HT-2023-000321 - [2025] EWHC 2496 (TCC)

KML accepts that interest runs pursuant to the Late Payment of Commercial Debts (Interest) Act 1998 (‘LPA’) in principle. It denies, however, that it runs on the VAT element of Pharos’ claim. LPA section 4(1) provides that LPA Interest shall run on a “qualifying debt”. A qualifying debt is defined in LPA section 3(1) as:

“A debt created by virtue of an obligation under a contract to which this Act applies to pay the whole or any part of the contract price is a “qualifying debt” for the purposes of this Act, unless (when created) the whole of the debt is prevented from carrying statutory interest by this section.”

Mr Macey-Dare KC argues that the VAT element is not a qualifying debt for

It is said that, if the VAT element was part of the ‘contract price’ for the purposes of the LPA, a supplier in the position of Pharos would receive an unwarranted windfall (and a purchaser in the position of KML would suffer an equally unwarranted penalty) in the form of a 20% uplift on LPA Interest, whenever the underlying debt giving rise to the claim for LPA Interest constituted consideration for a taxable supply. A supplier would not be liable to account for that windfall to HMRC as output tax, and nor would such a purchaser be entitled to recover that sum as input tax, because the sum would not itself constitute VAT. The windfall, it is submitted, would be particularly egregious where the supplier was subject to the VAT Cash Accounting Scheme, under which the supplier need only account for VAT when it is received.

Mr Woolgar argues, firstly, that Clause 6.1 is irrelevant, as all it did was make clear that VAT was not already included in the prices stated in the Purchase Order. The Purchase Orders themselves included the express obligation that ‘VAT as required to be charged at the applicable rate’. It is said, therefore, that VAT was part of the consideration, and therefore a ‘qualifying debt’ within the meaning of section 3(1). It is ‘created by virtue of an obligation under a contract…to pay the whole or part of the contract price’. Secondly, it is submitted that if the effect of Clause 6.1 is to remove the VAT element from the scope of the LPA, it is void pursuant to section 8(1), which provides that:

“Any contract terms are void to the extent that they purport to exclude the right to statutory interest in relation to the debt, unless there is a substantial contractual remedy for late payment of the debt.”

Thirdly, he submits that no windfall arises; interest is compensation for late payment and Pharos does not account for VAT on a cash basis. Fourthly, Pharos claims interest pursuant to section 35A of the Senior Courts Act 1981 in the alternative (at the same rate as under the LPA).

Ordinarily, a contract price agreed between parties, unless it is stated specifically to exclude VAT, would include any VAT which is required to be paid (see e.g. Lancaster v Bird (1998) 73 Con LR 22 at 26). The obligation to pay this contract price (inclusive of VAT) would plainly be a qualifying debt for the purposes of section 3(1) of the LPA. This starting point disposes of the arguments raised by Mr Macey-Dare KC about the ‘windfall’ (egregious or otherwise) which would accrue were the position other than that for which he contends. Mr Macey-Dare KC is, of course, right, that if the effect of the LPA is to require enhanced interest to run on the VAT element of a contract price, the recipient may receive a sum in excess of its likely losses – and potentially significantly so if accounting for VAT on a cash basis. However, it is clear that – at least in the simple, default position where any contract price is deemed to include VAT – this is precisely the effect of the LPA. If the intention had been for VAT to be excluded from the definition of a qualifying debt, the statute would have said so in terms. The purpose of the Act was to discourage late payment of commercial debts, and the fact that the recovery by the recipient under the Act is in a sum in excess of purely compensatory interest is inherent in the LPA.

The question, against this background, is whether the definition of ‘Contract Price’ within the particular contract in this case as excluding VAT means that VAT is excluded from constituting a ‘qualifying debt’ for the purposes of the LPA. The answer is no. There is no doubt that the contract between KML and Pharos required KML to pay not just the sum which was contractually defined as the ‘Contract Price’, but applicable VAT. That obligation was not created merely by the statutory tax laws, but expressly on the face of the Purchase Orders themselves. The express contractual obligation upon Pharos to charge the applicable VAT was plainly met with the reciprocal obligation to make payment of that sum, as a matter of contract. For the purposes of the LPA, therefore, VAT formed part of the ‘contract price’. Even if, contrary to the foregoing, it were necessary to construe the words ‘contract price’ under section 3(1) of the LPA as synonymous with the definition of ‘Contract Price’ under clause 6.1 of the Purchase Order, VAT would still form part of the “debt created by virtue of an obligation under a contract to which this Act applies to pay the whole or any part of the contract price”, because the obligation to pay the Contract Price gave rise to the (contractual) obligation to pay the applicable VAT upon the Contract Price. Either way, interest under the LPA is due on the VAT element of the sums owed, but unpaid, to Pharos.

It is noted that this conclusion also leads to a coherent regime where LPA interest applies in the same way whether the contract is based upon a VAT-exclusive price (to which VAT is added by the payor) or a VAT-inclusive price.