Can A Defendant Insurer Recover VAT On Costs Where The Insured Is In Liquidation?

Where an insured company is in liquidation, VAT on assessed costs may be recoverable by the estate under Regulation 111(5) of the VAT Regulations 1995. The paying party is not liable for VAT where no actual loss has been suffered by the receiving party.

VAT on costs liquidation Regulation 111(5) insolvent estate input tax recovery

MOLLER V ONE TOUCH SOLUTION LIMITED & HISCOX INSURANCE COMPANY LIMITED [2026] EWHC 14 (Comm)

In Moller & Ors v One Touch Solution Ltd & Anor, His Honour Judge Pearce determined the recoverability of VAT on assessed costs where the receiving party was in creditors’ voluntary liquidation. The claim was brought under the Third Parties (Rights Against Insurers) Act 2010. Following amendment of the Particulars of Claim, the claimants were ordered to pay the first defendant’s costs of amending its defence. At summary assessment, the court assessed those costs at £25,000 net of VAT, reserving the VAT issue for written submissions. The defendants argued that neither the insolvent first defendant nor its insurer could recover VAT, citing Friston on Costs. The claimants relied on Regulation 111(5) of the Value Added Tax Regulations 1995, which permits a deregistered person to reclaim VAT on post-deregistration services attributable to prior taxable supplies. The court accepted this argument, holding that the first defendant’s estate could recover VAT via its liquidators. Consequently, no VAT loss had been suffered, and the claimants were not liable for VAT. The claimants were also awarded £1,000 costs of the submissions.
Link to judgment on Bailii

I accept the proposition, supported by the passage from Friston on Costs at [55.37], that the relevant consideration in determining the recovery of VAT is the ability of the insured party (here the First Defendant) rather than the insurer (the Second Defendant) to recover VAT in respect of the relevant services. However, Regulation 111(5) of the Value Added Tax Regulations 1995 provides clear support for the recovery of VAT by the estate of the First Defendant, through the liquidators, even if the First Defendant itself is no longer registered for VAT. The Defendants assertion that the First Defendant cannot recover VAT because of its liquidation flies in the face of this Regulation and is unexplained.

Citations

Friston on Costs (4th Ed) at [55.37] The court adopted the principle that the ability of the receiving party themselves to recover VAT as input tax is determinative, regardless of whether an insurer or funder is financially supporting the litigation.  
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Key Points

  • The recoverability of VAT on costs is determined by the ability of the party to whom the legal services were supplied (the ‘receiving party’) to reclaim that VAT as input tax, not by the ability of a third-party funder or insurer who may have paid the bill. [5, 7]
  • Where a company in liquidation is the receiving party, its estate may still recover VAT on post-liquidation legal services if those services are attributable to taxable supplies made during its period of VAT registration, pursuant to Regulation 111(5) of the Value Added Tax Regulations 1995. [6, 7, 8]
  • A party cannot recover, as part of a costs order, a sum representing VAT if that party has not suffered, and will not suffer, an actual loss in that amount because the VAT is recoverable from HM Revenue & Customs. [8]
  • The general principle that the unsuccessful party should pay the costs of an issue applies to discrete procedural disputes, such as a contested point on the assessment of costs, following the provisions of CPR Part 44. [10.1]
  • Where a discrete issue is directed to be determined on written submissions, the costs of preparing those submissions may be awarded to the successful party, provided the sum claimed is reasonable and proportionate. [10.2, 11]

“It is the ability of the receiving party themselves to recover VAT as input tax that is relevant, not the ability of any insurer or funder that may be funding the litigation. In particular, the fact that an insurer has conducted a subrogated claim in the name of an insured or that it provided an indemnity is irrelevant for the purposes of assessing the paying party's liability for VAT. If the insured is unable to claim input tax for any reason, the legal representative's invoice may be sent directly to the insurer, but this must not be treated as a VAT invoice that gives rise to a right on the part of the insurer to claim input tax. Put otherwise, input tax cannot be claimed by the back door. Where, however, the insured is able to claim input tax, then a VAT invoice may be sent directly to the insured, with the insurer paying the non-VAT element.”

Friston on Costs (4th Ed), at [55.37]

Key Findings In The Case

  • The First Defendant, although in creditors’ voluntary liquidation since 28 March 2024, was held capable of recovering VAT on post-liquidation legal services under Regulation 111(5) of the Value Added Tax Regulations 1995, as such services were attributable to its prior taxable business activities during its VAT registration period [6], [7].
  • The Defendants were not entitled to include VAT within the assessed costs of £25,000 because the VAT was recoverable from HMRC and thus did not represent an actual loss to either the First or Second Defendant [8].
  • The assessment of costs for the First Defendant’s Amended Defence, following the Claimants’ permitted amendment of their Particulars of Claim, was summarily conducted, with the court determining the sum of £25,000 net of VAT as the appropriate figure, subject to the VAT issue being resolved separately [2].
  • The Claimants were awarded £1,000 in costs (exclusive of VAT) for their successful written submissions on the VAT issue, the court finding the amount reasonable and proportionate, and the issue having been unnecessarily prolonged by the Defendants’ position [9], [10.1], [10.2], [11].
  • The Second Defendant’s inability to claim VAT as input tax, despite paying the legal fees, was confirmed due to its role as insurer rather than receiving party for VAT purposes; the Court rejected any recovery based on insurer funding alone, aligning with authority in Friston on Costs [5], [7].

