UPPER TRIBUNAL (LANDS CHAMBER)

	
UT Neutral citation number: [2013] UKUT 0415 (LC)
Case Number: LRA/149/2012

	TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – leasehold enfranchisement - costs - Leasehold Reform Housing and Urban Development Act 1993, section 60 – absence of client care letter – refusal to admit additional evidence – VAT on professional fees incurred in connection with a residential building - appeal allowed

	IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE 
LEASEHOLD VALUATION TRIBUNAL FOR THE SOUTHERN
RENT ASSESSMENT PANEL
BETWEEN:
                           METROPOLITAN PROPERTY REALIZATIONS LTD                Appellant
and
                                                           JOHN KEITH MOSS                                        Respondent

Re: 11B Arlington House,
All Saints Avenue,
	Margate,
	Kent CT9 1XR

	Before: Martin Rodger QC, Deputy President

	Sitting at: 43-45 Bedford Square, London WC1B 3AS
	on 23 August 2013

Mr Simon Serota of Wallace LLP for the appellant
The Respondent in person

© CROWN COPYRIGHT 2013

The following case is referred to in this decision:

Garbutt v Edwards [2005] EWCA civ 1206

	DECISION
Introduction
1.	This is an appeal, brought with the permission of the President, against a decision of the Leasehold Valuation Tribunal for the Southern Rent Assessment Panel (“the LVT”) given on 10 September 2012 by which it determined that the total costs payable by the respondent to the appellant on the grant of a new lease of a flat in Margate under Part I of the Leasehold Reform Housing and Urban Development Act 1993 (“the 1993 Act”) was £676.  That figure represented a fee for a valuation of the flat obtained by the appellant plus a Land Registry fee but included nothing for work undertaken by the appellant’s solicitors.  
2.	The respondent holds a lease of 11B Arlington House in Margate granted in 1979 for a term of 114 years from 1 October 1961.  His immediate landlord is the appellant, Metropolitan Property Realizations Limited.  The appellant’s interest in the property is itself a long lease for a term of 199 years from 1961 which it holds from the freeholder, Thanet District Council (“the Council”).
3.	On 26 January 2011 the respondent served notice on the Council pursuant to section 42 of the 1993 Act claiming entitlement to a new lease.  A copy of the notice was also sent to the appellant which forwarded it to its solicitors, Wallace LLP.  It was agreed between the appellant and the Council that they would both instruct Wallace and that the appellant would be responsible for Wallace’s fees.  Accordingly on 30 March 2011, having considered the claim, Wallace served a counter notice admitting the respondent’s right to a new lease on behalf of the Council and providing their proposed draft.  
4.	The parties were some way apart on the premium payable for the new lease and an application was made to the LVT to determine that sum on 15 July 2011.  Subsequently, after an exchange of evidence, terms for the acquisition were agreed in November 2011 and the application was withdrawn.  Those terms provided for the payment of a total premium of £6,892 of which all but £72 was payable to the appellant, with the balance to the Council.
5.	A completion statement prepared by Wallace on 15 December 2011 included professional fees for the Council and the appellant.  The Council’s costs were limited to £285 while the appellant sought legal fees of £2,100 and surveyor’s fees of £1,350 (all figures including VAT).  Those sums were not agreed and on 22 May 2012 the appellant applied to the LVT for the determination of the reasonable costs payable by the respondent under section 60 of the 1993 Act.
The tenant’s statutory liability for reasonable costs
6.	Section 60(1) of the 1993 Act provides that:
	“Where a notice is given under section 42, then (subject to the provisions of this section) the tenant by whom it is given shall be liable, to the extent that they have been incurred by any relevant person in pursuance of the notice, for the reasonable costs of and incidental to any of the following matters namely –
(a)	Any investigation reasonably undertaken of the tenant’s right to a new lease;
(b)	Any valuation of the tenant’s flat obtained for the purpose of fixing the premium or any other amount payable by virtue of its schedule 13 in connection with the grant of a new lease under section 56;
(c)	The grant of a new lease under that section;
but this subsection shall not apply to any costs if on a sale made voluntary a stipulation that there were to be borne by the purchaser would be void.”
7.	Section 60(2) provides the following additional safeguard for tenants:
	“For the purposes of subsection (1) any costs incurred by a relevant person in respect of professional services rendered by any person shall only be regarded as reasonable if and to the extent that costs in respect of such services might reasonable be expected to have been incurred by him if the circumstances had been such that he was personally liable for all such costs.”
8.	Finally, it is made clear by section 60(5) that a tenant is not liable under the section for any costs which a party to any proceedings before the LVT incurs in connection with those proceedings.
