British Airways Plc v Prosser

Nowadays, solicitors instructed on personal injury claims will sometimes use a medical reporting organisation (or “MRO”) to obtain relevant medical reports and records. That was what happened here. The respondent, Mr John Prosser, had been injured at work on 26 May 2014. He instructed Sintons Law, solicitors, to act for him in a claim against the respondent, British Airways plc (“BA”), by whom he was employed. Sintons in turn commissioned Absolute Medicals Limited (“AML”), an MRO that they owned, to secure medical reports and records. Between December 2014 and June 2016, AML invoiced Sintons for a total of £1,278, £213 of which was attributable to value added tax (“VAT”). Two of the invoices expressly recorded that

BA admitted liability to Mr Prosser and in September 2016 damages were agreed at £15,424.98. BA also made a payment in respect of the fixed costs to which Mr Prosser was entitled. BA took issue, however, with the sums that Mr Prosser claimed for disbursements. While, therefore, it made an interim payment on account of disbursements, it denied liability for much of the VAT included in the invoices from AML. As a result, Mr Prosser issued costs-only proceedings, pursuant to CPR 46.14, on 23 December 2016. On 8 February 2017, District Judge Temple, sitting in the County Court at Newcastle Upon Tyne, made an order for BA to pay Mr Prosser’s reasonable disbursements, to be assessed if not agreed. Assessment proceedings ensued, culminating in an oral hearing before District Judge Temple on 16 July 2018.

BA’s position was that AML should in fact have charged VAT only on the element of each invoice that represented its administration fee. As to the remainder, the doctors, medical centre and hospitals would not have levied VAT (because the providers were not VAT-registered or their supplies were exempt), and AML (so it was argued) should not have done so either. In the circumstances, BA should not be required to meet the excess (viz. £189).

District Judge Temple did not accept BA’s contentions. She said that, if she had to make a decision on the point, it was her view that VAT was properly chargeable on the totality of AML’s invoices and not merely AML’s administration fees. She considered that AML “is not simply a direct agent or post-box … for the solicitor/client” but “provides services whereby it obtains records and reports and passes those back on to the solicitor” (paragraph 18 of the judgment). However, she saw the question that she had to ask as being, “was it unreasonable and disproportionate for the claimant’s solicitors to incur these fees and was it unreasonable and disproportionate for the claimant’s solicitors not to investigate and ask questions of their supplier in relation to the VAT status” (paragraph 22). The District Judge went on:

“My view is that it would have been entirely unreasonable and disproportionate to expect the claimant’s solicitors to start questioning the VAT status of the invoice that was provided to them by the medical agency. That, in my view, is going way too far on the expectations that are to be placed on a claimant’s solicitor.

It is not, under a standard basis of assessment of costs, the job of a claimant solicitor to take every step necessary or possible to investigate whether or not a cost has been properly incurred.

The issue is whether or not the claimant’s solicitors have acted reasonably and proportionately, and whether or not those costs have been reasonably and properly incurred. My view is that it was perfectly reasonable and proportionate for the claimant’s solicitors to accept the bill as it was presented to it on the face of it, including the VAT that was charged. It is not for the claimant’s solicitors to start investigating with their supplier and with the tax authorities, whether or not the supplier should or should not be charging VAT on particular aspects of their bill. That is a matter between the supplier and the taxman.”

On 29 October 2018, His Honour Judge Freedman, sitting in the County Court at

In January of this year, BA’s solicitors informed HM Revenue & Customs (“HMRC”) of the forthcoming appeal, but in February HMRC confirmed that they would not be applying to join the proceedings.

The parties’ contentions give rise to two issues:

It is convenient to address the second of these points next.

