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
		8 May 2008

Master Rogers:

THE ISSUE

1. The issue in this case is whether or not the successful Defendants can recover VAT on the costs assessed by Principal Costs Officer Lambert, from the unsuccessful Claimant. There is also a preliminary point about whether the appeal should be allowed to proceed at all, as it is out of time.

THE BACKGROUND

2. Mr Mehrotra set up his company, Solicitors-In-Law Ltd, on 12 July 2001, and, on 19 November of that year, started to employ the Claimant as a secretary/pa. She was, I was told, the only such employee.
3. On 27 August 2002 she ceased to be employed as a secretary by the company, but started a training contract to become a solicitor.
4. Some thirteen months later Mr Mehrotra was admitted to hospital with a heart attack, and less than a fortnight later, on 6 October 2003, the Claimant was dismissed from both her training contract, and her employment with the Defendants.
5. On the same day she wrote to Mr Mehrotra, stating that she felt mentally and physically exhausted, due to "workload and work pressure".
6. A week later, on 13 October 2003, she wrote again to Mr Mehrotra, saying that she agreed that she could not continue working, but in neither of the letters, of 6 and 13 October 2003, is there any mention of the subsequent allegations of sexual assaults or fraud.
7. On 19 December 2003 the Claimant issued an originating application in the Employment Tribunal against the Defendants.
8. The effective hearing of her complaints took place before an employment tribunal, between 21 and 27 October 2004, and again between 2 December and 20 December in that year.
9. By this time her application had become much broader, and she was alleging sexual assaults by Mr Mehrotra, as well as wholesale fraud on his behalf in respect of his clients.
10. The Claimant was only successful in respect of a very small part of her claim, and the main, and most serious allegations she made, mentioned in the last paragraph, were not upheld.
11. On 12 and 13 May 2005, the Employment Tribunal handed down its judgment on remedies, and, on the second of those two days, refused an application by the Claimant to review its decision.
12. The written judgment of the Tribunal was sent out to the parties on 18 September 2005, awarding the Defendants 100% of their costs.
13. In October and November of 2005 the Department for Constitutional Affairs, and the Law Society respectively, informed Mr Mehrotra that no action would be taken against him in respect of the Claimant's complaints to them about his conduct.
14. On 22 November 2006, the Employment Appeal Tribunal upheld the decision of the Employment Tribunal but reduced the Defendants' costs award from 100% to 80%.

THE COURSE OF THE ASSESSMENT PROCEEDINGS

15. The Employment Tribunal's award was payable within 42 days after judgment, subject of course to its being assessed before then, that is by 31 October 2005.
16. Within a week of receiving the award of costs in its favour, the First Defendants submitted a request for payment, in the sum of £22,803.87, in accordance with the costs schedule which had been prepared for the remedies hearing in May, and seeking payment from the Claimant within seven days.
17. That figure included VAT of £3,773.69, which they contend would have been recoverable by the Defendants.
18. The Claimant sought to defer payment of these costs, pending her appeal to the Employment Appeal Tribunal from the adverse decision of the Employment Tribunal, contending that it would be premature to assess the costs until that court had reached its decision.
19. Nevertheless, on 9 November 2005, the Defendants served Notice of Commencement with a bill, and when no Points of Dispute were served, obtained a default costs certificate.
20. On 7 December 2005, the Defendants applied for a charging order on the Claimant's property, and an interim charging order was made on that date, with the return date for it to be made final, or otherwise dealt with, listed for 6 February 2006, in the local County Court.
21. On 19 May 2006 the Employment Appeal Tribunal hearing took place to determine the costs award made against the Claimant.
22. On 19 June 2006 the Employment Appeal Tribunal handed down its judgment on costs, and paragraph 29 read:

"For the reasons given above we take the view that the case should be remitted to the same ET to reconsider in the light of this judgment whether an award should be made for compensation for failure to provide a written statement of terms and conditions, what compensation for unfair dismissal should be assessed and whether it should be reduced (and if so, if what way), and whether an order for costs should be made (and if so, in what form).

