The High Court of Justice (in the case of Halsall and others v. Champion Consulting Ltd and others  EWHC) has handed down judgment in a professional negligence claim arising out of failed tax avoidance schemes. HHJ Moulder found the tax adviser defendants to be negligent, but nevertheless ruled that, on the facts of the case, the claims were time barred. This article summarises the professional negligence findings and concentrates on the limitation arguments.
Four partners in a solicitors' firm (the Claimants) issued proceedings against accountancy firms (individually the Defendant or collectively the Defendants) claiming that the Defendants induced them to invest in two tax schemes: the "charity shell" scheme in 2003 (the Charity Scheme) and the "Scion" film scheme in 2007 (the Film Scheme).
The Claimants asserted that the Defendant introduced them to the Charity Scheme in July 2003 and in October/November 2003 the Defendant's representative had assured the Claimants that the Charity Scheme would "work effectively". The Claimants also alleged that the Defendants failed to advise of the significant risk that Her Majesty's Revenue and Customs (HMRC) would challenge the Charity Scheme.
In relation to the Film Scheme, the Claimants argued that the Defendant had not only advised that the prospects of successfully avoiding tax were 75/80% but had failed to advise on the Claimants' potential liability in a worst-case scenario.
HMRC successfully challenged the schemes and the Claimants did not obtain tax relief. The Claimants issued a claim in negligence on 6 March 2015.
The test to determine professional negligence is whether the advisers had acted in a way that no reasonably competent tax adviser could have acted. In SAAMCO v. York Montague Ltd  AC 191, the House of Lords distinguished between two categories which professionals may fall into. First, "the information" category – here the professional merely contributes a limited part of material to the transaction and the client assesses its overall financial and commercial merits. Second, "the advice" category – here the professional considers all of the matters which the client should take into account when assessing whether to enter a transaction and assists the client in the decision-making process. In the latter, the adviser is liable for "all the foreseeable loss which is a consequence of that course of action having been taken" (SAAMCO) even if only one aspect of the advice is negligent.
In relation to the Charity Scheme, the Judge held that, on the facts, the Defendants were clearly acting as advisers and "guiding the whole decision-making process" and so fell into the "advice" category and were liable for all foreseeable loss. She decided that the Defendant was negligent as no reasonably competent tax adviser could have given unconditional assurances, including that the scheme would "work effectively".
In relation to the Film Scheme, HHJ Moulder also found that the Defendants advised the Claimants on the course of action to take. Advising that the Film Scheme had a 75% prospect of success was advice which "no reasonably well-informed and competent member of that profession could have given". HHJ Moulder held that, in light of the other financial alternatives available, the Claimants would not have entered either scheme but for the Defendants' negligent advice. Therefore the Defendants' negligence caused the Claimants' losses.
The Limitation Act 1980 (LA) – Primary Limitation Period
By way of a reminder, the primary limitation dates for breach of contract and tort claims are:
- for a breach of contract, the primary limitation is six years from the breach of contract; and
- for a claim in negligence, the primary limitation is six years from when the cause of action accrues.
This claim was brought for negligence (rather than breach of contract) where the primary limitation period is set out in section 2 of the LA 1980 and which provides that a claim must be issued within six years of the date on which "the cause of action accrued" and the cause of action accrues when damage occurs. Here it began when the party was contractually bound to enter into the transaction. Once the party entered a transaction it was "tied into a commercially disadvantageous straightjacket" (Pegasus Management Holdings SCA v. Ernst & Young  EWCA Civ 181). Given that the Claimants were contractually bound to enter into the Charity Scheme in 2003 and the Film Scheme in 2007, the primary limitation of six years for bringing a claim had expired for both schemes.
