In one of the first cases to apply the long established SAAMCO principles recently clarified by the Supreme Court in the widely reported case BPE Solicitors v Hughes-Holland  UKSC 21, the High Court has considered in Halsall & Ors –v- Champion Consulting Limited & Ors (Rev 1)  EWHC 1079 (QB) (1) the duty of care owed by a reasonably competent tax advisor with respect to clients entering into tax planning schemes; and (2) the accrual date for limitation purposes in professional liability disputes.
- The Claimants were four solicitors who were said to have been negligently induced into two tax avoidance schemes by the Defendant accountants.
- The first "charity shell scheme" sought to take advantage of tax relief available on donations to charities through Gift Aid. In short, 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).
- Crucially, 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 second scheme was supposed to deliver tax benefits through investment in film rights.
- In respect of the first scheme, 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 the Defendant had assured them that the scheme would work effectively.
- In respect of the second scheme, the Claimants alleged that the Defendants had advised that this scheme had a 75-80% chance of success and further that if it failed the maximum loss would be the cash invested.
- Both schemes apparently failed, and the Claimants brought proceeds on the basis of negligent advice and losses suffered.
Liability/Duty of care
SAAMCO/BPE – a recap
In South Australian Asset Management Corp v York Montague  AC 191 the House of Lords distinguished between (1) providing information for the purposes of enabling someone else to decide upon a course of action (in which cases the information giver is generally not responsible for all of the consequences of the course of action); and (2) a duty to advise someone as to what course of action to take (in which case the advisor must take reasonable care to consider all of the consequences of the course of action).
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.
Halsall: The High Court Decision
- The Court concluded that on the facts the Defendant accountants had failed to properly advise the Claimants 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, it considered that (having applied the Bolam test) no reasonably competent tax adviser could have acted as the Defendants did.
- The Judge stated that whilst in all cases it is the client that ultimately takes the decision; the key test (applying 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 the Defendant accountants and had not "retained responsibility for assessing the full range of risks". Accordingly, it was a case that fell into the 'advice' category and liability was established.
- 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. The Court concluded here that the advice given regarding this scheme was advice that no reasonably competent tax advisor could have given.
The Court held that the claim ultimately failed as a result of it having been brought outside the limitation period. The judgment provides a useful reminder of the issues at play when considering the accrual date for statutory limitation purposes in professional liability disputes under the Limitation Act 1980 ("the Act"):
Primary limitation period
- Section 2 of the Act requires an action founded on tort to be brought within six years from the date on which the cause of action accrued.
- In this case, the relevant date 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'".
Additional limitation period
- Section 14A of the Act, requires Claimants to bring the claim within three 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.
- In determining the relevant date, the Court considered Section s14A(5) of the Act which sets out that the correct date for these purposes is "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 (2006 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, the Judge 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 other words, the point at which the Claimants were aware that HMRC were investigating and challenging the scheme and accordingly the point at which the Claimants knew that success was no longer assured contrary to what the Defendant accountants had said.
Contractual limitation of liability
- Of further note is the Court's obiter consideration of a limitation of liability clause in the Defendant'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 which appeared on its face to exclude the operation of section 14A of the Act.
- Here, 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, 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 the limitation clause.
The decision is a useful reminder of the key principles applicable in professional negligence claims and provides a careful examination of (a) duty of care arguments (post BPE); and (b) limitation.
It is also a reminder, if needed, that:
- Appropriate risk warnings should always be considered particularly where advice is being given.
- Consideration should be given to the political/cultural shift against (aggressive) tax avoidance and reputational issues at risk for any professional. 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...".
- HMRC has a particular appetite for challenging tax planning schemes. Indeed, it asserts that it wins 8 of 10 avoidance cases heard in court (although of course many cases will be settled or dropped before that stage).
- The Finance Bill, currently before Parliament, has reintroduced the provisions that were dropped before the general election, providing for penalties for enablers of defeated tax avoidance schemes. Going forward therefore, firms will need to tread even more carefully when advising in this area.