23. The order of the Employment Tribunal leading to the bill of costs (dated 18 September 2006 but signed by the chairman on 22 November 2006) reads as follows:

"The unanimous judgment of the Tribunal is that the Claimant is entitled to an award of £520 in respect of her claim regarding the First Respondent's failure to provide her with written terms and conditions of employment; that there was a 100% chance that had fair procedure been followed the Claimant would have been dismissed; that the Claimant is not entitled to a basic award since her conduct before dismissal was such as to make it just and equitable to reduce the award to nil; that it is just and equitable to reduce the compensatory award to nil since the Claimant's actions were a 80% cause of, that is contribution to, the dismissal; that in bringing the proceeding for those claims which the Tribunal dismissed the Claimant acted unreasonably and was misconceived; in relation to the claim for unfair dismissal the Claimant was misconceived and acted unreasonably and that in the circumstances the Tribunal orders the Claimant to pay 100% of the Respondent's costs as assessed.

The Tribunal also orders the Respondent to pay the Claimant £520."

24. On 7 December 2006 the Defendants served Notice of Commencement, seeking a net amount of £38,927.50.
25. As the matter came from West London County Court, those proceedings had to be started in the Supreme Court Costs Office, which they were, on 20 February 2007, when the bill was balloted to Principal Costs Officer Lambert.
26. On 5 March 2007 Mr Lambert caused to be notified to the parties that the hearing before him would take place on 2 May 2007.
27. Some six weeks later, the Defendants served a revised bill of costs, reducing the amount claimed by them to £28,007.35.
28. The hearing before Principal Costs Officer Lambert took place on 2 May 2007, and, I was told by Mr Gordon, who was present on that occasion, that the hearing was protracted, lasting until about 6.50 pm. Understandably, in those circumstances, the Costs Officer asked the parties to go away and agree the figures, and submit them to him.
29. Apparently, the Defendants alone did the necessary exercise, and sent a schedule to Mr Lambert, but without sending a copy to the Claimant, or her representative.
30. The exact dates when that letter was sent and received are not known, but the certificate was issued by Mr Lambert on 25 May 2007, in the sum of £20,867.50.

SHOULD PERMISSION TO APPEAL OUT OF TIME BE GRANTED?

31. The appeal to a Costs Judge was sent by the Defendants, representing themselves, on 20 March 2008, and was balloted to me, I directing that it be listed for hearing before me on 17 April 2008. At the relevant date, that is to say 25 May 2007, the period within which any such appeal should have been lodged was 14 days, under CPR rule 47.22. It was only subsequently, on 1 October 2007, that that period was enlarged to 21 days, to bring it in line with the uniform period applying to all other appeals.
32. On the face of it, therefore, the appeal was very late, and the Defendants needed permission to appeal out of time, which they duly sought, both in their Notice of Appeal, and also in their Counsel's skeleton.
33. This application was vigorously opposed by Mr Gordon, on behalf of the Claimant, who drew my attention to a number of authorities, all of which state that the rules are there to be complied with, and that there should be finality to all litigation, and therefore applications for permission to appeal out of time should rarely be granted.
34. In particular, he referred to the Court of Appeal decision in Smith v Brough [2005] EWCA Civ 261.
35. Mr Gordon drew my attention to what was said by Lord Justice Brooke, in paragraph 54 of his short supporting judgment:

"54. I agree. From time to time this court is receiving applications for permission to appeal which include an application for a long extension of time for appealing. In agreeing that this application should be dismissed, I wish to stress three matters which appear from the passage of the judgment of Lord Woolf CJ in Taylor v Lawrence [2002] EWCA Civ 90 [b], [2003] QB 528, to which Arden LJ has referred: (1) that it is a fundamental principle of our common law that the outcome of litigation should be final; (2) that the law exceptionally allows appeals out of time; (3) that this, and the other exception mentioned in that passage, are the exception to a general rule of high public importance and reserved for rare and limited cases where the facts justifying the exception can be strictly proved."