The LA 1980 – Secondary Limitation
For tort claims there is also a secondary limitation date set out in section 14A of the LA 1980 which extends the primary limitation period for three years subject to a longstop date of 15 years. Pursuant to section 14A(4)(b) a claim will not be considered time barred if it is issued within three years from when the claimant first had "both the knowledge required for bringing an action for damages in respect of the relevant damages … and a right to bring such an action" [emphasis added] (section 14A(5)). There are two tests which determine whether the claimant had the relevant knowledge. These are the "degree of certainty" test and the "degree of detail" test. The degree of certainty test entails "knowing with sufficient confidence to justify embarking on the preliminaries to the issue of the claim form…the claimant must know enough for it to be reasonable to begin to investigate further" (Haward v. Fawcetts  UKHL 9). The degree of detail test is knowing there was a real possibility that the damage was caused by the alleged defendants' negligence. The Claimants had the burden of proving that they only had the requisite knowledge for the purposes of section 14A after 5 March 2012, being three years before proceedings had been issued.
The Charity Scheme
The Judge dealt with the knowledge of each Claimant separately, except for Mr McDermott who had passed away.
While Mr Halsall had been aware of negotiations between the Defendant and HMRC in December 2009 and had told the Defendant to notify its professional indemnity insurers of a potential claim, he contended that he did not have the requisite knowledge at that point. HHJ Moulder stated that the test for requisite knowledge is whether Mr Halsall knew enough in December 2009 to justify investigating the possibility that the advice was negligent. The Judge held that an inference could be drawn that Mr Halsall had sufficient knowledge in December 2009 "that a reasonable person would consider it sufficiently serious to investigate the possibility that the advice was flawed". HHJ Moulder also added, in the alternative, that it was beyond doubt that Mr Halsall had the requisite knowledge on 21 June 2011 when he threatened proceedings against the Defendants and requested a meeting with the them to discuss what the Claimants owed "if the schemes were not accepted" and so his claim was clearly out of time since he had this knowledge prior to 5 March 2012.
HHJ Moulder held that Mr Stanton had the requisite knowledge on 27 January 2011, when HMRC notified him that the Charity Scheme was under investigation and so again was out of time.
Finally, in relation to Mr Higgins, HHJ Moulder referred to his email exchanges with the Defendant in late 2009 which contained statements such as "when things go wrong". The Judge decided that Mr Higgins was aware of HMRC's investigation and it was therefore reasonable for him to have started investigating then. HHJ Moulder added, in the alternative, that Mr Higgins had the requisite knowledge in June/July 2011 when the Claimants proposed to meet the Defendants, as above. Alternatively, he had the requisite knowledge in February 2012, the date the Claimants received schedules detailing their potential tax liabilities if the scheme failed. Accordingly all these dates were prior to 5 March 2012.
The Judge held that Mr Higgins had the requisite knowledge in January 2011, and Mr Stanton and Mr Halsall in late 2011, when HMRC notified each Claimant of its enquiries into tax relief sought for the Film Scheme.
In light of the above, HHJ Moulder decided that the Claimants had the requisite knowledge for the purpose of section 14A of the LA 1980 in relation to both schemes before March 2012. Therefore, despite having held the Defendants liable in negligence, the claims were statute barred.
The judgment is a helpful analysis of the circumstances under which advisers will be found liable for negligent advice on tax avoidance schemes and the application of the LA 1980. It provides a salutary lesson that parties who have a potential claim should consider at an early stage when the relevant limitation period starts.
As the dates for calculating when the limitation period commences are different for a breach of contract and a tortious claim, it can sometimes be difficult to determine the correct date and therefore parties with potential claims should seek to identify the relevant dates for each claim as soon as possible, erring on the side of caution if there is any doubt. Further, if the primary limitation periods have passed, there may be longer, secondary limitation periods, but these depend on the facts of each case and careful scrutiny must be given to ascertaining the claimant's state of knowledge.
If the limitation date is near, parties should consider entering into a standstill agreement to stop time from running. This will give the claimant the opportunity to discuss and seek to settle any dispute with the confidence that they are not prejudicing any potential claim due to a limitation argument.