9.	These provisions are straightforward and their purpose is readily understandable.  Part I of the 1993 Act is expropriatory, in that it confers valuable rights on tenants of leasehold flats to compel their landlords to grant new interests in those premises whether they are willing to do so or not.  It is a matter of basic fairness, necessary to avoid the statute from becoming penal, that the tenant exercising those statutory rights should reimburse the costs necessarily incurred by any person in receipt of such a claim in satisfying themselves that the claim is properly made, in obtaining advice on the sum payable by the tenant in consideration for the new interest and in completing the formal steps necessary to create it.  
10.	On the other hand, the statute is not intended to provide an opportunity for the professional advisers of landlords to charge excessive fees, nor are tenants expected to pay landlords’ costs of resolving disputes over the terms of acquisition of new leases.  Thus the sums payable by a tenant under section 60 are restricted to those incurred by the landlord within the three categories identified in section 60(1) and are further restricted by the requirement that only reasonable costs are payable.  Section 60(2) provides a ceiling by reference to the reasonable expectations of a person paying the costs from their own pocket; the costs of work which would not have been incurred, or which would have been carried out more cheaply, if the landlord was personally liable to meet them are not reasonable costs which the tenant is required to pay.    
11.	Section 60 therefore provides protection for both landlords and tenants: for landlords against being out of pocket when compelled to grant new interests under the Act, and for tenants against being required to pay more than is reasonable.
The proceedings before the LVT
12.	On 6 June 2012 the LVT gave directions for the determination of the application under section 60.  The appellant and the Council were directed to provide a bundle of documents setting out full details of their claim for costs and to include in that bundle, amongst other things, “any relevant client care letters”.  Full details of the time spent and hourly rates applied together with copies of bills of costs delivered to the applicants were also to be included.  The respondent was then to serve points of dispute to identify the issues between the parties.
13.	The appellant duly provided a bundle of documents which included a detailed schedule of its legal costs permitted by section 60(1).  The total sum claimed was £2,418 to which VAT of £483.60 was added.  The schedule of costs itself did not contain any statement that those sums were payable by the applicants, nor was it signed by Wallace.  The bundle of documents did not include any invoice rendered by Wallace to the appellant, or any document showing that Wallace had been instructed by the Council and the appellant. 
14.	In his points of dispute served on 13 July 2012, the respondent did not dispute that Wallace had indeed been instructed on behalf of both landlords.  He disputed the principle of engaging specialist London solicitors for a relatively low value enfranchisement claim in Margate, and took issue with a number of individual items in the appellant’s schedule, but nowhere in the points of dispute did the respondent suggest that the appellant was not entitled to recover any sum for the cost of legal services provided to them by Wallace.  No complaint was made over the absence of a client care letter or any invoice to the appellant by its solicitors.  
15.	The LVT’s directions had provided for the service of points of reply by the appellant and these were supplied on 27 July 2012, well before the hearing on 3 September 2012.  In that document Wallace addressed the issues raised by the respondent.  In answer to the general complaint that the charging rate applied to the work carried out was too high, the appellants’ solicitors responded in paragraphs 15 and 16 of their reply as follows:
	“The basis upon which legal fees are charged are by reference to the time spent by the relevant fee earners.  Metropolitan’s solicitor was a partner in a London firm of solicitors and at the relevant time had a charge out rate of £350 per hour.  The partner is a Grade A fee earner.  A paralegal whose charge out rate was £150 per hour also undertook work on the matter.  Additionally a partner in the Conveyancing Department of Metropolitan’s solicitors also undertook work in preparing the draft lease forming part of the counter proposals in the counter notice.  The conveyancing partner is a Grade A fee earner and at the relevant time had a charge out fee of £375 per hour, rising to £375 in June 2011.  An assistant solicitor also undertook work on the matter and at the relevant time had a charge out rate of £260 per hour.  The assistant solicitor is a Grade B fee earner.