36. This "message" has been repeated in many of the cases which have arisen under CPR 3.9, where relief from sanctions is sought to allow an appeal, such as this, to proceed out of time.
37. For instance, in the case of RC Residuals Ltd v Linton Fuel Oils Ltd [2002] 1 WLR 2782, Sir Swinton Thomas said at paragraph 28:

"I agree. This court cannot stress too strongly the importance of strict compliance with court orders particularly unless orders. If relief is granted likely an entirely wrong message goes out to litigants and their advisors …"

38. The very latest pronouncement is to be found in a decision handed down by Mr Justice Floyd, only two days prior to the hearing before me (Supperstone v Hurst [2008] EWHC 735 (Ch)),on an appeal in relation to a decision of a Costs Judge to grant relief from sanctions, where the learned Judge said at paragraph 39:

"39. I agree that relief from sanctions should not be granted lightly and any party who fails to comply with the CPR runs a significant risk that he will be refused relief. Thus if a party does not have a good explanation, or the other side is prejudiced by his failure, relief from sanctions will usually be refused. It is vitally important to the administration of justice that the rules of procedure are observed."

39. On the face of the dates, therefore, it seemed to me, on preparing for the appeal, that the Claimant had strong grounds for resisting the application to appeal out of time. The delay was one of some ten months, and the point, namely whether or not VAT was recoverable, was apparent from Mr Lambert's decision and markings on the bill made on 2 May 2007. Indeed, Mr Gordon told me that when the point was argued before him, on 2 May, Mr Lambert had made it very clear that VAT was not recoverable from the Claimants, because he considered that it could be recovered by the Defendants as an input tax from HM Customs & Excise.
40. Accordingly, Mr Gordon, in his submissions on the Defendant's application for permission to appeal out of time, took me through the various sub-paragraphs of CPR 3.9, emphasising his view, that most of them came down in his favour, and against the grant of an extension.
41. However, during the course of a sustained argument on this matter, which took over 2 hours, some somewhat unusual facts came to light, which, in my judgment, cast a very different light on matters.
42. The Claimant's advisors, when they received the final costs certificate, were concerned that Mr Lambert might not have made the 20% deduction, which was part of the costs order made by the Employment Tribunal in November 2006, and accordingly they wrote to Mr Lambert asking him to correct the final certificate to reflect that fact, under the slip rule (CPR 40.12).
43. A copy was sent to the Defendants on the same day.
44. Similarly, the Defendants, after corresponding with the VAT authorities, wrote to Mr Lambert with copies of that correspondence, which suggested that his original decision had been wrong, so far as VAT was concerned, presumably also under the slip rule.
45. Again, the Defendants chose not to notify the Claimant of what they were doing.
46. Perhaps regrettably, but understandably, Mr Lambert decided to try to deal with both these matters under the slip rule, though, in retrospect, it would clearly have been better had he not done this, or, at the very least, if he had kept copies of his attendance notes on the court file, which unhappily he did not.
47. Ultimately, in January 2008, Mr Lambert suggested to both sides that the best way ahead would be for him to conduct a telephone hearing on both points, and this was fixed for 26 February.
48. The Claimant had instructed new specialist counsel (Mr Gordon – actually instruct in August 2006). Mr Arnold (for the Defendants) asked for more time to put in written representations about the 20% reduction point, if I can so describe it, which was granted.
49. Mr Arnold, on behalf of the Defendant, referred Mr Lambert to a VAT case (referred to later in this judgment), which he said was conclusive in his favour.
50. There is no record of exactly what he said, but Mr Gordon believes that, at that point, Mr Lambert refused to deal with the VAT aspect of the matter any further, saying that it was a matter for appeal by Mr Arnold and his client.
51. Mr Arnold, it was said, responded that the appeal was now late, but Mr Lambert refused to change his mind and deal with the matter.
52. The unsatisfactory situation that has now arisen is that Mr Lambert remains seised of the issue of whether or not there should be a reduction in the amount due under the final costs certificate on the "20% point", whereas the VAT point has been brought before me on appeal.
53. As I informed the parties at the hearing, in my judgment the final decision by Mr Lambert, in relation to the VAT point, was made on 26 February 2008, when he refused to hear any further arguments about changing the decision he had made on 2 May 2007, which is reflected in the final costs certificate, which he caused to be issued on 25 May 2007.
54. The appeal, therefore, is still out of time, but only by some eight days, compared with the ten months which it would be out of time if I had accepted Mr Gordon's submission, that the final decision made by Mr Lambert was that made between 2 and 25 May last year, when he caused the certificate to be issued.
55. In those circumstances, it seemed to me that it would not be unfair, and would be a proper exercise of my discretion, balancing the various matters that need to be considered under rule 3.9, to allow the appeal to proceed out of time, and that is why I granted permission to that effect.
56. However, I think the moral to be drawn from this aspect of the appeal, if not from the commentary mentioned above, is that it is unwise for any judicial officer to seek, however well meaningly, to open the door to reconsideration of a judicial decision which he has made, and which has been recorded in a document of legal significance, such as a final costs certificate.
57. In this case the Defendant has been seeking to enforce its costs order against the Claimant, by way of a charging order, and considerable litigation has been generated by that in West County Court.
58. That is not directly relevant to the decision that I need to take, because if the Defendants are right, the amount of their charge will be increased by some £3,000, but, even if they are wrong, it will not hinder their obtaining a final charging order. However, it might well have been otherwise, involving a substantial effect on the charging order proceedings.

