the supply of services for a consideration to Redrow.  The agents were doing what Redrow instructed them to do, for which they charged a fee which was paid by Redrow" (Lord Hope).

"Questions such as "who benefits from the service?" or "who is the consumer of it?" are not helpful.  The answers are likely to differ according to the interests which various people may have in the transaction.  The matter has to be looked at from the stand point of the person who is claiming the deduction by way of input tax.  Was something done for him for which, in the course of furtherance of the business carried on by him, he has had to pay a consideration which has attracted VAT?  The fact that someone else, in this case the prospective purchaser, also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction" (Lord Hope).

"In fact of course, there can be no question of deducting input tax unless Redrow has incurred a liability to pay it as part of the consideration payable by [it] for a supply of goods or services" (Lord Millett).

"Once the taxpayer has identified the payment, the question to be asked is:  "Did he obtain anything - anything at all - used or to be used for the purpose of his business in return for that payment?"  This will normally consist of the supply of goods or services to the taxpayer.  But it may equally well consist of the right the have goods delivered or services rendered to a third party.  The grant of such a right is itself a supply of services" (Lord Millett).

10. The second case authority which I have endeavoured to follow is HMRC v Jeancharm Ltd [2005] EWHC 839 (Ch).  In that case a company employee was involved in a major road accident as a result of which he was convicted of causing death by dangerous driving.  He had been driving a car belonging to and insured by the company.  The motor insurers appointed legal representatives for the employee and ultimately the company paid the VAT element of their fees and the motor insurers paid the balance.  It was held that the company could not deduct the VAT element of the fees as input tax:

"It follows that on the facts of this particular case two principal questions arose:  was the relevant supply a supply to the company and, secondly, if it was, was the service thus supplied used for the purpose of any business carried on by the company?  It is convenient to call the former question the "to whom?" question and the latter the "purpose" question" (Lindsay J).

MY DECISION

11. I have reached the firm conclusion that Mr Foyle and those indemnifying him cannot recover      from the Claimant any VAT paid on Mr Foyle's representation.  This is because such VAT could have been reclaimed by Lovells in its VAT accounts.  But for the indemnity offered by BATCO Messrs Norton Rose's services were supplied to Messrs Lovells for the purpose of Lovells' business.  I therefore do not accept as correct the certificate as to VAT given in these bills or the opinion as to VAT stated in the correspondence from HMCE. 

THE TO WHOM? QUESTION

12. To my mind there are two sub questions here:   who was instructing Norton Rose and, but for BATCO's offer of indemnity, who would have been liable to pay them?    I recognise that Norton Rose provided legal representation in proceedings under the name of Mr Foyle not Lovells and Norton Rose's invoices were addressed to Mr Foyle not Lovells.    However I take the view that Norton Rose were dealing with Mr Foyle in his capacity as a partner in Lovells.   The proceedings were taken against Mr Foyle because of the work he had done as a partner in Lovells. For most if not all of the relevant time he would have been the client partner and his evidence might relate not only to his own acts but also the acts of others in his team.    The subject matter was of importance not only to him (and BATCO) but also to Lovells.    To my mind it is unreal to suggest that these costs, which were likely to run to six or more figures, would not have been paid by Lovells had BATCO not volunteered to pay them.   Even if the partnership deed between Mr Foyle and his partners did not give him a right to recoup this expense from his partners I think it right to infer that such a right was agreed in relation to these proceedings subject to the promises BATCO made.   The decision in P&O European Ferries (Dover) Ltd (LON/91/2146) provides an example of a large commercial concern undertaking the cost of funding legal representation of others (their employees) even though such funding could not have been required of them had they been unwilling to supply it.
13. Counsel for Mr Foyle raised a powerful argument which runs counter to the decision I made:   what would the position have been had Mr Foyle moved to another firm or retired before the proceedings had started in England?   The answer to that point is that there would be less chance that the costs would be recoverable as input tax by Lovells.    Circumstances do alter cases.   In that different circumstance I would have been less willing to assume that this expense was Lovells' expense.    However, in that circumstance I would imagine that Lovells would not have written as they did to HMCE.

THE PURPOSE QUESTION

14. If the decision I have reached as to the "to whom?" question is correct (ie, that Norton Rose's services were provided to Lovells via Mr Foyle) there can be little doubt that the service was thus supplied for the purpose of the business carried on by Lovells.    The supply arose in consequence of the work done by Mr Foyle in Lovells' name over many years.   The reputational benefits to Lovells are great.    Also, the fact that Mr Foyle resisted the proceedings so far as he reasonably could is likely to have facilitated the continuance of goodwill between Lovells and their important client, BATCO.

THE CERTIFICATES GIVEN IN THE BILLS

15. Paragraph 5.5 of the Costs Practice Direction provides as follows:

"Where there is a dispute as to whether VAT is properly claimed the receiving party must provide a certificate signed by the solicitors … of the receiving party substantially in the form illustrated in Precedent F in the schedule of costs precedents annexed to this Practice Direction …"

16. Although disputes as to the recoverability of VAT in bills are often resolved by the making of such a certificate, I do not accept that such certificates should be regarded as conclusive.   It is always open to a paying party to seek to go behind such a certificate and persuade the Costs Judge, as the Claimant has done in this case, that the certificate is inaccurate.  

CORRESPONDENCE WITH HMCE

17. As a general rule, a Costs Judge conducting a detailed assessment will give great weight to any guidance as to the recoverability of VAT which is given by (what is now) Her Majesty's Revenue & Customs if satisfied that all relevant circumstances were properly revealed to the Commissioners and that the advice given emanates from a senior level.    In this case doubts were expressed as to the seniority of the person to whom Lovells wrote (Mr Tomaschek) and the person who replied (Matt Clarke).   However, I have departed from the guidance Matt Clarke gave not because of any lack of seniority on his part but because I think the alternatives presented to him in Lovells' letter were not correct.    Mr Clarke was invited to conclude that, if Lovells could recoup the cost as input tax, Lovells would then have to deliver a bill to BATCO.    Of course it is completely absurd to suggest that Lovells should deliver a bill to their client in respect of work done by another firm.   In order to avoid that conclusion Mr Clarke chose the first possibility suggested by Lovells.    In my judgment the second possibility suggested by Lovells would have been correct if the inaccurate reference to Lovells invoicing BATCO in respect of this work had been deleted.    Norton Rose supplied legal services to Mr Foyle in his capacity as a partner in Lovells.    Lovells could have treated the VAT on the Norton Rose invoices as input tax and reclaimed them in the normal way.    The evidence requested by the US court in these proceedings relates to Mr Foyle's role as legal adviser to BAT which he performed in his capacity as a partner in Lovells.    Whether or not Mr Foyle gave evidence and the content of his evidence were all matters which potentially had an impact on the business of Lovells.