Forensic Accounting in Litigation: A Guide for Instructing Solicitors

Forensic accountants are instructed across a wide range of civil litigation: quantum disputes in commercial and personal-injury claims, fraud and asset-tracing investigations, shareholder and partnership disagreements, family finance proceedings, and estate disputes. For the instructing solicitor, understanding how CPR Part 35 reshapes the instruction, how expert fees are treated for VAT, and how to protect cost recovery is as important as selecting the right expert.

This guide covers the instructing-side mechanics. It is written for litigation partners, commercial solicitors, and family finance practitioners who appoint or work alongside forensic-accounting experts. It does not cover the internal methodology of forensic work itself, which is the expert's domain.

When to instruct a forensic accountant

Forensic accountants are instructed when a court will need opinion evidence on a financial question that goes beyond what a witness of fact can provide. The common triggers are:

Quantum of loss claims. Lost profits, wasted expenditure, and diminution in value all require an expert to apply a professional methodology to the available financial data. A business-interruption claim, a loss-of-earnings claim in a personal injury matter, or a claim for profits diverted by a dishonest employee are typical examples. The expert's role is to quantify the loss using a recognised approach (earnings-based, cost-based, or market comparables), to identify the assumptions built into the analysis, and to address competing methodologies in their report.

Fraud and asset-tracing matters. Where funds have been misappropriated, diverted, or concealed, forensic accountants reconstruct cash flows, trace transactions through bank records, and carry out lifestyle assessments comparing known income to expenditure. These investigations often feed into freezing-order applications and proprietary claims as well as the underlying liability dispute.

Shareholder and partnership disputes. Valuing a minority shareholding, identifying unauthorised withdrawals by a partner, or quantifying a breach of fiduciary duty all require a forensic analysis that cannot be provided by the company's own auditors (who owe duties to the entity, not the individual claimant).

Family proceedings: valuing the matrimonial asset pool. In financial remedy proceedings, a forensic accountant is frequently instructed as single joint expert to value a business interest forming part of the matrimonial pool. The family court routinely defaults to a single joint expert under FPR 2010 Part 25. See our guide to business valuation for family lawyers for the full matrimonial context, including the s.25 MCA 1973 factors and minority-discount treatment.

Estate and probate disputes. Challenges to the valuation of business assets in an estate, claims against personal representatives for misapplication of estate funds, and disputes between beneficiaries over the apportionment of income and capital all require forensic analysis.

The timing question. Early instruction is almost always better. A forensic accountant brought in at the pre-action stage can help frame the issues, identify the financial documents needed on disclosure, and scope the expert evidence proportionately. Late instruction -- after disclosure closes or after the issues have been fixed by a court order -- risks a narrow permission that forces the expert into a constrained analysis and increases the chance of a costs-capping direction.

CPR Part 35 -- the expert's overriding duty

The starting point for any expert instruction in civil litigation is CPR Part 35. The rules reshape what the expert can and cannot do in ways that have direct practical consequences for the instructing solicitor.

The overriding duty (r35.3). Under CPR r35.3(1) an expert's duty is to help the court on matters within their expertise. Under r35.3(2) that duty overrides any obligation to the instructing party or the party paying the expert's fees. This is not a formality. A forensic accountant who shades an opinion in the client's favour, or who omits an adverse methodology from the range-of-opinion summary required by PD 35, risks losing standing with the court. In practice, courts give significant weight to expert evidence and are quick to criticise experts whose reports appear to have been shaped by the instructing party.

Permission to adduce expert evidence (r35.4). Under CPR r35.4(1) no expert evidence may be adduced without the court's permission. The application for permission should be made in good time -- ideally at the case management conference -- and should include a cost estimate and a description of the specific issues the expert is to address (r35.4(2)). Under r35.4(4) the court may limit the amount of the expert's fees that can be recovered from the other party. Where a costs management order is in place, the expert's scope and estimated fees must appear in the Precedent H budget before they are incurred.

Practical consequence for the solicitor. The combination of r35.3 and r35.4 means the instructing solicitor should: select an expert who can and will perform the overriding duty without restriction; define the issues in the permission application narrowly and accurately; obtain a written cost estimate tied to those issues; and resist any temptation to ask the expert to produce a tactical report rather than an honest one.

Single joint experts -- when the court directs one

In many cases, particularly in the family court and in lower-value civil disputes, the court will direct a single joint expert rather than allowing each party to appoint their own.