THE VAT POINT

59. The starting point in relation to VAT clearly is paragraph 5.5 of the Costs Practice Direction, which 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 or the auditors of the receiving party substantially in the form illustrated in Precedent F in the Schedule of Costs Precedents annexed to this Practice Direction. Where the receiving party is a litigant in person who is claiming VAT, reference should be made by him to HM Revenue and Customs and wherever possible a statement to similar effect produced at the hearing at which costs are assessed."

60. It is, however, clear from the decision of Master O'Hare in the case of United States of America v Philip Morris Inc & Ors [2006] EWHC 90067 (Costs), that such certificate, or statement, is not necessarily conclusive. In paragraph 16 of his judgment, Master O'Hare says:

"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."

61. Mr Shale included in the small bundle of documents, which he submitted in support of his appeal, an exchange of correspondence between the Defendants and HM Revenue & Customs.
62. That correspondence starts with a letter sent by the Defendant to HM Customs & Excise on 14 May 2007, the relevant paragraphs of which read:

"We confirm that since 1 March 2007 we are no longer registered for VAT.

However during the relevant period this firm had been sued by an employee and been taken to the Employment Tribunal for which this firm had to pay fees and charges which were vat-able both to KE Davis & Sons and to Counsel/Barrister.

We had an assessment hearing of the costs awarded in our favour on 2^nd May 2007 before Mr Lambert the Supreme Court Costs Officer in the High Court of Justice who brought to our attention the fact that this firm is entitled to recover all VAT paid. As a consequence he disallowed any VAT claimed on all the bills of both KE Davis & Sons as well as Counsel's fees. Copies of the invoices of Counsel's fees and KE Davis & Sons are herewith enclosed and you will observe that for each relevant period the amount of VAT refund is as follows:

Tax Period	VAT	Invoice
A) 1st October 2003 - 30th September 2004	£350.00	KE Davis & Sons 28 July 2004 - £2,000.00
	£131.25	27 August 2004 - £750.00
	£140.00	29 September 2004 - £800.00
		Counsel James Arnold
	£131.25	21 June 2004 - £750.00
	£43.75	1 September 2004 - £250.00
B) 1st October 2004 - 30th September 2005	£875.00	KE Davis & Sons 29 October 2004 - £5,000.00
	£52.50	Counsel James Arnold 11 October 2004 - £300.00
	£612.50	27 October 2004 - £3,500.00
	£43.75	20 January 2005 - £250.00
	£150.94	20 April 2005 - £862.50
	£192.50	20 June 2005 - £1,100.00
C) 1st October 2005 - 30th September 2006	£308.07	Counsel James Arnold 23 August 2006 - £1,760.42
D) 1st October 2006 - 30th September 2007	£229.69	Counsel James Arnold 23 January 2007 - £1,312.50
Total VAT paid	£3,261.20

We also enclose herewith copies of The Law Society VAT Guide 1996 pp.13-15 and SCCO Guide 2006 paragraph 2.23 VAT attached thereto for your ready reference.