	Metropolitan’s solicitors had been acting for Metropolitan for many years dealing with enfranchisement matters.  Metropolitan’s solicitors are accordingly Metropolitan’s choice of solicitor and have a knowledge and capacity to deal with this work on their behalf.  The rates charged by Metropolitan’s solicitors are entirely consistent with the usual charge out rate for solicitors in Central London.  Additionally, Metropolitan submits that it is reasonable for a fee earner with the relevant experience to have conduct of the matter and to perform work on the same.”
16.	The points in reply were signed on behalf of Wallace.
17.	Anyone reading the documents supplied to the LVT would have understood it to be common ground between the parties that Wallace had been engaged by the appellant to carry out legal services in respect of the respondent’s claim and that the appellant was entitled to recover the reasonable costs of those services from the respondent under section 60 of the 1993 Act.  The dispute between the parties was over points of detail in the bill of costs and not over the principle of the appellant’s entitlement to recoup costs for work which had clearly been carried out on its behalf by Wallace.  
18.	In view of the documents defining the scope of the dispute, the course which the hearing took before the LVT was therefore surprising.  The Tribunal described what happened in paragraphs 16-18 of its decision, as follows:
	“16  	The respondent had made detailed points of dispute in respect of the sums claimed by the applicant and on behalf of the applicant Wallace LLP had provided detailed submissions in response to many of those points.  
17.	However, before considering those detailed matters, the Tribunal was concerned that the Directions had required the applicant to provide client care letters and bills and none had been produced in relation to the Council.
18.	Ms Neale [the applicant’s solicitor at the hearing] explained that Wallace LLP were not charging the Council, that they would not be issuing invoices to the Council and that there would be no bills sent to the Council.  The Council had not had to pay anything to Wallace LLP.  The entire amount Wallace LLP are asking the respondent to pay are fees incurred by the applicant on behalf of both landlords. … There are two parts to the works, the first concerns consideration of the Notice of Claim and preparation of the Counter –Notice and, once the premium is agreed, the second part is the preparation of the lease.  This second part was done for the council.  All Wallace LLP have is a letter of instruction from the council in the form of an email dated 15 February 2011.  It was the respondent who had made enquiries of the council and had obtained a copy of that email on 29 August 2012.  He had forwarded a copy to Wallace LLP and to the Tribunal.  The Tribunal noted that it was stated in the email that “I confirm that Thanet District Council would be prepared for Wallace LLP to act on the council’s behalf as competent landlord in relation to service of the counter-notice.”  It did not include instructions to prepare the lease.  Ms Neale stated that the counter-notice included a draft of the proposed lease and that the grant of the lease was done much later by the person who prepared the draft lease.  She submitted that the email was justification for Wallace LLP to do all the work on behalf of the council.  She also stated that she had a copy of the first interim bill to the applicant, but not the final bill.  Two invoices had been prepared for the applicant.  There was a separate invoice for non-section 60 costs.  She did not have a copy of a client care letter with her but stated that a letter is sent to the Freshwater Group and that the applicant is part of that group.  The client letter is sent every year setting out the charging rate.  
19.	The Tribunal asked how the applicant was to satisfy the Tribunal that the amount the respondent was being asked to pay did not exceed the amount payable to Wallace LLP by the applicant.  Miss Neale suggested that she could send a copy of the client care letter but accepted that no evidence of it had been produced so far.  It was pointed out that the Directions specifically required it and Miss Neale accepted that she could not dispute that the Directions had not been complied with.  She suggested that a copy of the client care letter could be faxed through but the Tribunal decided that it was now too late to provide basic evidence which should have been provided in response to the Directions.  Miss Neale said she did not know the client care letter was an issue but that did not change the position.
20.	The Tribunal considered the matter and found that there was no evidence that the applicant had been asked to pay or had agreed to pay the costs.  The Tribunal came to the conclusion that no profit costs claimed by Wallace LLP should be payable by the respondent because the Tribunal could not be satisfied on the evidence provided the applicant was actually liable to pay Wallace LLP all or any part of the costs claimed.  This decision rests on the indemnity principle.  At its simplest the principle provides that as paying party is obliged to indemnify a receiving party only for expenditure actually incurred.  Accordingly a party may not recover more than he/she is actually obliged to pay his/her advisers.  This was announced to those present.