"The Court can rely on the liquidators of the First Defendant to discharge their duties by filing appropriate VAT returns to recover the sum. It follows that, on a true reading of the relevant VAT law, the First Defendant’s estate can recover VAT on the services to which the assessed costs relates and, correspondingly, neither the First nor the Second Defendant has suffered a loss in that amount that can be included in its costs statement."

The High Court’s decision in Moller & Ors v One Touch Solution Ltd (in creditors’ voluntary liquidation) & Anor [2026] EWHC 14 (Comm) confirms that a company in liquidation can recover VAT on post-liquidation legal services via Regulation 111(5) of the VAT Regulations 1995, meaning the paying party is not liable for VAT where the receiving party has suffered no loss.

Background

This case concerned a claim brought against One Touch Solution Limited (in creditors’ voluntary liquidation) and its insurer, Hiscox Insurance Company Limited, under the Third Parties (Rights Against Insurers) Act 2010. The substantive details of the underlying claim are not material to the costs issue determined. Procedurally, the claimants were granted permission to amend their Particulars of Claim by an order of Dias J dated 30 July 2024. As a consequence of that amendment, the judge ordered that the claimants pay the first defendant’s reasonable costs of amending its defence, to be assessed if not agreed [§1].

The parties were unable to agree on the quantum of those costs. At a subsequent hearing on 10 December 2025, the court conducted a summary assessment of those costs, assessing them net of VAT in the sum of £25,000 [§2]. However, a dispute arose between the parties regarding the recoverability of VAT on those costs. This issue was not resolved at the hearing. Instead, the court directed that the parties file written submissions on the VAT point for a determination to be made on the papers [§2].

Costs Issues Before the Court

The court was required to determine two discrete costs issues arising from the hearing on 10 December 2025.

The primary issue was whether the defendants were entitled to recover VAT on the £25,000 of costs awarded for the amended defence. This issue turned on the VAT status of the first defendant, which was in creditors’ voluntary liquidation, and the position of its insurer, the second defendant.

The secondary issue was whether the claimants were entitled to their costs of preparing the written submissions on the VAT point, which they quantified at £1,000 (excluding VAT) [§9].

The Parties’ Positions

The Defendants’ Position: The defendants argued that neither defendant could recover VAT on the costs. They noted that the first defendant entered creditors’ voluntary liquidation on 28 March 2024, and the liability for the legal work subject to the costs order arose after that date [§4]. They contended that the first defendant, being in liquidation, “can neither pay nor recover VAT” [§4]. They further argued that the second defendant (the insurer) could not recover the VAT it had paid because the tax related to a legal service supplied to the insured (the first defendant) [§5]. In support, they cited a passage from Friston on Costs (4th Ed) at [55.37], which states that the ability of the insured party to recover input tax is the relevant factor, not the ability of an insurer funding the litigation. The passage notes that input tax cannot be claimed “by the back door” [§5].

The Claimants’ Position: The claimants contended that the liquidation of the first defendant did not automatically preclude the recovery of VAT [§6]. They relied on Regulation 111(5) of the Value Added Tax Regulations 1995, which provides a mechanism for a person who has ceased to be a taxable person (e.g., due to deregistration following liquidation) to reclaim VAT on services supplied after deregistration, provided those services are attributable to taxable supplies made when the person was registered [§6]. They argued that the first defendant’s estate, through its liquidators, could therefore recover the VAT. On the secondary issue, the claimants sought their costs of £1,000 for preparing the written submissions, arguing they were the successful party on the VAT point and that the issue could have been resolved at the earlier hearing to avoid further expense [§9].

The Court’s Decision

The court ruled in favour of the claimants on both issues.

On the primary VAT issue, the court accepted the defendants’ starting point, as supported by Friston on Costs, that the relevant consideration was the ability of the insured (the first defendant) to recover VAT, not the insurer [§7]. However, the court found that the defendants’ assertion that the first defendant could not recover VAT due to its liquidation was incorrect in law. The court emphasised that Regulation 111(5) of the VAT Regulations 1995 provided “clear support” for the recovery of VAT by the estate of the first defendant, via the liquidators, even though the company was no longer VAT registered [§7]. The court noted that the defendants’ assertion “flies in the face of this Regulation and is unexplained” [§7].

The court further observed that it could “rely on the liquidators of the First Defendant to discharge their duties by filing appropriate VAT returns to recover the sum” [§8]. Consequently, the court held that the first defendant’s estate could recover VAT on the relevant legal services. As neither defendant had suffered a loss in the amount of the VAT, that sum could not be included in the costs payable by the claimants [§8].

On the secondary issue regarding the costs of the written submissions, the court awarded the claimants the £1,000 sought [§11]. The court noted that it had not heard submissions from the defendants on this issue [§10]. Applying the general principle under CPR Part 44 that the unsuccessful party should pay the costs of the issue, the court found the claimants were the “clear winners” on the VAT point [§10.1]. It also held that the sum claimed was reasonable and proportionate, resolving any doubt in favour of the defendants as the paying party [§10.2]. The order was made subject to a provision allowing the defendants to apply in writing to set aside or vary the order, with a corresponding right for the claimants to respond. The court indicated any such applications and responses should be concise, with costs kept to a modest level [§11].

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