Introduction

As the government continues to grapple with a budget deficit and strained public finances, there remains considerable pressure on HMRC to crack-down not only on tax evasion, which is illegal, but tax avoidance, which HMRC refers to as "bending the rules of the tax system to gain a tax advantage that Parliament never intended"[1]. Scrutiny of tax avoidance schemes is not new, but measures introduced by parliament in recent years (together with a shift in the attitude of the Courts in favour of HMRC, and tighter HMRC guidance) have created a much tougher environment for taxpayers. These measures include the Disclosure of Tax Avoidance Scheme ("DOTAS") regime (since 2004), the General Anti-Avoidance Rule (since 2013), and Follower Notices and Accelerated Payment Notices which require a taxpayer to make an accelerated payment of tax they wish to dispute (since 2013/4).

The net impact has been significant. There have been substantially fewer new tax avoidance schemes being mass-marketed, and many firms have closed their tax scheme units. There has also been greater focus on the legitimacy of historic schemes which has only been heightened by public attention including following the release of the so-called "Panama Papers". In the March Financial Statement this year, the Chancellor announced that: "since 2010, we have secured £140 billion in additional tax revenue by taking robust action to tackle avoidance, evasion, and non-compliance" [2]. Where individuals and corporates face financial and reputational issues in respect of challenged tax planning, it is predictable that some may seek to point the finger at their professional advisers.

We expect to continue to see run-off claims against advisers for historic tax advice. Given that taxpayers may need to wait years for HMRC to work through a backlog of tax returns and finalise the outcome of any subsequent enquiries or action, limitation issues are likely to be relevant to many claims. In one such case earlier this year - Halsall & Ors v Champion Consulting Limited & Ors [3] - the Mercantile Court concluded that the tax adviser was negligent by acting as no reasonable tax adviser could have acted, but it escaped liability on limitation grounds.

Halsall

The Claimants were four solicitors who were said to have been negligently induced into two tax avoidance schemes by the Defendant accountants ("Champion").

The "charity shell scheme" sought to take advantage of tax relief available on donations to charities through Gift Aid. The Claimants subscribed for shares in a shell company, which then acquired a target company before the shell company was listed on the stock exchange. At that point, the Claimants gifted the shares to a charity and sought tax relief on the value of the gift (effectively the list price of the shares). As tax relief would be available at the investors' marginal rate of tax, in order for the tax relief to exceed the Claimants' initial subscription in the shell company, the scheme relied on the listing price of the shell company being significantly higher than the initial subscription.

Accordingly, there was a question as to whether the listing price (upon which tax relief was sought) represented the true market value of the shares. The key issue was whether the Defendants had advised that there was a significant risk that the valuation of the shell company was subject to challenge by HMRC. The Claimants contended that they had not been so advised, and that Champion had assured them that the scheme would work effectively.

The Judge agreed, concluding that Champion had failed properly to advise of the risk that the valuation would be challenged and, in fact, "gave them a 100% assurance that their tax liability would be reduced as a result of this investment". In the circumstances, she considered that no reasonably competent tax adviser could have acted as the Defendants did and that Champion was negligent. However, the claim ultimately failed as it had been made outside the limitation period, under:

  1. Section 2 of the Limitation Act 1980 ("the Act"), which requires an action founded on tort to be brought within six years from the date on which the cause of action accrued. That was considered to be the point at which the Claimants contracted to enter into the scheme, not because loss at that point was inevitable, but because that was the point at which they were "tied into the 'commercial straitjacket'".
  2. Section 14A of the Act, requiring the Claimants to bring the claim within 3 years of the earliest date upon which the Claimants had both the knowledge required for bringing an action for damages and the right to bring such an action. That was considered to be the point at which the Claimants were aware that HMRC was investigating and challenging the scheme and accordingly the point at which the Claimants knew that success was no longer assured contrary to what Champion had said.

The Court made similar findings in relation to the second tax scheme, in which the Claimants entered into a sole trader business to trade film distribution rights creating losses to set against income.

Provision of advice or information

Halsall is one of the first cases considering the distinction between advice and information drawn by Lord Hoffman in SAAMCO v York Montague [4] following the consideration given in the Supreme Court case of BPE v Hughes Holland [5].

In BPE, Lord Sumption explained that where a case fell into the 'advice' category "it is left to the adviser to consider what matters should be taken into account in deciding whether to enter into the transaction", and accordingly the professional should consider all relevant factors. However, where a case fell into the 'information' category "a professional adviser contributes a limited part of the material on which his client will rely in deciding whether to enter into a prospective transaction, but the process of identifying the other relevant considerations and the overall assessment of the commercial merits of the transaction are exclusively matters for the client." The consequence is that if a professional has provided advice, he or she will be liable for the consequences of that advice being wrong, whereas if the professional has provided information he or she will only be liable for the more limited consequences of the information being wrong.

