The following is a letter received from Master Andrew Gordon-Saker, Costs Judge, SCCO:

The Senior Costs Judge is away on official business and he has asked me to respond to your letter dated 21^st February.

I do know that Master Hurst has raised section 5 of the Costs Practice Direction with HMRC and is presently awaiting their response.

Obviously I can only offer my personal view on the question that you raise. As you rightly point out, a solicitor’s liability to account for VAT will ultimately be a matter for HMRC or a VAT tribunal; and whether a party can recover VAT on the fee for a medical report on detailed assessment in any particular case will be a matter for the court hearing that assessment.

Paragraphs 5.11 and 5.12 of the Costs Practice Direction provide:

5.11 Petty (or general) disbursements such as postage, fares etc which are normally treated as part of a solicitor’s overheads and included in his profit costs should be charged with VAT even though they bear no tax when the solicitor incurs them. The cost of travel by public transport on a specific journey for a particular client where it forms part of the service rendered by a solicitor to his client and is charged in his bill of costs, attracts VAT.

5.12 Reference is made to the criteria set out in the VAT Guide (Customs and Excise Notice 700 – 1^st August 1991 edition paragraph 83, or any revised edition of that Notice), as to expenses which are not subject to VAT. Charges for the cost of travel by public transport, postage, telephone calls and telegraphic transfers where these form part of the service rendered by the solicitor to his client are examples of charges which do not satisfy these criteria and are thus liable to VAT at the standard rate.

Section 25.1 of the current version of HMRC Notice 700 (the VAT Guide) provides:

If…

you merely pay amounts to third
parties as the agent of your client
and debit your client with the
precise amounts paid out

Then…

you may be able to treat them as disbursements for VAT purposes and exclude these amounts when you calculate any VA T due on your main supply to your client.

You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met:

you acted as the agent of your client when you paid the third party;

your client actually received and used the goods or services pj^ovided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, telephone bills, postage, and other costs being treated as disbursements for VAT purposes);

your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client);

your client authorised you to make the payment on their behalf;

your client knew that the goods or services you paid for would be provided by

- your outlay will be separately itemised when you invoice your client; you recover only the exact amount which you paid to the third party; and

- the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.

I anticipate that it would be the third of these conditions which in most cases would take the fee for a medico-legal report outside the definition of disbursements for VAT purposes. In the majority of cases I would assume that it would be the solicitor who arranged the examination and report and who would be responsible for paying the doctor or agency.

Some assistance may perhaps be obtained from the second example given at paragraph 25.1.3 of Notice 700:

Example A solicitor pays a fee for a personal search of official records such as
2: a Land Registry, in order to extract information needed to advise a
client.

VAT The solicitor cannot treat the search fee as a disbursement for VAT
treatment: purposes. The fee is charged for the supply of access to the official
record and it is the solicitor, rather than the client, who receives that
supply. The solicitor uses the information in order to give advice to
the client and the recovery of this outlay represents part of the overall
value of the solicitor’s supply. The solicitor must account for output
tax on the full value of the supply.

Note: Where a solicitor pays a fee for a postal search, this may he treated as a disbursement since the solicitor merely obtains a document on behalf of the client. The client will normally need to use the document for their own purposes, such as to obtain a loan.

A medico-legal report is used by the solicitor to give advice to the client and on that basis the cost of the report would be part of the overall value of the solicitor’s supply. In the ordinary way the report would not be used by the client outside of the service provided by the solicitor.

Hopefully the guidance presently awaited from HMRC and any consequent amendment of section 5 will provide a definitive answer.

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