19.	Having decided that nothing was payable in respect of legal fees incurred by the appellant, the LVT went on to consider the sum claimed in respect of valuation advice, disbursements and VAT.  It reduced the £1,350 (including VAT) claimed for the provision of a valuation to £600, largely because the appellant had declined to produce a copy of the report and because a fee had been paid in earlier proceedings for a valuation carried out by the same surveyor in 2008 so that all that was required was for him to update his previous report.  
20.	As far as VAT was concerned the LVT’s conclusion, at paragraph 34 of its decision, was as follows:
	“The question of whether or not the respondent was liable for the VAT on sums payable by him was raised by him in his points of dispute and at first he was told that the applicant was not registered for VAT.  He made enquiries and found that to be incorrect.  He was then told that the applicant was registered for VAT but could not reclaim it.  The normal rule is that an entity which is registered for VAT can recover the VAT it has paid to others i.e. its input tax.  The Tribunal was not satisfied by the evidence that the applicant could not reclaim the VAT and therefore determined that the sum payable by the respondent should be inclusive of VAT.”
21.	The LVT therefore decided that of the total sum of £4,485.64 claimed by the appellant as the costs it had incurred within section 60 of the 1993 Act, only £676 was payable by the respondent.
The appeal
22.	The President gave permission to appeal and directed that the appeal be dealt with as a review with a view to rehearing.  
23.	On behalf of the appellant, Mr Serota made five submissions:
(1)	The LVT was wrong to conclude that the evidence provided to it did not demonstrate a liability on the part of the appellant to pay its solicitors.  There had been no suggestion that the appellant had not retained Wallace to act on its behalf in relation to the claim, nor was there any dispute that the work shown in the schedule of sums claimed had been carried out.  Even in the absence of a formal retainer between the appellant and Wallace, there was clearly a contract for the provision of legal services subject to an implied term that the solicitors would be entitled to be paid a reasonable charge for the services provided.    
(2)	Secondly, and in any event, the LVT had had more than sufficient evidence to satisfy it that the appellant was liable to pay the costs claimed.  The appellant’s points of reply (see paragraph 15 above) which were confirmed to the LVT at the hearing by Ms Neale, the solicitor with conduct of the file, established that work had been done on the appellant’s instructions and that a bill had been delivered in respect of that work.
(3)	The LVT should have treated the points in reply and the evidence of Ms Neale as equivalent to a certificate of the receiving party’s solicitors in a between the parties assessment of costs in civil litigation.  Where such a certificate is provided the court generally will not go behind it.  Mr Serota relied on the decision of the Court of Appeal in Garbutt v Edwards [2005] EWCA Civ 1206.
(4)	The LVT’s decision had been based wholly on the absence of a client care letter from Wallace, which had caused it to conclude that it could not be satisfied there was any liability on the part of the appellant to pay its solicitors fees.  The LVT had directed the inclusion in the bundle of any relevant client care letters but Mr Serota explained that there were no such letters.  The Solicitors’ Costs Information and Client Care Code 1999 did not require a solicitor to provide repeat client care information to an existing client for whom the solicitor had acted before the Code came into force.  His firm has acted for the appellant and other companies in the Freshwater Group of companies since 1996.  The terms of the firm’s engagement had been agreed with the appellant at that time and in each subsequent year details of revised charging rates for each of its fee earners had been sent to the Freshwater Group.  Those were the documents which Miss Neale had asked the LVT to allow her to obtain by fax and which the LVT referred to in paragraph 19 of its decision as the client care letter.  In any event, the absence of a client care letter did not invalidate a contract between a solicitor and his client even where such a letter was required by the Code.
(5)	Finally, Mr Serota submitted that the LVT had acted unfairly in refusing Ms Neale a brief adjournment to enable the interim bill and the relevant client care letters to be faxed to the hearing.  The available material which could have been put before the LVT included an interim bill delivered by his firm to the appellant on 31 March 2011 seeking payment of £1,750 plus VAT as its professional charges for acting on the appellant’s behalf in connection with the claim. Mr Serota also informed me that the bill had been paid on 8 July 2011.  Mr Serota very fairly acknowledged that the interim bill was a document falling within the scope of the LVT’s direction for the production of relevant material and should have been included in the original bundle supplied to the respondent.