We therefore look forward to receiving this payment in the sum of £3,261.20 for VAT paid during the above mentioned periods.

Yours faithfully,

Solicitors-in-Law Ltd"

63. The reply, which came from HM Revenue & Customs, is dated 18 June 2007. The relevant part of which reads as follows:

"Before I can consider your claim I need more details on what the tribunal case was about. There have been large numbers of court and tribunal cases concerned with whether supplies are used for the purpose of the business, in particular in relation to legal costs.

When recovering input tax in respect of legal services it is important to consider, whether the services were supplied for the purpose of the business.

The following extract from the "Rosner" judgment illustrates the principle that for legal services to be regarded as having been obtained for the purpose of a business there must normally be a direct connection between the nature of the legal action and the activities of the business:

"I suppose it could be argued that where the offence with which any company is charged is an offence which relates directly to its trading activities, then the legal costs incurred in defending that company would be so and sufficiently connected as to mean the legal expenditure would be for the purposes of the company. However, as one moves away from the concept of the offence being an offence committed in relation to the activities of the company, it becomes more and more difficult to argue that the expenditure is being incurred for the purpose of the company. In particular it seems to me that one must identify the activity in respect of which it is said that there has been a criminal offence and the extent to which the activity is an activity which relates directly to the carrying on of the business and therefore the purpose of the business."

The above extract has been taken from the VAT Guidance V-13 SERIES Pg 93."

64. The reply from the Defendants, is contained in their letter of 25 June 2007, which reads:

"This has reference to your letter dated 18^th June 2007 and the conversation had with you and with Counsel, the Supreme Court Taxing Office and with the Law Society. Please be advised that this firm in defending the action appointed other solicitors and Counsel which they are fully entitled to do to defend the claim brought by an ex-employee for unfair dismissal and several other claims as an employee, at which she failed in.

Accordingly the Supreme Court Costs Office refused to give VAT on a Cost Order assessed on the simple basis that we are entitled to claim this as input tax.

We hope that this clarifies the situation and accordingly look forward to hearing from you."

65. HM Customs & Excise did not consider that was an adequate response to their queries, and said this, in a letter sent on 5 July:

"… You have not addressed the points in my original letter fully.

I need to know if the nature of the legal action has a direct impact on the actual running of the business. I need more precise details on the tribunal case and how it affected your business. The information below on compensation payments may help to clarify the situation.

Compensation payments for damage or loss are outside the scope of VAT as they are not a consideration for a supply. This is because the payments are made as a direct result of a court order or agreement between two parties to compensate one party for suffering some inconvenience, loss or damage."

66. The Defendant replied on 9 July 2007, the relevant paragraphs of that letter reading:

"The legal action had a direct impact on the actual running of the business in as much as the turnover of this firm was directly affected as a consequence of the claims made by this former employee (the Claimant) and the subsequent proceedings which took place over the last few years. We can provide evidence of the same if necessary.

Kindly note that the Claimant was not successful in substantially any of her claims and that no payments made were therefore compensation payments except for some minor technical matters.

The amount of VAT payments which are the subject matter of our earlier letters relate exclusively to counsel's and solicitors' fees for acting on this firm's behalf in defending this firm in legal proceedings issued by the claimant.

As a consequence of our success in defending ourselves against the same claims the court issued a cost order but the Costs Office did not include VAT already paid out in relation to counsel's and solicitors' fees as he stated that we were entitled to claim it as input VAT."

67. The correspondence concluded with a letter from HM Revenue & Customs, of 16 August 2007, which reads as follows:

"Thank you very much for your letter dated 09/07/07 and received in this office on the 16/07/07.

Unfortunately you cannot claim back VAT in this case as the legal costs are not an actual business expense. I am aware that the legal action had a direct impact on the running of the business but the dispute did not involve your actual trading activities.

