IPEC claims: clarification that the legal costs recovery cap of £50K is inclusive of VAT

Summary

The Intellectual Property Enterprise Court (IPEC) has a fixed costs system with scale costs for the recovery of damages, and a £50,000 costs cap. This provides greater certainty for litigants with less complex, lower value IP disputes. A recent case in the IPEC further demonstrates that the IPEC costs cap is virtually impossible to exceed, even where there is an apparent anomaly between VAT registered and non-VAT registered businesses.     

Following the Response Clothing Ltd v The Edinburgh Woollen Mill Ltd trial[1] in the IPEC, Hacon J considered the question of whether the costs recovery cap of £50,000 was inclusive of VAT. As Response Clothing was successful at trial and its legal costs exceeded £50,000, it claimed entitlement to £50,000 plus VAT. It claimed VAT on top of the costs cap because it was not VAT registered and was therefore unable to recover the VAT as input tax. The Defendant, Edinburgh Woollen Mill disagreed, and asserted that the costs cap was inclusive of VAT.

Decision

The Judge stated that the wording of CPR rule 45.31(1)(a), which provides that the only exception to the costs cap is set out in CPR rule 45.32 (i.e. where a party behaves unreasonably), was unambiguous. It was also noted that further to the judgment in Henderson v All Around the World Recordings Limited, judges have additional discretion to award costs over and above the costs cap in exceptional circumstances. No arguments for exceptional circumstances were put forward by Response Clothing and CPR rule 45.32 did not apply in this case. The Judge therefore awarded Response Clothing £50,000 for its costs.

Commentary

The result of the VAT inclusive costs cap at the IPEC is that where a party’s costs exceed the costs cap, the net recovery of costs for non-VAT registered businesses would be under £50,000. This is because VAT registered business can recover the full £50,000 and can then recover the VAT on top of that, whereas non-VAT registered businesses cannot. Although this does not take away from the merits of the IPEC, this apparent anomaly is something to take into account when considering initiating proceedings in the IPEC vs the High Court.