24.	  In his concise and helpful submissions in reply Mr Moss focussed on the absence of any document originating with the appellant itself showing that it had given instructions to Wallace to act on his behalf.  He acknowledged that letters from Wallace to the appellant had been produced, since the hearing before the LVT, showing the annual charging rates for work done by the solicitors on its behalf, but Mr Moss pointed out that there was no response from the appellant accepting those rates.  He agreed that it was not normal for solicitors to provide their services gratuitously, and he did not go so far as to suggest that was what had happened in this case.  Nonetheless he argued that the LVT was entitled to reach the conclusion it had that the evidence before it was insufficient for it to be satisfied that the appellant was liable to pay a fee to Wallace in connection with his enfranchisement application.
Discussion
25.	In paragraph 20 of its decision the LVT concluded that it could not be satisfied on the evidence provided to it that the applicant was liable to pay Wallace all or any part of the costs claimed.  Ms Neale is recorded by the LVT in paragraph 18 as stating that she had a copy of the first interim bill rendered to the appellant but not a copy of the final bill, and the LVT could have looked at that interim bill (although it does not seem to have done so).  It is strongly suggested by paragraph 19 that the document which the LVT considered to be vital to the establishment of an entitlement to payment was a client care letter.  
26.	I am satisfied that by focussing its attention on the absence of a client care letter, the LVT failed to take into account the totality of the evidence before it.  It was clear beyond argument (and the contrary had not been suggested by the respondent) that Wallace had acted for the appellant in connection with the enfranchisement claim.  Wallace is a well-known and reputable firm of solicitors specialising in work of this type.  It is neither a charitable institution nor a gang of conspirators and in the context of an application under section 60 the LVT adopted a surprisingly sceptical approach to what it was told by the firm’s representative.  There was no reason for the LVT to disregard the material contained in the points of reply signed on behalf of Wallace and confirmed by Ms Neale that the work comprised in the schedule had been carried out at the agreed charging rates.  Had the LVT considered all of the evidence before it and asked itself whether, on the balance of probability, there existed a contract between the appellant and its solicitors which obliged the appellant to make payment for legal services supplied to it, only one conclusion could have been reached.  
27.	Any suggestion that Wallace was acting gratuitously would have been fanciful and neither the LVT nor the respondent has suggested that to be the case.  The alternatives to taking the schedule of costs at face value were, therefore, that the costs incurred in the connection with the enfranchisement claim were to be paid by the Council, rather than by the appellant, or alternatively, that Wallace were to receive nothing from their client and were to be entitled only to such sum as the respondent agreed to pay or the LVT was willing to award.  Neither of those possibilities was canvassed by the LVT and neither stands up to scrutiny.  The total costs payable in respect of professional fees incurred by the Council had been agreed by the respondent at the figure of £280 set out in the completion statement.   Nor could it credibly have been suggested that Wallace had acted on a speculative basis so that their remuneration was not to be a liability of their client but rather was to come only from the respondent.  Why any reputable firm of solicitors should agree to act on that basis is not obvious, but in any event the evidence before the LVT was that Wallace had rendered an interim invoice to their client.  Unless that invoice was to be regarded as a sham, which was not a conclusion remotely open to the LVT on the evidence before it, it was wholly inconsistent with any notion that the solicitors were acting without the expectation of being paid by their own client albeit that their client would be entitled to be reimbursed for so much of their charges as fell within section 60 of the 1993 Act.
28.	The LVT’s focus on the absence of a client care letter was in any event misconceived.  For the reasons explained by Mr Serota (see paragraph 23(4) above) the provision of client care information is not mandatory in all cases (especially for established clients), as the LVT may have appreciated when directing the inclusion of “any relevant client care letters” in the bundle of documents.  The failure to produce a client care letter could not therefore be taken to indicate a failure to comply with the Solicitors Practice Rules or the Client Care Code.  Even if there had been a breach of the Code, such a breach would not have rendered a reasonable fee for carrying out the clients instructions irrecoverable.  