In general, the only costs that a successful claimant can recover in a claim under the Pre-Action Protocol for Low Value Personal Injury (Employers’ Liability and Public Liability) Claims (such as Mr Prosser’s was) are the fixed costs laid down by Part 45 of the CPR and “disbursements in accordance with rule 45.29I”. Under CPR 45.29I, such costs can include “the cost of obtaining medical records and expert medical reports as provided for in the relevant Protocol” (see CPR 45.29I(2)(a)). However,

Mr Laurent Sykes QC, who appeared for BA, pointed out that costs “are not imposed as a punishment on the party who pays them, nor given as a bonus to the party who receives them”, but are rather “given by the law as an indemnity to the person entitled to them” (Harold v Smith (1860) 5 H & N 381, at 385, per Bramwell B). If, he argued,

As, however, was pointed out by Mr Steven Turner, who appeared for Mr Prosser,

The question then arises whether the sums claimed in the invoices were “reasonably and proportionately incurred” and “reasonable and proportionate in amount”, so as to satisfy the requirements of CPR 44.3. District Judge Temple considered that they were, and it seems to me that she was amply entitled to take that view. This was a low value claim in which Sintons could recover no more than the relatively modest fixed costs prescribed by CPR 45.29E by way of remuneration. The amount at stake with which Mr Prosser should, on BA’s case, have taken issue was, moreover, tiny: just £189. On top of that, whether or not Sintons were aware of them at the time, there were seemingly authoritative materials appearing to confirm that VAT was chargeable. In a letter to Deloitte & Touche LLP dated 29 April 2008, HMRC stated that a claim handling service provider (or “CHSP”) “must account for VAT on the full amount charged to their client” so that, “where the total charge made comprises the £50 fee charged by the doctor or hospital, plus a further charge made by the CHSP of, say, £30, the total value of the CHSP’s supply for VAT purposes will be £80, and it is this amount on which VAT must be calculated”. Again, a (now withdrawn) practice note published by the Law Society in 2011 suggested that VAT was probably payable on the totality of what an MRO charged. In all the circumstances, it is readily comprehensible that the District Judge did not think that it was incumbent on Sintons to investigate the VAT position.

That is not to say that the fact that VAT was charged on a bill that a receiving party has paid will always mean that the cost was reasonable and proportionate. If, say, the

On the facts of the present case, however, I would answer the question posed in paragraph 7(ii) above in the affirmative. In other words, it appears to me that District Judge Temple was entitled to allow the costs claimed, including the VAT, regardless of whether AML was actually obliged to charge VAT as it did.

That conclusion suffices to dispose of the present appeal. It could not, however, be right for me to stop here. Given the importance of the issue to insurers, we ought, I think, to try to give such guidance as we can on when VAT should be charged.

VAT is charged by reference to the “taxable amount” of a supply. Under article 73 of

After referring to the equivalent provision then to be found in the predecessor of the Principal VAT Directive (viz. article 11A(3)(c) of the Sixth Council Directive of 17 May 1977 (77/388/EEC)), Sir Christopher Slade explained as follows in Nell Gwynn House Maintenance Fund Trustees v Customs and Excise Commissioners [1996] STC 310 (at 326):

“VAT law draws a clear distinction in principle between (i) the case when the relevant expenses paid to a third party C have been incurred by A in the course of making his own supply of services to B and as part of the whole of the services rendered by him to B; and (ii) the case where specific services have been supplied by the third party C to B (not A) and A has merely acted as B’s known and authorised representative in paying C. Only in case (ii) can the amounts of the payments to C qualify for treatment as disbursements for VAT purposes, and on this account as constituting no part of the consideration for A's own services to B.”

When the case reached the House of Lords, Lord Slynn expressed agreement with Sir Christopher Slade on this point: see [1999] 1 WLR 174, at 183-184.

Just as the concept of a “supply” is “an autonomous concept of the EU-wide VAT system” (see Revenue and Customs Commissioners v Airtours Holidays Transport Ltd [2016] UKSC 21, [2016] STC 1509, per Lord Neuberger, at paragraph 20), so must article 79(c) of the Principal VAT Directive fall to be interpreted in its own terms rather than on the basis of the domestic law of Member States. This is borne out by a passage from the opinion of Advocate General Kokott in Case C-98/05 De Danske Bilimportører v Skatteministeriet EU:C:2006:186. At paragraph 40, the Advocate General observed that the question which she was addressing:

“must be answered by reference to Article 11(A)(3)(c) of the Sixth Directive, that is to say, the Community law notion of acting in the name and for the account of another and not by reference to civil law provisions concerning agency and mandate which vary from one legal system to another”.