The court's power (r35.7(1)). The court may direct a single joint expert where multiple parties seek evidence on the same issue. Relevant considerations include the complexity of the issue, the value at stake, and whether a neutral expert can adequately address the parties' different factual scenarios.

Instructions in an SJE case (r35.8). Any instructing party may send instructions to the SJE, and copies go simultaneously to all other parties. This means the SJE receives -- and must address -- instructions from both sides. The solicitor drafting the joint letter of instruction must include the factual scenarios of both parties; an instruction that frames only the instructing client's version of events will be corrected by the other side's supplemental instructions and risks undermining the process.

Joint and several fee liability (r35.8(5)). The parties are jointly and severally liable for the SJE's fees and expenses unless the court directs otherwise. Either party can be required to pay the full amount. In practice, instruction letters address the split (often 50:50), but the SJE can pursue either party for the full amount if payment is not made. Settlement agreements should deal with any outstanding SJE fees explicitly.

Tactical considerations. An SJE narrows the parties' ability to build competing narratives. In a complex quantum dispute -- where the parties rely on fundamentally different methodological assumptions -- the parties may prefer party-appointed experts and argue the proportionate cost of a contested approach at the case management stage. If the court directs an SJE and the report is adverse, the primary lever is Part 35 written questions before applying for permission to adduce party evidence.

Part 35 written questions

Part 35 written questions are the mechanism for seeking clarification from any expert, whether party-appointed or SJE. They are not a substitute for adducing your own expert evidence but they can be effective in exposing assumptions, obtaining acknowledgment of alternative approaches, and narrowing the disputed issues.

The rules (r35.6). Written questions must be proportionate, submitted within 28 days of service of the expert's report, and limited to clarification of the report. Under r35.6(3) the answers form part of the expert's report. The rules do not fix a deadline for the expert to respond, but a reasonable time is expected.

Sanctions for non-answer (r35.6(4)). Where an expert fails to answer Part 35 questions, the court may direct that the party cannot rely on the expert's evidence or that the expert's fees are not recoverable from any other party. Before applying, write to the opposing solicitor setting a reasonable deadline; if the answers remain outstanding, the appropriate route is an unless order.

Drafting discipline. Unfocused or disproportionate questions may be rejected by the court and reflect poorly on the asking party, affecting any costs application. Each question should identify the specific passage in the report that requires clarification and ask for a specific answer. Questions that effectively invite the expert to change their opinion, rather than explain it, are outside the scope of r35.6(1) and are likely to be resisted.

What a forensic accountant does in litigation

Quantum of loss. The forensic accountant quantifies a financial claim by applying recognised approaches to the available data: an earnings-based approach to lost profits (typically a before-and-after comparison or a market-comparable approach); a diminution-in-value approach for asset damage; a wasted-expenditure approach for reliance losses. The report must identify which figures come from the client's own records, which from agreed instructions, and which from assumptions -- the facts-versus-assumptions structure that PD 35 paragraph 3.2(3) and (4) requires.

Business and share valuations. Earnings-based (EBITDA multiple), asset-based (net asset value), and market-comparable approaches each produce different outcomes. The expert must summarise the range of opinion and explain their preferred approach. Minority discounts are frequently contentious in shareholder disputes and in matrimonial proceedings.

Fraud and asset-tracing. Cash-flow reconstructions, invoice analysis, bank-statement reconciliation, and lifestyle assessments are the core techniques. The expert may be instructed on both liability (proving the diversion) and quantum (quantifying the loss).

PD 35 mandatory requirements. Under Practice Direction 35 paragraph 3.2 a compliant expert report must state the expert's qualifications; list all literature and materials relied on; set out the substance of all material facts and instructions; distinguish between facts within the expert's own knowledge and those taken from instructions or assumptions; summarise the range of opinion and give reasons for the expert's own view; contain a summary of conclusions; state any qualifications or caveats; and confirm compliance with the overriding duty. Paragraph 3.3 requires a statement of truth. A report that presents a single loss figure without addressing competing methodologies does not comply and is vulnerable to challenge.

Joint statements. Where each party has appointed their own expert, the court will typically direct the experts to meet without the parties' solicitors present and to produce a joint statement setting out agreed and disputed issues. Under PD 35 the expert must not be given instructions that restrict what they can agree with the opposing expert. The instructing solicitor's role is to prepare the expert well before the meeting (identifying the key disputed assumptions and ensuring the expert understands the factual matrix) and to review the joint statement carefully once produced -- it will carry significant weight at trial.