In Halsall, HHJ Moulder stated that in all cases it is the client that ultimately takes the decision and noted that labels may not always assist. She emphasised that the test (in line with BPE) "is whether the adviser is responsible for 'guiding' the whole decision-making process." On the facts, she found that the Claimants were guided entirely by Champion and had not "retained responsibility for assessing the full range of risks". Accordingly, it was a case that fell into the 'advice' category.

The attraction of structures that legitimately reduce one's tax burden is clear. The charity shell scheme in Halsall (like some other schemes) had the additional attraction of allowing taxpayers to donate to a charity of their choosing. However, in the current climate, both the individuals considering entering into tax planning schemes, and the professionals who advise them, need to be particularly careful. HMRC is clearly willing, and recently emboldened, to challenge schemes and asserts that it wins around 8 out of 10 avoidance cases heard in Court [6] (though, of course, many cases will be settled or dropped before that stage).

However, advisers may draw some comfort from the fact that the path leading to recovery of substantial damages is not an easy one to tread. Claimants must overcome the hurdle of proving negligence, in relation to which a key issue will be the standard of care, and specifically whether a significant body of reasonable practitioners would have given the same advice (Bolam[7]). Defences along those lines may be easier where the scheme failed in light of a change in law or change in approach by HMRC (so long as appropriate risk warnings were given). Courts are also willing to give hard scrutiny to Claimants' causation cases, such as in Altus v Baker Tilly [8] where the Court held that there was no loss caused in a tax planning claim where the accountants had admitted breach of duty. Accordingly, Defendants should consider at an early stage whether they have causation defences in addition to other arguments such as in relation to quantum or failure to mitigate.

Further, given the long running nature of HMRC enquiries (which can last for over a decade, during which time the taxpayer may not have a reasonable idea of the likely outcome), limitation defences will be common. The primary limitation period may well have expired, necessitating Claimants to rely on s14A of the Act. The date from which time runs under that section will be key and may be difficult to pin-point. It is defined in s14A(5) of the Act as "the earliest date on which the plaintiff or any person in whom the cause of action was vested before him first had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action." In Haward v Fawcetts [9] it was held that what is required is"sufficient knowledge to realise that there is real possibility of his damage having been caused by some flaw or inadequacy in his advisers' investment advice, and enough therefore to start an investigation into that possibility…" Considering this issue in Halsall, HHJ Moulder found that the relevant point in time for the Claimants was "not when they first knew they might have a claim for damages but when each of them first knew enough to justify setting about investigating the possibility that [the] advice was defective."

In Halsall, the Court also considered (obiter) a limitation of liability clause in Champion's terms of business that provided that a claim could only be brought against it within six years of the date of breach of duty and therefore appeared on its face to exclude the operation of section 14A of the Act. The Judge noted that where there is uncertainty as to the intention of an exclusion clause, it should be resolved against the person relying on it, but considered that as the Claimants were litigation solicitors they would have been well aware of the issue and law regarding limitation and accordingly did not accept there was any uncertainty. Accordingly, the Judge considered that the terms of business did not permit any extension of the limitation period by reference to section 14A. Further, it was found that the clause met the requirement of reasonableness under section 11 of the Unfair Contract Terms Act 1977, given that, among other things, it could be inferred from the fact the Claimants were litigation solicitors that they were capable of understanding the significance of the limitation clause. Whilst it is certainly positive for professional defendants that a limitation clause was upheld in this way, it is questionable whether Courts would be willing to do so where the Claimants are not themselves lawyers or are otherwise less sophisticated in their knowledge of the law relating to limitation. It may also produce a harsh result where the trigger for the additional s14A limitation period might well be after the six year primary limitation period has expired, if HMRC investigates the scheme many years later.

Even where no substantive defences are available, damages may be limited to interest and penalties for the late payment of tax, together with wasted professional fees in relation to the failed scheme, given that the tax would often have been payable to HMRC in any event. However, the process of defending tax advice claims is inevitably expensive and defendant professionals may face the risk of damage to their reputation. A cultural shift in recent years has resulted in reduced public tolerance and aggressive schemes are increasingly seen as morally reprehensible. Indeed, in Halsall the expert for the Defendants opined that the charity shell scheme was tax planning of the sort that "large accounting firms would not have been willing to be involved in due to the risk to their reputation..."

Halsall is a salutary reminder that advisers are exposed to claims in respect of advice given on tax avoidance schemes and, even if not ultimately successful, are likely to find themselves put to the cost and inconvenience of defending their conduct, with the reputational risk that may entail. It is also a reminder, if needed, of the importance of providing appropriate warnings as to the potential risks of any scheme.