In this case the High Court considered how it should make loss of chance assessments in relation to tax mitigation schemes, in particular, whether the court should look to make a definitive assessment as to whether the relevant tax planning works as a matter of law.
The accountancy firm Baker Tilly was engaged by Altus for the purposes of preparing its corporation tax returns from 2007 to 2010. Altus claimed Baker Tilly failed to advise them of the tax implications of section 1263 of the Corporation Tax Act 2009 (CTA 09). The legislation came into force on 1 April 2009 – however, Baker Tilly did not inform Altus of the change in the law until October 2011.
A month after being informed of the statutory change Altus employed Ernst & Young as a tax adviser. EY proposed a company restructuring in order to mitigate its tax liability under the new legislation. However, the attempt to restructure was eventually abandoned after four months.
Altus’ claim centred on the contention that had Baker Tilly advised them regarding s.1263, it would have had sufficient time to restructure and mitigate any new tax liabilities.
Baker Tilly admitted it had breached its duty with regard to advising Altus of the introduction and implications of s.1263 CTA 09. However, the firm argued that even if they had provided advice, Altus would not have implemented the restructure, and therefore Altus had not suffered a loss. They also argued that HMRC would have investigated the new structure proposed and determined that it did not work.
Judge Keyser QC (sitting in the High Court) held that Baker Tilly was in breach of its duty towards Altus, particularly considering it held itself out as being “a top-end very large firm of specialist advisers.” Consequently, the Court deemed it was reasonable to judge them by those standards, rather than the standards of an “ordinary” firm of accountants.
The Court also concluded that, contrary to Baker Tilly’s defence, had the accounting firm given the relevant advice, Altus would have undertaken the company restructuring.
Loss of a Chance
Judge Keyser QC then considered the consequences of the breach, and decided any loss should be determined on the basis of loss of a chance.
The claim consisted of a breach of duty in the form of an omission, but the benefit to Altus had the breach not occurred was dependent on the actions of a third party (ie HMRC, who could have challenged the legitimacy of the proposed tax planning). The Court therefore applied the relevant case law, Allied Maples Group Ltd v Simmons & Simmons5.
Allied Maples contains a two stage test which any Claimant must successfully overcome in order for a loss of chance to be proven. The two stages are:
- the Claimant must prove on the balance of probabilities what it would have done had the breach not occurred
- should the Claimant overcome stage 1, damages will be assessed on the basis of the value of the chance that the third party would have acted in such a way as to confer the benefit.
Leading Counsel for Baker Tilly accepted that the first question involved the Claimant showing on the balance of probabilities that it would have implemented a restructure. In relation to
the second question, he submitted that an assessment needed to be made as to whether that restructure would have had the desired effect as a matter of law. That is, if tax planning was held to be ineffective as a matter of law, no damages should be recoverable even if there was a significant chance of the restructure succeeding in practical terms (ie of HMRC not challenging it). The Court rejected this approach and decided that it needed to make:
“a practical assessment of the chances that [the restructure] would in fact have resulted in a tax saving for the claimant. Only if a particular issue of fact or law is so clear that there was no substantial prospect of it being resolved other than in a particular way should the court depart from the “loss of a chance” approach”.
The Court was confident that had Altus instructed E&Y in 2009 it would have implemented the restructure. However it was not confident that the Claimant would have in fact instructed E&Y at all in 2009, even with knowledge of the new legislation. Instead, Judge Keyser QC believed that Altus would have instructed PwC, its preferred tax adviser of the time. He was confident that on the balance of probabilities PwC would not have recommended the type of restructure proposed by E&Y, and therefore the claim failed at stage 1 of the Allied Maples test.
Nevertheless, the Court went on to discuss hypothetically stage 2 of the test – how damages would have been assessed had the claim been successful. It concluded if there had been a restructure there was a 7.2% chance that the tax benefits of Altus’ original filing position would have been set aside.
Despite being a first instance decision, this case provides useful guidance on how the Courts will apply loss of a chance cases to accountancy matters (particularly those involving tax mitigation). It is noteworthy that the Court decided to take a relatively broad brush approach to loss of a chance, and rejected the suggestion that it needed to make a definitive ruling on whether a certain form of tax planning worked as a matter of law. Clearly this is likely to be of significance in relation to claims against accountants and financial professionals in cases involving alleged negligent promotion or advice in respect of tax efficient products.