Expert fee and VAT treatment: the instructing firm's position

The VAT treatment of expert fees depends on the instruction structure. The threshold question is whether the expert's fee is a disbursement (outside the scope of VAT, recharged at cost with no VAT added by the firm) or a cost component of the firm's own supply (standard-rated on the recharge).

The eight disbursement conditions

A payment is a disbursement only if all eight conditions in HMRC VTAXPER39000 (VAT Notice 700 §25.1.1) are met:

1. The firm acted as the client's agent when paying the third party.
2. The client received and used the services.
3. The client was responsible for paying the expert.
4. The client authorised the payment.
5. The client knew the expert would be provided by a third party.
6. The outlay is separately itemised on the firm's invoice.
7. The firm recovers only the exact amount paid to the expert.
8. The expert's services are clearly additional to the firm's own legal supply.

All eight must be met. If any condition fails, the fee becomes a component of the firm's standard-rated supply and output VAT is charged on the recharge. See our full guide to disbursements VAT treatment for the eight conditions applied across the range of third-party professional costs.

Party-appointed expert: the supply-to-firm default

Where the firm contracts with and instructs the expert, selects them, shapes the letter of instruction, and uses the report in its own case strategy, the default position under house position §6.K is a supply to the firm rather than a disbursement. Condition 1 (the firm acted as the client's agent) is the hardest to satisfy in this route because the firm is acting on its own professional judgment, not merely as conduit.

In this route: the expert's VAT-bearing fee note is received by the firm; the firm recovers the expert's VAT as input tax (assuming the firm makes standard-rated supplies); on recharging to the client the firm adds output VAT to the full amount including the expert's fee.

For example, a forensic accountant invoices the firm at £10,000 plus £2,000 VAT (total £12,000). The firm recovers the £2,000 as input tax. On recharging to the client, the firm charges output VAT of £2,400 on the £12,000 recharge (total to client £14,400). The firm's net VAT position is the £400 difference. The parallel analysis for counsel's fees is at our counsel fees VAT guide.

Single joint expert: disbursement treatment a stronger case

In an SJE arrangement under CPR r35.7 and r35.8, the court directs the appointment and both parties are jointly and severally liable for the fees under r35.8(5). This makes the "client responsible for paying the third party" condition (condition 3) materially easier to satisfy. If the client contracted directly as part of the court-ordered process and the firm merely paid on their behalf, disbursement treatment is supportable -- though still dependent on satisfying all eight conditions on the specific facts.

In an SJE disbursement scenario the firm passes through the VAT-inclusive fee at cost. Using the same numbers: the firm passes through £12,000 (the expert's fee inclusive of VAT) to the client with no additional output VAT. The firm claims the expert's £2,000 input VAT separately.

Inter-partes recovery and VAT

Where expert fees are recovered from the other side, the VAT treatment follows house position §6.G. The amount claimed against the paying party depends on the receiving client's VAT position:

• Receiving client is VAT-registered and can recover input tax: the inter-partes bill claims the expert's fee net of VAT.
• Receiving client cannot recover VAT (for example, an individual or an exempt body): the bill claims the VAT-inclusive amount and the paying party bears the VAT cost.

The firm issues its tax invoice to its own client, not to the paying party. The bill of costs or costs schedule must state the receiving party's VAT-recovery position (per CPR PD 44).

Recoverability of expert fees as costs

Expert fees are within the costs regime. Under CPR r44.1(1) "costs" includes fees, charges, disbursements, and expenses. The general rule under r44.2(2) is that costs follow the event: the unsuccessful party pays. On the standard basis, only proportionate costs are allowed under r44.3(2) and r44.3(5); expert fees must bear a reasonable relationship to the matters in issue.

The key risk points are:

Costs cap at permission stage (r35.4(4)). The court may limit the amount of expert fees recoverable when it gives permission for expert evidence. The solicitor should apply for the appropriate level of permission, present a realistic cost estimate, and keep the expert's scope tightly aligned to the permitted issues.

Costs management (Precedent H). Where a costs management order is in place, expert fees must be budgeted and approved before they are incurred. Expert fees not in the approved budget are at real risk of disallowance on detailed assessment. Update the Precedent H when the scope of instruction changes -- a late disclosure exercise that expands the forensic scope without a contemporaneous budget update is a preventable recovery failure.