“[C]onsideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT” (Case C-653/11 Revenue and Customs Commissioners v Newey [2013] STC 2432, at paragraph 42 of the judgment). The contractual position may nonetheless be important. That can be seen from the decision of the Supreme Court in Secret Hotels Ltd (formerly Med Hotels Ltd) v Revenue and Customs Commissioners [2014] UKSC 26, [2014] STC 937. The case concerned article 306(1) of the Principal VAT Directive, which provides:

“Member States shall apply a special VAT scheme, in accordance with this Chapter, to transactions carried out by travel agents who deal with customers in their own name and use supplies of goods or services provided by other taxable persons, in the provision of travel facilities.

This special scheme shall not apply to travel agents where they act solely as intermediaries and to whom point (c) of the first paragraph of Article 79 applies for the purposes of calculating the taxable amount.”

The issue was whether the business of “Med”, which marketed hotel rooms, fell within the second of these paragraphs. In that connection, Lord Neuberger said this:

“[34] In the present proceedings, it has never been suggested that the written agreements between Med and hoteliers, namely the Accommodation Agreements, were a sham or liable to rectification. Nor has it been suggested that the terms contained on the website (‘the website terms’), which governed the relationship between Med and the customers …, were a sham or liable to rectification. In these circumstances, it appears to me that (i) the right starting point is to characterise the nature of the relationship between Med, the customer, and the hotel, in the light of the Accommodation Agreement and the website terms (‘the contractual documentation’), (ii) one must next consider whether that characterisation can be said to represent the economic reality of the relationship in the light of any relevant facts, and (iii) if so, the final issue is the result of this characterisation so far as art 306 is concerned.

[35] … In order to decide whether the FTT was entitled to reach the conclusion that it did, one must identify the nature of the relationship between Med, the hotelier, and the customer, and, in order to do that, one must first consider the effect of the contractual documentation, and then see whether any

conclusion is vitiated by the facts relied on by either party.”

Various United Kingdom cases have raised issues as to whether VAT was chargeable on expenses incurred in relation to work undertaken by solicitors. The earliest to which we were referred was Rowe & Maw v Customs and Excise Commissioners

Rather more recently, in Makuwatsine v Trathens Travel Services Ltd, 9 July 2010, unreported, His Honour Judge Grenfell considered that a solicitor had been right to charge VAT on “the fee for obtaining medical notes in a claim for personal injuries” (paragraph 1 of the judgment). In Judge Grenfell’s view, the District Judge whose decision was under appeal “correctly found that it was the solicitor who received and

That case can be contrasted with Barratt, Goff and Tomlinson v Revenue and Customs

Judge Demack further said that he had concluded that “the case presented by Mr. Milne [i.e. Mr David Milne QC, who had put in written submissions on behalf of the

In Kellett v Wigan & District Community Transport, 16 September 2015, unreported, neither side appears to have taken issue with the Barratts case, which was cited. The claimant’s solicitors had invoked the services of a medical agency to obtain a medical report in connection with a personal injury claim, and the amount for which the agency had invoiced the solicitors represented the doctor’s fee, an amount in respect of the agency’s own services, and VAT on both elements. His Honour Judge Platts, sitting in the County Court at Manchester, decided that VAT was not properly chargeable on so much of the invoice as was attributable to the doctor’s fee. Judge Platts said in paragraph 21 of his judgment:

“It seems to me that, on any proper construction of the relationship here, the payment by the agency to the expert was expenditure incurred in the name of the solicitor and/or the Claimant and on behalf of the solicitor and/or the Claimant.

The last case I should mention is the decision of the FTT in Brabners LLP v Revenue and Customs Commissioners [2017] UKFTT 0666 (TC). The question there was whether search fees charged to a law firm undertaking conveyancing work by Searchflow, a specialist online search agency, bore VAT. FTT Judge McNall held that they did. He explained:

“47.

In my view, the relevant expenses paid to Searchflow have been incurred by the Appellant ‘in the course of making its own supply of services to’ (its client) ‘and as part of the whole of the services rendered by it to (its client)’ - the first category identified in Nell Gwynn House Maintenance Fund Trustees.

48.

The Appellant is supplying conveyancing services. As part of this, it owes its clients a duty to take reasonable care and skill. It routinely makes property searches. This is because the client is asking the Appellants, as solicitors, to ensure that the transaction can safely go ahead; and is expecting the Appellants, as solicitors, to identify any risks or other factors adversely affecting the subject property.