Compensation payments for damage or loss are outside the scope of VAT as they are not a consideration for a supply. This is because the payments are made as a direct result of a court order or an agreement between two parties to compensate one party for suffering some inconvenience, loss or damage.

Please present this letter and our previous correspondence to the Court Cost Officer so that you can be correctly refunded for the VAT through the Court."

MR SHALE'S SUBMISSIONS ON BEHALF OF THE DEFENDANTS

68. Mr Shale's primary argument before me, therefore, was that this correspondence amounts to the "statement" required from the VAT Authorities specified in CPD 5.5, and that, in the light of those documents, Mr Lambert ought to have amended the final certificate to include VAT, and, on this appeal, I should do so.
69. One of the arguments made against this submission by Mr Gordon, was that the writer of the letters at the VAT Office was very junior, a Miss N Purohit, described as an assistant officer. Mr Shale responded that she must have had the relevant authority to write the letter, and, even if she was fairly junior, she must have been supervised, and that I should accept the letters at face value.
70. Interestingly, this very point seems to have arisen in the United States of America case, which I referred to above, where, in paragraph 17 Master O'Hare says:

"… 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. ..."

71. Though it is tempting to do so, I do not think it would be right for me to decide this case, simply on the basis that the correspondence provided by the Defendants, and in particular the very last letter from the VAT Authorities, should be treated as conclusive.
72. Accordingly, both Counsel dealt with the relevant law and authorities, as they saw them, in their skeletons, and in their further submissions to me.
73. Mr Shale's skeleton refers to an extract from Tolly (paragraph 35.6):

"Where the connection between the expenditure and the business is not clear, the following tests should be applied:

(a) Determine the intention of the person at the time of incurring the expenditure. This is a subjective test and where there is no obvious association between the business and the expenditure concerned, the court should approach any assertion that it is for the business with circumspection and care In Flockton Developments Ltd v C & E Commrs QB 1987 STC 394.

(b) Establish whether or not there is a clear connection between the actual or intended use of the goods or services and the activities business. This is an objective test of the use to which the goods or services are put.

In the circumstances of this case the legal services were applied to Defend the Defendants from untrue civil allegations of sexual assault and Fraud. This was not connected with the business activities of a solicitor.

5) The Defendant would also refer to the attached case of Marks v The Commissioners of Customs and Excise 1993. Here the legal services were expended to Defend a claim for the return of £12,000 of a Director's severance pay due to an issue as to whether his severance pay was £36,000 or £36,000 plus a £12,000 car. The VAT element of the legal costs was not deductible.

It is submitted that if in this case it was not allowed how can it be allowed in the present case where criminal wrongs, albeit in a civil Court are alleged."

74. Mr Shale relied heavily on the judgment of Latham J (as he then was), in the case of Customs & Excise Commissioners v Rosner [1994] BTC 5044, a full transcript of which was produced. Part of the headnote reads as follows:

"This was an appeal by Customs against the decision of the VAT tribunal that legal expenses incurred by the taxpayer in defending criminal proceedings against him were deductible as input tax as expenditure for the purposes of his business.

The taxpayer owned and ran a private educational establishment for foreign students, mainly from the third world, who required permits to enter the UK based on their attendance at the school.

In 1988 the taxpayer was charged with others with conspiracy to defraud in relation to the provision of false information under the Immigration Act 1971 and assisting persons in making false representations about whether they were genuine students or not. He received a suspended sentence on conviction and was ordered to pay £40,000 costs.

The taxpayer claimed credit for input tax of £17,090.55 under the Value Added Tax Act 1983, s.14 in respect of legal costs which was disallowed by Customs. The VAT tribunal allowed his appeal on the basis that the outcome of the criminal proceedings directly affected and was bound up with the purposes of the business and the taxpayer and was therefore entitled to deduct at least part of the input tax claimed."

75. The ratio of the judgment appears to be in the following paragraphs:

"It follows that there can be no question but that the tribunal in directing its attention to the outcome of the criminal proceedings was in error. It was committing the error of looking at the question of benefit to the business as opposed to determining the true question which is the question of whether the expenditure was for the purpose of the business.