Proportionality. Even where costs management does not apply, a detailed assessment on the standard basis will scrutinise whether the expert's fees were proportionate to the issues. Keeping the letter of instruction tightly focused and ensuring the expert does not expand into issues outside the permitted scope are the practical safeguards.

Selecting and managing the expert: a practical checklist

The following considerations apply from the moment of selection through to trial.

Independence first. The expert must be able to perform the overriding duty without restriction. Before instruction, confirm that the expert has no conflict of interest with any party or with the subject-matter of the dispute. An expert whose appointment is challenged on independence grounds mid-litigation is expensive to replace.

Narrow the issues. The letter of instruction should map precisely to the court's permission. Wider instructions inflate cost, increase the risk of a costs-capping direction, and produce a longer report that may address issues that are ultimately irrelevant. Include the agreed factual assumptions and identify the documents being provided.

Fee estimate at instruction. Obtain a written cost estimate before instruction. Forensic scopes can expand rapidly once disclosure arrives: a business-interruption claim that appears straightforward at the pleading stage may require a multi-year financial reconstruction once the disclosure bundles land. Build a contingency into any Precedent H entry for the expert's fees and obtain a revised estimate before authorising expanded work.

Draft reports and privilege. Draft expert reports prepared for the dominant purpose of litigation attract litigation privilege; do not volunteer drafts in disclosure. Limit written comments on drafts to factual corrections, disclose the substance of those corrections in the final report's instructions section under PD 35 paragraph 3.2(3), and never suggest amendments to the expert's analytical conclusions.

Joint meetings. Agree the agenda with the opposing solicitors in advance. Under PD 35 the expert must not be given instructions that restrict what they can agree with the opposing expert. Brief the expert on the key disputed assumptions but do not attempt to control what is agreed at the meeting.

SRA investigations. Forensic accountants are also instructed where a firm is under SRA investigation and a financial reconstruction is required. See our guide to handling an SRA investigation for the broader regulatory context.

VAT walk-throughs: worked examples

Party-appointed expert: supply-to-firm route

A litigation firm (VAT-registered, standard-rated supplies) instructs a forensic accountant as party-appointed expert on a business-interruption quantum claim. The expert invoices the firm at £10,000 plus £2,000 VAT (total £12,000). The firm selected and instructed the expert and is not acting as the client's agent.

Step 1: the supply is to the firm. Condition 1 of VTAXPER39000 is not met. The fee is a cost component of the firm's supply.

Step 2: the firm recovers the expert's £2,000 as input tax (fully taxable firm, no partial exemption restriction).

Step 3: the firm recharges £12,000 to the client and adds output VAT of £2,400. Total to client: £14,400. The firm's net VAT position is £400 (output £2,400 minus input £2,000).

Single joint expert: disbursement route (where conditions are satisfied)

The court directs a single joint expert on a share-valuation issue. Two parties are jointly and severally liable under CPR r35.8(5). The SJE invoices at £8,000 plus £1,600 VAT (total £9,600). The instruction letter allocates the cost 50:50, so each party's share is £4,800 (VAT-inclusive).

Because the court directed the SJE and both parties are directly and jointly liable, the "client responsible for paying" condition (VTAXPER39000 condition 3) is materially easier to satisfy. If the client contracted directly and the firm merely paid on their behalf, disbursement treatment applies on the facts.

On disbursement treatment: the firm passes through £4,800 (the client's 50% share of the VAT-inclusive SJE fee) with no additional output VAT. The firm claims the input VAT element (£800 being 50% of the expert's £1,600 VAT) separately.

Inter-partes recovery: if costs are ordered in favour of this client and the client is a private individual (non-VAT-registered), the inter-partes bill claims the VAT-inclusive £4,800 and the paying party bears the VAT. If the client is a VAT-registered business that can recover input tax, the bill claims the net amount (£4,000) and the VAT is excluded from the recovery.

Costs cap risk: if the court capped recoverable expert fees at permission stage (for example, limiting total SJE fees to £6,000), each party recovers only their proportionate share of the cap regardless of the actual SJE charge. The instruction letter should reference any costs cap and require the SJE to notify the parties before exceeding the permitted amount.

Getting the financial side of an instruction right

If you need help with the financial analysis that sits alongside a forensic instruction (quantum modelling, loss-of-profits work or a business valuation for use with the expert report), or with the VAT and costs-recovery treatment of expert fees on a matter, contact Accounts for Lawyers using the form on this page.