How VAT Treatment in Costs Budgets Affects Recovery Strategy After Marbrow

Quick Summary of the Decision

The issue in Marbrow was whether a costs budget should be treated as inclusive or exclusive of VAT when assessing recoverability limits. The court confirmed that, unless clearly stated otherwise, budgeting figures are generally treated as exclusive of VAT, meaning VAT may be recoverable in addition to the approved phase totals.

On the surface this looks like a technical budgeting clarification. In reality, it has practical consequences for forecasting, proportionality arguments, and assessment disputes.

Why This Matters Beyond the Case

This decision is not just about accounting treatment. It affects:

• How costs professionals structure Precedent H budgets

• How paying parties analyse exposure risk

• How receiving parties protect recoverability

• How proportionality challenges are framed at detailed assessment

Misunderstanding VAT treatment can distort:

• total litigation cost forecasting

• settlement strategy

• the perceived gap between budgeted and claimed costs

That makes this a recoverability and risk issue, not just a drafting point.

The Strategic Impact on Costs Budgeting

1️⃣ Budget Presentation Risk

If a budget is unclear on VAT treatment:

• Paying parties may argue that phase totals were intended to be VAT inclusive

• Receiving parties may face disputes about whether claims exceed approved limits

Clarity in drafting avoids later arguments that the budget has been exceeded when VAT is added.

2️⃣ Exposure Analysis for Paying Parties

From a paying party perspective, treating budgets as VAT-exclusive means:

• The real financial exposure is higher than the approved phase totals suggest

• Settlement modelling must account for VAT on top of budgeted figures

• Proportionality arguments based purely on budget totals may understate recoverable sums

This affects how early-stage offers and reserve calculations should be approached.

3️⃣ Interaction with Proportionality

VAT treatment can influence proportionality debates:

• Budgets approved exclusive of VAT may still lead to totals that appear high once VAT is added

• Paying parties may try to argue that the overall figure is disproportionate even if phase figures were approved

Understanding this interaction helps frame arguments on:

• Reasonableness

• Budget adherence

• Global proportionality

Practical Guidance for Costs Professionals

✔ When Preparing Budgets

• State expressly whether figures are exclusive of VAT

• Ensure assumptions sections align with VAT treatment

• Avoid ambiguity that invites post-assessment arguments

✔ When Acting for Paying Parties

• Analyse whether VAT was addressed during the budgeting stage

• Factor VAT into exposure modelling from the outset

• Consider whether any ambiguity supports arguments that totals were intended as global caps

✔ At Detailed Assessment

This issue can arise where:

• There is a dispute over whether claimed sums exceed the approved budget

• VAT pushes totals above phase limits

• Parties argue about the meaning of approved figures

Being able to link budgeting treatment to recoverability principles strengthens the argument on both sides.

Why This Decision Still Matter

Although procedural rules continue to evolve, budgeting disputes remain common. VAT treatment is one of those “small” technical points that can shift recoverable totals significantly, particularly in multi-phase or high-value litigation.

For costs practitioners, this case reinforces a wider principle:

Budgeting is not just about numbers — it is about how those numbers will be interpreted later in a recoverability dispute.

Understanding VAT treatment helps avoid artificial arguments about budget exceedance and ensures that financial exposure is assessed realistically from the outset. Disputes over whether VAT pushes a claim beyond an approved budget are not rare on assessment, particularly where phase assumptions are unclear

Key Takeaways

• Costs budgets are generally treated as exclusive of VAT unless stated otherwise

• This affects real exposure, not just drafting mechanics

• Ambiguity can lead to disputes at assessment

• Paying parties should model VAT risk early

• Receiving parties should draft budgets to eliminate later interpretation arguments