49.The client expects the Appellant to do all that is necessary for the transaction - unless the Appellant is told expressly otherwise - which includes making all relevant searches and inquiries, and to draw anything relevant in them to the client's attention ….

50.The Appellants are not simply a conduit or post-box for search results. Simple common sense dictates that clients engage the Appellant in transactional work since the Appellant knows what it is doing, knows what a search is, knows what searches to obtain, knows how to get them quickly and conveniently, and knows what to do with them when it gets them.”

Judge McNall rejected the “argument that the act of obtaining the search results is separate from the provision of the advice”, which, he said, was a “species of artificial disaggregation” which “disregard[ed] the overall nature of the supply” (paragraph 61).

With regard to the Barratts case, Judge McNall said that he “part[ed] company with [Judge Demack] on his ultimate analysis” (paragraph 69). He continued:

“70.

In Barratt, the Tribunal was dealing with a materially different scenario, namely the obtaining of medical records and the reporting on them in the context of personal injury litigation. The scenario in Barratt lends itself more readily to the analysis that the solicitor was, for those purposes (and in the words of Advocate General Kokott in De Danske) ‘merely an intermediary … used to facilitate payment’. The context supports such an analysis. The solicitor could only obtain access to patient records with the client’s consent. The records were otherwise confidential. They were not matters of public record, available to all and sundry. The client (him- or herself) was the subject matter of the records, and (at least for certain purposes) could be regarded as the ‘owner’ of the records and reports.

71.

There are no such restrictive features in this case. Anyone can commission a search, over any property. One does not have to own the property to commission the search. The records are public records.”

It is also relevant to consider what the contractual position is where medical reports and records are obtained. As a general rule, “where a person contracts as agent for a principal, the contract is the contract of the principal and not that of the agent; and, prima facie, at common law the only person who may sue is the principal, and the only person who can be sued is the principal” (Montgomerie v United Kingdom Mutual Steamship Association Ltd [1891] 1 QB 370, at 371, per Wright J). The principle was applied in Wakefield v Duckworth & Co [1915] 1 KB 218, where solicitors had ordered certain photographs from a photographer for the purposes of litigation in which the solicitors were acting for a client. It was held that the solicitors were not liable to the photographer for the price of the photographs. Lord Coleridge J said (at 220):

“There is no question that the plaintiff knew that the defendants were solicitors acting on behalf of a client, and that being so, apart from any other considerations, they were agents acting on behalf of a principal. Prima facie in such a contract the plaintiff would have to have recourse to the principal and not the agent.”

Lord Coleridge J noted that “the solicitor might be personally responsible … where a custom can be proved that he should be so”, but said that no such custom had been proved (see 220).

On the other hand, in Hichens Harrison Woolston & Co v Jackson & Sons [1943] AC 266 solicitors were held to be personally liable in connection with a sale of shares for which they had given instructions, Lord Atkin observing (at 274) that it is “the commonest occurrence in business for known agents, known to be acting on behalf of a principal, to contract in their own names”. Moreover, there came to be a principle of solicitors’ professional conduct that a solicitor was “personally responsible for paying

To my mind, there is force in these comments. Support for the view that a client does not himself contract with an expert (and, correspondingly, that the solicitor acts as principal rather than agent in this respect) is also to be found in what was said about the recoverability of disbursements in Hollins v Russell [2003] EWCA Civ 718, [2003] 1 WLR 2487. The Court of Appeal there proceeded on the footing that a client would not be liable for unpaid disbursements such as experts’ fees if his agreement with his solicitor was unenforceable (see paragraphs 43(ii), 93 and 113-116). That implies that the client did not have a direct contractual relationship with the experts. In the present case, of course, the interposition of AML meant that the doctor, medical centre and hospitals were at one further remove from the lay client.

Communications between the relevant parties may, of course, be important in determining their contractual relationships. In the present case, Sintons have explained that no written contracts existed between themselves and AML or with the doctor, medical centre or hospitals. They have also, however, pointed out that they work with a number of other MROs and that contractual agreements will differ from organisation to organisation and from solicitor to solicitor. Equally, the terms of a solicitor’s retainer by his client may be of significance when considering whether the solicitor was acting as principal or agent in his dealings with an MRO, an expert or a source of medical records. While any formal contractual documentation is likely to matter most, what the parties have said to each other otherwise, either in writing or orally, may also be material.