In Garbutt v Edwards [2005] EWCA Civ 1206 the Court of Appeal rejected the submission by the paying party in an assessment of costs that a failure to give a costs estimate (as required by the Code) rendered the contract of retainer unlawful and unenforceable.  A failure to comply with the Code was a breach of Rule 15 of the Solicitors Practice Rules and was liable to attract a disciplinary sanction, but it did not have the additional consequence of undermining the solicitor’s entitlement to receive his fee from his own client.  The Court of Appeal also concluded that, as between the parties to the assessment, it was a question for the discretion of the Judge assessing costs in any particular case whether to take into account any failure by the receiving party to provide an estimate in the circumstances required by the Code (per Arden LJ at paragraph 43).  There is, in my judgment no reason why a breach of the provisions of the Code relating to client care should be treated differently.
29.	The LVT’s decision is also open to challenge in my judgment, on the grounds of procedural unfairness.  The omission to provide a copy of any client care letter, an omission that had been apparent for almost two months before the LVT hearing, was not relied on by the respondent.  There was therefore no reason for the assistant solicitor who attended the hearing to have been prepared to deal with the LVT’s interest in it.  When the LVT took the point it was incumbent on it to allow the appellant a fair opportunity to deal with it.  Ms Neale made a perfectly reasonable request for a brief adjournment to allow documents which she knew to exist to be transmitted to the Tribunal for its consideration that day.  Where the significance of a missing document has not been appreciated by either party in preparing for a hearing, and where a point based on its absence is taken by the LVT on its own initiative, the LVT must consider carefully whether the refusal of a brief adjournment to enable enquiries to be made and the document to be provided straightaway if possible, is a fair procedure.   Although the LVT is entitled to considerable latitude in case management decisions of this nature, in this case I am satisfied that the decision made by the LVT was unfair and fell outside the range of permissible decisions in response to an application of this type.  I reach that conclusion despite the LVT’s original direction for the production of any relevant client care letters because of the weight which the LVT attributed to the absence of the letter, and because of the modesty of the request.  A brief interruption in the course of the day would have enabled Ms Neale to contact her office and request the provision of the necessary documents.  While they were being procured the LVT could have continued with its consideration of the other disputed costs items, including the valuation fee to which it devoted very considerable attention in its decision.  There was no reason for the LVT to fear that its time would be wasted by a brief adjournment to enable the necessary call to be made.  The significant costs and delays of this appeal would have likely to have been avoided and the dispute between the parties resolved very much earlier if the LVT had acceded to Ms Neale’s request.
30.	For that reason also, therefore, the decision of the LVT to refuse to include any legal costs in the sum payable by the respondent under section 60 must be set aside.
The costs payable
31.	Having heard submissions from both parties I indicated to them that I would allow the appeal.  In the light of that indication the parties took the opportunity of a brief adjournment to reach agreement on the sum payable in respect of the work carried out for the appellants by Wallace.  The parties quickly agreed that that sum should be £1,500 plus VAT, if VAT was payable.  The parties were unable to reach agreement on the question whether VAT was payable in addition to the sum of £1,500 and they asked me to rule on that matter.  
VAT
32.	The reasonable costs which a tenant is liable to pay under section 60 of the 1993 Act necessarily include an indemnity for any VAT payable on professional fees by the landlord which it is unable to reclaim as input tax.  That principle was not disputed by the respondent.  
33.	In his points of dispute the respondent referred to determinations by other leasehold valuation tribunals to the effect that where a landlord is registered for VAT, any VAT payable by the landlord on professional fees is not recoverable from the tenant under section 60 because the landlord to whom the services have been provided will be able to recoup the VAT as an input when accounting for its own VAT liability.
34.	When it considered the question of VAT on the fee paid by the appellant for the valuation, the LVT said that the normal rule was that an entity that is registered for VAT can recover the VAT it has paid to others as input tax.  On the evidence presented to it the LVT was not satisfied that the appellant was unable to reclaim the VAT on the valuation fee.  The LVT therefore determined that the sum payable by the respondent should be exclusive of VAT.  