In the present case the facts seem to me to make it abundantly clear that the only conclusion must be that the criminal offences in respect of which the legal expenses claimed were incurred were offences which, whilst they had a connection with the business in the sense that it would appear as though the immigration offences related to people who might become students of the business, they were not offences which related to the carrying on of the business. They were sufficiently removed from the purpose of the business to mean that the expenditure was not incurred for the purpose of the business.

For those reasons it seems to me that the tribunal fell into error and that the right order would have been to disallow these payments as input tax. I would therefore restore the original decision of the commissioners."

76. Mr Shale also referred me to the case of Marks v Commissioners of Customs & Excise, which is a VAT Tribunal decision where the relevant part of the Chairman's judgment reads:

"The principal issue in dispute arises in this way. Mr Marks, who has 30 years experience in the men's fashion clothing industry, was, in June 1989, managing director of the core division of Jaytex Ltd and a director of that company. In that month Mr Marks was required to leave the company. By way of compensation he was to receive, firstly, £18,000 representing 6 months salary and, secondly, a further sum of £18,000; there was evidently dispute as to the last term for Mr Marks believed that in addition to these sums he was to retain a BMW motor car or to receive a further sum of £12,000 as its agreed value. Jaytex Ltd, however, apparently believed that if Mr Marks retained the BMW his cash payment was to be reduced by £12,000. In July 1989, however, he was evidently given a cheque for £36,000 and allowed to keep the BMW.

He also started in business on his own account as a manufacturers' agent and marketing consultant. He sold other people's products on commission and gave advice on marketing.

In October 1989 Jaytex demanded the repayment of £12,000 allegedly overpaid to him under the settlement or the return of the BMW. Mr Marks refused to do either and in mid-November was told that the company would institute proceedings. They did so and succeeded against Mr Marks in the Westminster County Court.

It is the VAT in respect of his solicitor's bills in these proceedings that is in issue in this appeal. Mr Marks said that he resisted the claim because otherwise he would not have been able to carry on his business. Although he lost the action he did nonetheless subsequently succeed in keeping his business going.

The question is therefore whether these payments for legal services can be described as used or to be used for the purpose of his business and as attributable to taxable supplies made or to be made by Mr Marks in the course or furtherance of his business within sections 14 and 15 of the Value Added Tax Act 1983."

77. After quoting from another Tribunal case, whose chairman was a Mr Fearns, the Chairman said this:

"Following Mr Fearns, I can see that it would be for the benefit of Mr Marks' business if a claim against him for £12,000 could be reasonably resisted. But there seems to me to be an insufficient nexus between this legal expenditure and the business he carries on. On this part of the appeal I am against the Appellant and accept the position of the Commissioners."

78. Mr Shale submitted that the charges made against him, and his company, by the Claimant were very serious, amounting to sexual assaults, if not rape, and the defrauding of clients, which of course amounts to fraud, and, as such, brings his case squarely within the principle of Rosner.

THE CLAIMANT'S SUBMISSIONS

79. In his skeleton, Mr Gordon refers me to the actual wording of Section 26 of the Value Added Tax Act 1994:

"Input tax allowable under Section 25

26(1) The amount of input tax which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in that period) as is allowable by or under Regulations as being attributable to supplies within sub-section (2) below.

26(2) The supplies within this sub-section are the following supplies made or to be made by the taxable person in the course or furtherance of his business –

(a) taxable supplies."

80. Mr Gordon's skeleton continues, in paragraphs 26 to 29:

"26. In the present case, a taxpayer business was taken to the employment tribunal by a former employee. Contrary, to the Receiving Party's submissions, that clearly comes within the heading of "in the course [or furtherance] of business" and the VAT was paid on the supply to it of services used for the purpose of its business. This is in just the same way as every other civil dispute arising out of the day-to-day activities of a VAT-registered business. There is clearly the nexus referred to by Latham J in Rosner.