I suspect that it will be a rare case in which an MRO acts as agent for the ultimate client, so that a direct contractual relationship arises between the client and the doctor/medical centre/hospital producing the report or records. The client will obviously have to consent to disclosure of medical records relating to him, and the doctor or other provider of the report/records can be expected to be aware that what he is being asked to do is for the benefit of the client. It by no means follows, however, that the doctor or other provider should be taken to be contracting with the client rather than either the MRO with which he is in contact or the solicitor from whom the MRO is taking instructions.

An MRO is more likely to have acted as agent for the solicitor. Subject to any light that might be cast on the point by communications between the parties, it seems to me that that might well be the correct analysis in a case where an MRO had in effect acted as a mere postbox, obtaining and forwarding documents as asked for an identifiable fee. In any event, the “economic and commercial realit[y]” in such a situation will usually, I think, be that the cost of a report or records represents “expenditure incurred in the name of and on behalf of” a customer (viz. the solicitor) within the meaning of article 79(c) of the Principal VAT Directive. On that basis, the MRO should charge VAT only on its own fee, not on the totality of the amounts invoiced.

An MRO may, however, play a more active role. It might, for example, be expected to vet possible experts, to have some input into how a particular report is prepared and to check the quality of a draft. Once again, communications between the parties may be crucial to the nature of the contractual relationships, but the MRO is less likely to have acted as a mere agent from a contractual point of view. More importantly for present purposes, where an MRO has done substantially more than act as a postbox, the “economic and commercial realit[y]” will probably be that the cost of the report/records is not “expenditure incurred in the name of and on behalf of” a customer. The expense will instead have been incurred by the MRO “in the course of making [its] own supply of services … and as part of the whole of the services rendered by [it]” (to adapt words of Sir Christopher Slade in the Nell Gwynn House Maintenance Fund Trustees case). VAT will therefore be payable on everything that the MRO invoices, not just its own “fee”.

Even supposing, however, that the circumstances are such that an MRO does not need to charge VAT on anything but its own fee, the client will not necessarily escape VAT on the cost of medical reports/records. That will depend on whether the solicitor is himself obliged to impose VAT when passing on the cost to the client.

As I have already indicated (paragraph 31 above), I doubt whether a client will often have entered into a direct contractual relationship with the doctor or other provider of a medical report or records obtained via a solicitor and MRO. If that is right, the solicitor will generally have contracted as a principal with either the doctor/provider or the MRO. As a matter of domestic law, he will not have acted merely as an agent of his client.

The “economic and commercial realit[y]” may nonetheless be that the solicitor has incurred the cost of the report/records “in the name of and on behalf of” the client if his role has essentially been that of a postbox. That, however, must surely be unusual. It can be seen from the Makuwatsine case that a client is unlikely even to be provided with medical notes and that, whilst a client might be given a copy of a medical report, “in the ordinary way the report would not be used by the client outside the service of

In the circumstances, it seems to me that in a typical case in which a solicitor commissions an MRO to obtain a medical report/records the solicitor will neither be acting as the client’s agent in contractual terms nor incurring the expenditure “in the name of and on behalf of” the client for the purpose of article 79(c) of the Principal VAT Directive. The report/records will be “supplied to the solicitor … to enable him effectively to perform the service supplied to his client” (in the words of Bridge J in the Rowe & Maw case).

While I would not endorse all of the reasoning in Kellett v Wigan & District Community Transport, the outcome would appear to have been correct if the MRO in question was fairly to be seen as a postbox. As regards the Barratts case, that did not involve an MRO: Barratts obtained medical reports and records themselves, without using an MRO. That distinction could potentially affect the contractual analysis: it is easier to conceive of a solicitor who obtains reports and records direct acting merely as his client’s agent, although there is plainly scope for argument to the contrary (see paragraphs 27-29 above). I can see a strong case for saying that, whatever the true contractual position, as a matter of “economic and commercial realit[y]” a solicitor who is more than a postbox does not incur the cost of the reports/records “in the name of and on behalf of” his client. The point was not, however, squarely before us and I prefer not to express a final view on it.

I would dismiss the appeal.

I agree.

I also agree.