35.	Mr Serota did not seek to challenge the LVT’s conclusion in relation to VAT on the valuation fee.  Nonetheless he contended that, as the appeal was now being dealt with as a rehearing by the Tribunal, I should consider afresh the question of VAT on his firm’s charges.  The respondent pointed out correctly that permission had not been sought from the Tribunal to appeal the LVT’s conclusions in relation to VAT and suggested that those conclusions should therefore bind the appellant both in relation to the valuer’s fee and in relation to the fees of Wallace which now fell to be determined for the first time.  I indicated to the parties that I was satisfied that the basis on which permission to appeal had been given, i.e. that the appeal would proceed to a rehearing in the event that it was successful, meant that it was open to me to determine the sum payable under section 60 in respect of legal fees including any VAT which the appellant was liable to meet on those fees.
36.	As is well-known, VAT is charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him (VAT Act 1994 section 4(1)) (“the 1994 Act”).  Anything which is not a supply of goods, but which is done for a consideration, is a supply of services for this purpose (section 5(2)(b)) (“the 1994 Act”).  However the grant, assignment or surrender of a major interest in land (which means the fee simple or a tenancy for a term certain exceeding 21 years) is designated a supply of goods (1994 Act section 96(1) and schedule 4, paragraph 4).
37.	For VAT purposes supplies of goods or services are divided into three categories: exempt supplies, zero-rated supplies and standard-rated supplies.  The grant of any interest in or right over land or of any licence to occupy land is an exempt supply unless it falls within a list of exceptions (see Group 1 of schedule 9 to the 1994 Act).  The general rule is therefore that the grant of an interest in or right over land is an exempt supply.  None of the exceptions to that general rule includes the grant of an interest in or right over a dwelling or a number of dwellings used solely for residential purposes.  In particular, the right to waive the exemption from VAT on the grant of interests in land (commonly called the option to tax) does not apply in relation to a building or part of a building designed or adapted and intended for use as a dwelling or a number of dwellings (1994 Act schedule 10, paragraph 6).  A supply relating to the grant of an interest in a residential building is accordingly an exempt supply.  
38.	VAT on purchases which relate to exempt supplies is known as “exempt input tax”.  As explained in HMRC’s VAT Notice 700, generally a business registered for VAT is not entitled to reclaim exempt input tax unless the amount of the exempt input tax is below a certain threshold.  That threshold is determined annually.  A business which can show that it has paid only a relatively small amount of input tax on its purchases which relate to exempt supplies is able to reclaim all of that input tax if two conditions are satisfied, namely that the average exempt input tax it has paid is not more than £625 per month and that the amount is not more than half of the businesses total input tax reclaimed.
39.	The position is, therefore, not as simple as was assumed by the LVT.  Where professional fees have been incurred in connection with the grant of a lease of residential premises in a residential building it cannot be assumed that the landlord who incurred those fees will be able to recover the VAT as input tax.  Where on a determination of the costs payable under section 60 of the 1993 Act the paying party puts the indemnity for VAT in issue, it will be for the receiving party to satisfy the tribunal that it cannot recover the VAT it has incurred on professional fees as input tax.
40.	The evidence before me is in the form of an email from Mr Stuart Nicholls, the Finance Director of the Freshwater Group of companies, dated 20 March 2013 (which was not before the LVT).  Mr Nicholls explains that the appellant is a member of a group VAT registration within the Freshwater Group of companies.  VAT is only charged on rents for, and recovered on expenditure in relation to, the group’s commercial property on which the exemption from VAT has been waived.  Arlington House is a residential property in relation to which the option to tax may not be exercised.  Costs incurred by the appellant in relation to Arlington House must therefore be borne by the appellant gross of VAT and it is not in a position to recover VAT as input tax.  
41.	I am satisfied on the basis of the information provided by Mr Nicholls that the appellant is not entitled to reclaim the VAT for which it is liable on the fees of Wallace.  Accordingly, the reasonable costs payable by the respondent under section 60 of the 1993 Act include an indemnity against that VAT liability.  The parties have agreed that the reasonable costs are £1,500 to which must therefore be added an additional £300 to take account of irrecoverable VAT.  
Disposal
42.	For the reasons given above the appeal is allowed.  The sum of £1,800 is payable by the respondent under section 60(1) of the 1993 Act in addition to the sum of £676 already determined by the LVT.

									Dated: 9 September 2013  

									Martin Rodger QC
									Deputy President