27. The Receiving Party has cited the case of Rosner. The facts of that case show why Mr Rosner's claim falls outside the scope of the statutory relief. Mr Rosner has claimed the VAT in respect of the defence costs for a criminal prosecution against him. That differs from having to defend a company in a claim for unfair dismissal where criminal acts were alleged by the former employee.

28. Mr Rosner's defence was a service to him which undoubtedly benefited the business. Arguably, they were incurred (partly) for the purposes of the business. However, even if the defence costs were incurred for the purposes of the business, they were not incurred in the course of the business.

29. Rosner reinforces the view that employers can recover costs incurred in respect of actions concerning their employees. In that case, there was no disallowance of VAT incurred in respect of the defence fees paid by the business in respect of its employees. The allegations made by the Paying Party concerned the director of the Receiving Party and not the Receiving Party personally. They were merely subsidiary to the issue of the unfair dismissal. Thus Rosner does not assist the Receiving Party."

81. Mr Gordon submitted that the decision in Rosner had been doubted in a number of cases, the most important of which was perhaps Revenue and Customs Commissioners v Jeancharm Ltd (t/a Beaver International) [2005] BTC 5285, and also in the decision of the House of Lords, in the case of Customs & Excise Commissioners v Redrow Group Plc [1999] BTC 5062.
82. Interestingly, these cases are dealt with at some length by Master O'Hare, in the United States of America case, at paragraphs 9 to 11. In those paragraphs he sets out the facts of the cases, and concludes that they support the view which he has formed, that VAT could not be recovered on the facts of that case.
83. Those paragraphs read as follows:

"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 supplier 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 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 with HMCE."

84. I have re-read the two cases in question, but do not consider that either casts doubt on the decision in Rosner, let alone purports to overrule it.

SHOULD THIS MATTER GO TO A VAT TRIBUNAL FOR DETERMINATION?

85. At the conclusion of the submissions I floated to the advocates the suggestion that this was a highly technical matter, upon which a definitive ruling from a VAT Tribunal would satisfy everybody, in a way that perhaps any decision from me would not. It would seem, from the debate that we had, that it would not be too late for an application to be made to the Tribunal, but probably the application would need to be made by the Defendants, who, understandably, are unwilling to incur further expenditure on such an exercise.
86. Mr Gordon offered to repay the VAT, if, as a result of the application to the VAT Tribunal, the decision confirmed the advice given in the correspondence, from which I have quoted, but understandably Mr Shale was not inclined to take up that suggestion.
87. As there appears to be some doubt about whether such an application would be out of time, and because of the further delay and expense that would thereby be incurred, I rejected that proposal.

MY DECISION

88. Having given the matter careful thought, I have come to the conclusion that Mr Shale's submissions are to be preferred, for the reasons which he has set out in his skeleton, from which I have quoted. Following Rosner, I consider that the expenditure incurred by the Defendants was not incurred "for the purpose of the business". Accordingly HM Customs & Excise were correct to refuse a refund of the VAT incurred by the Defendants.
89. Accordingly, I allow the appeal and direct the final costs certificate granted by Mr Lambert to be amended to include the VAT element of £3,621.20.
90. There may, of course, have to be a further adjustment after Mr Lambert makes his decision on the other application, under the slip rule, which I referred to above, in relation to the "20% point". This should be done promptly, so that this matter can be quickly concluded.

COSTS

91. Neither side was anxious to come back and incur further costs when this judgment is formally handed down, and accordingly, Mr Shale handed in a schedule of costs, totalling £2,743.30, together with VAT of £375.08. Of that sum £600 represents the solicitor's attendance with Mr Shale at the hearing before me, which I think was fully justified, but that does not attract VAT, because Solicitors-in-Law Ltd no longer trades, and therefore does not recover VAT, and, the firm which succeeded it, is not registered for VAT either.
92. Mr Gordon conceded that if the appeal succeeded, it meant that the VAT on the principal bill was recoverable, and therefore the VAT on these costs was also recoverable.
93. Accordingly, I direct the Claimant to pay the costs of the appeal, summarily assessed at £3,118.38, inclusive of VAT.