The case of Altus Group (UK) Limited v Baker Tilly Tax and Advisory Services1 provides a helpful reminder as to the correct application of the loss of chance test, together with commentary on the scope of duty of a tax adviser.
In late 2007, the Altus group (a Canadian group of companies) acquired Edwin Hill, a general partnership of property consultants in the UK. It was advised by Ernst & Young (“EY”) as to how best to structure the acquisition for tax purposes, and it was determined that the most efficient structure was to set up a Limited Liability Partnership (the “LLP”), with the membership consisting of both individual partners (the property consultants), and corporate members (the main one being Altus Group (UK) Limited (“Altus”)).
The intended effect of the structure was to allow Altus to generate tax losses over the subsequent five year period (that is, until late 2012), taking advantage of a c.£5m annual deduction of amortised goodwill to which it was entitled under corporation tax rules, but which was not a deductible expense for the individual members under income tax rules. In short, Altus would generate tax losses, despite the LLP being profitable.
In 2008, Baker Tilly was engaged as Altus’ tax adviser, to produce its tax returns and computations. It completed these on the basis that Altus was entitled to the tax losses; the law in this area was, however, unclear.
The legal position was clarified in 2009 by s.1263 of the Corporation Tax Act 2009 (“CTA2009”), which came into force on 1 April 2009. This expressly precluded a member of a profitable partnership from claiming a tax loss when other members had been allocated taxable profits (i.e. it wiped out Altus’ ability to generate tax losses).
Baker Tilly did not advise on the effect of s.1263 CTA, and continued to produce Altus’ tax returns and computations on the basis that Altus was entitled to a tax loss, until the issue was finally detected in late 2011.
When the issue came to light in 2011, Altus sought advice from EY as to any options which might have been available to circumvent the CTA 2009. EY advised that a novel restructuring scheme could be implemented (the “Scheme”). As the goodwill would be fully amortised less than a year later, however, it was decided that the benefit of the Scheme would be too short lived, and it was not put in place.
There were two key issues in the case:
- The court was asked to consider whether Baker Tilly was under a duty to inform Altus about the change in law +before+ it came into effect; and
- Altus alleged that, had the issue come to light in 2009, it would have implemented the Scheme, and saved some £1million in tax. It claimed that, due to Baker Tilly’s breach of duty, it had lost the opportunity to restructure its affairs.
A forward looking duty?
The judge found that the forthcoming change in the law did not “come out of the blue”; it was part of a tax re-write project, and the adviser ought to have been aware of this change when advising Altus about the risks to its pre-CTA 2009 filing position.
HHJ Keyser QC also commented on the scope of duty of a “large firm” of tax advisers, such as Baker Tilly, with substantial technical resources, compared to what he termed an “ordinary firm”. His view was that a “large firm” was “reasonably to be expected to have much greater technical resources than an “ordinary” firm of accountants and as a result to be aware of relevant impending changes to tax legislation”.
That analysis seems to us to place a forward-looking duty on the tax adviser. It is questionable whether this analysis is correct, or whether the court should simply focus on what the particular adviser has been engaged to do (as per, for example, Mehjoo v Harben Barker). The size of a firm in itself should not translate into a broader duty.
Application of the loss of chance analysis to tax cases
The classic loss of chance analysis, per Allied Maples Group Limited v Simmons & Simmons, entails the following two stage test:
- If the defendant’s negligence consists of an omission, for example to give proper advice, the first stage is to ask the hypothetical question: what would the claimant have done if the advice had been given? The claimant must prove that it would have taken action to obtain the benefit which it says it would have obtained, and it must establish this on the balance of probabilities.
In this case, Altus alleged that, on the balance of probabilities, it would have implemented the Scheme.
- The second stage arises where the claimant’s loss depends on the hypothetical action of a third party. The claimant must establish it had a substantial, rather than speculative chance, of obtaining it. If the claimant can show there was a substantial chance, the quantification of loss depends on the assessment of the chance lost.
Here, Altus alleged that there was a substantial chance that HMRC would not successfully have challenged the efficacy of the Scheme.
The case turned on the first part of the test. The judge held that Altus had failed to discharge the burden of proof in demonstrating that, on the balance of probabilities, it would have implemented the Scheme, and for this reason the claim failed in its entirety.
The key finding was that Altus had not put forward sufficient evidence to prove that it would have instructed EY in 2009 when the problem came to light. Altus’ evidence was all directed to what had happened in 2011, not what would have happened in 2009. Things would have been very different two years earlier, with different decision makers at Altus. Instead, the judge said, it was more likely that it would have approached PwC (the firm which Altus had either appointed, or was about to appoint, as its UK tax advisers). In those circumstances, Altus would not have been aware of the Scheme, which was, according to the judge, not an obvious one.
The judgment confirms that the well-known Allied Maples loss of chance analysis is applicable to tax avoidance cases. It also provides a salutary reminder to parties of the importance of ensuring appropriate evidence is before the court to support the findings sought.
Andrew Howell and Stuart Broom acted for the successful defendant in this case.