The High Court held that a company in liquidation, although no longer trading, retains the legal capacity to recover VAT on its litigation costs through its liquidators, thereby preventing an insurer from claiming that same tax as an irrecoverable loss from the opposing party.
Facts:
The litigation originated from an order by Mr. Justice Dias in July 2024, which permitted the claimants to amend their particulars of claim on the condition that they pay the defendants’ reasonable costs for updating their defence. By the time these costs were assessed, the first defendant, One Touch Solution Ltd, had entered creditors’ voluntary liquidation (CVL), and its participation in the lawsuit was being funded and directed by its insurer, the second defendant, under the Third Parties (Rights Against Insurers) Act 2010 (TPA 2010).
When the parties could not agree on the final bill, the matter went before His Honour Judge Pearce for a summary assessment. The Judge set the base costs at £25,000, but was left to resolve a specific dispute as to whether the claimants were also liable to pay an additional 20% for VAT. The defendants argued that, because the first defendant was in liquidation and the second defendant was an insurer, the VAT could not be recovered from HMRC and therefore constituted a real loss that the claimants had to cover. The claimants countered this by arguing that, under existing tax regulations, a company’s estate remains capable of reclaiming VAT through its liquidators, even after it has ceased actively trading.
Decision:
The High Court ruled that the insolvent company’s estate was still capable of recovering VAT, finding that their argument was “unexplained” and ignored Regulation 111(5) of the Value Added Tax Regulations 1995. This regulation allows a person or company that is no longer “taxable” (e.g., a company in liquidation that has deregistered) to still claim VAT back from HMRC for services received after they stopped trading, provided that those services relate to their old business. The Judge reasoned that, since the liquidators had a legal pathway to recover this money from the government, the VAT did not represent a permanent financial “loss” to the company.
Finally, the Judge applied the Indemnity Principle, which states that a court cannot order a losing party to pay more in costs than the winning party actually lost. If the company’s estate could potentially reclaim the 20% VAT from the tax authorities (through the liquidators), then forcing the claimants to pay that same 20% would result in the defendants receiving a “windfall” tantamount to being over-compensated.
The Court concluded that the defendants had failed to prove they were “out of pocket” for the VAT. By awarding the claimants an additional £1,000 for the cost of the VAT dispute, the Judge further signalled that the defendants’ legal position was an unnecessary and incorrect distraction from the main case.
Implications:
The judgement clarifies that liquidators have an active duty—and the legal mechanism—through which to reclaim VAT on legal services, even after a company has entered a CVL. Under Regulation 111(5) of the VAT Regulations 1995, liquidators can file returns for VAT on services provided after the company has ceased trading, provided that those services relate to the business’s previous taxable activity. Therefore, liquidators cannot simply assume that VAT is an “irrecoverable loss” – one to be passed on to an opponent. In company law, the Court expects the liquidator to discharge their duty by filing the appropriate paperwork to maximise the estate’s assets (or else minimise its liabilities).
Consequently, even if an insurer is directing the litigation under the TPA 2010, the legal rights regarding costs and VAT belong to the company. Directors and liquidators must remember that an insurer cannot “step into the shoes” of the company for tax purposes. The company’s ability (or inability) to recover tax is the only factor the Court will consider when assessing costs.
