No duty of care owed to investors in failed tax schemes

Summary

The High Court’s judgment in McClean and others v Thornhill [2022] EWHC 457 (Ch), held that no duty of care was owed to investors by tax counsel who advised the promoter of tax schemes.

Background

A group of over 100 investor claimants brought proceedings against the defendant, Andrew Thornhill QC (the “ Defendant ”), a tax barrister, seeking damages for losses suffered after they invested in a series of tax schemes in the early 2000s which eventually failed. A sample of 10 claims were chosen to take to trial to determine “Common Issues”, which included:

· whether the Defendant owed a duty of care to the claimants; and

· whether the Defendant breached that duty.

The Court’s decision on these issues would be binding on all claimants.

The claimants invested over £100 million in three limited liability partnerships between 2002-2004 (collectively the “ Schemes ”), which were created to acquire distribution rights for films. The Schemes were promoted by Scotts Private Client Services Limited and Scotts Atlantic Management Limited (together “ Scotts ”). The Schemes were marketed to investors on the basis that an investor could offset any losses incurred by the Schemes against their own taxable income (known as “ Sideways Loss Relief ”).

The Schemes were promoted by way of an Information Memorandum (“ IM ”), which provided warnings of the potential risks of investing. The Defendant advised Scotts on the tax aspects of the Schemes, including his view that the Schemes were carrying on a trade with a view to profit. He did not advise any of the claimants directly. He did, however, consent to being named as a tax adviser to Scotts in the IM and for his advice to be made available to potential investors. Each IM identified the Defendant as a “ taxation adviser ” to Scotts.

Before investing, each investor was required to provide warranties in their subscription agreement that:

- they recognised the Schemes were a speculative venture;

- they had taken appropriate professional advice from their own adviser;

- they had read and understood the terms of the IM; and

- they were aware of the risks attached to becoming a member.

In 2016, HMRC refused the tax relief claimed by the claimants and HRMC subsequently reached a settlement with the claimants in 2017 in respect of the tax they had underpaid.

Claimants’ case

The claimants alleged the Defendant owed them a duty of care because his advice was referred to in the IM and made available to potential investors. They argued that the Defendant had negligently advised that the Schemes would achieve a tax benefit and that no reasonably competent counsel could have given this advice and that the Defendant had negligently failed to advise that there was a significant risk that the Schemes would be challenged by HRMC.

In addition, the claimants submitted that insofar as the Defendant relied on the warranties contained in the subscription agreements, they could only do so to the extent that they satisfied the requirements of reasonableness in Section 2 of the Unfair Contracts Terms Act 1977.

Decision

The Court rejected the claims and held that the claimants had failed to establish the existence of a duty of care or a breach.

Duty of care

The Court applied the “ assumption of responsibility ” test of Hedley Bryne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465, taking into account: the relationship between the parties; the circumstances in which any advice came into existence and was communicated; the presence of other advisers; any opportunities for the adviser to issue a disclaimer and whether any disclaimer was made. The Court also considered the decision in NRAM Ltd v Steel [2018] UKSC 13, where the Supreme Court held that a representor is not to be held to have assumed responsibility towards a representee unless it was reasonable for the representee to have relied on the representation and the representor should have reasonably foreseen he/she would do so.

The Court considered there to be a number of factors which pointed towards a duty of care being owed by the Defendant. These included the Defendant giving his advice in the knowledge it was made available to potential investors and potential investors were likely to take comfort from the fact the Defendant was named as a tax adviser. However, these factors were outweighed by the terms of the IM, which clearly advised investors to consult their own tax advisers and the requirement that the investor warrant that they had relied only on the advice of their own adviser before investing. The claimants could not reasonably rely on the Defendant’s advice without making their own enquiries and the Defendant could not reasonably foresee that they would rely solely on his advice. It was objectively reasonable to assume that independent professional advice would be taken by investors.

Unfair Contract Terms Act (“UCTA”)

The Court held the warranties were entirely clear and UCTA did not apply, but even if it did, the warranties would have been fair and reasonable in all the circumstances.

Breach

The Judge also rejected the claim that the Defendant’s advice had been negligent. The Defendant had acted reasonably in following the approach in Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] 1 A.C. 655, which established that distributing and producing a film was a trading activity. Although the Ensign approach could no longer reasonably be adopted today, it was one which a reasonably competent tax counsel could have taken at the time.

The claimants also argued the Defendant had breached his duty of care in failing to give a specific warning that there was a significant risk that the Schemes would be challenged by HMRC. The Court held that there was no duty to warn as the claimants had never been the Defendant’s clients and he knew nothing about their individual circumstances. Even if a duty of care had existed, it did not extend to advising the claimants on the risks to them of acting on his advice.

Conclusion

The claim is an example of a group action which was managed by a docketed Judge. The decision provides helpful guidance regarding the duties of advisors who provide opinions or advice which are relied on by third parties. In particular, the question of whether a duty is owed to third parties will be fact specific and depend on whether the adviser reasonably foresaw the third party would rely u

Summary

The High Court’s judgment in McClean and others v Thornhill [2022] EWHC 457 (Ch), held that no duty of care was owed to investors by tax counsel who advised the promoter of tax schemes.

Background

A group of over 100 investor claimants brought proceedings against the defendant, Andrew Thornhill QC (the “Defendant”), a tax barrister, seeking damages for losses suffered after they invested in a series of tax schemes in the early 2000s which eventually failed. A sample of 10 claims were chosen to take to trial to determine “Common Issues”, which included:

• whether the Defendant owed a duty of care to the claimants; and

• whether the Defendant breached that duty.

The Court’s decision on these issues would be binding on all claimants.

The claimants invested over £100 million in three limited liability partnerships between 2002-2004 (collectively the “Schemes”), which were created to acquire distribution rights for films. The Schemes were promoted by Scotts Private Client Services Limited and Scotts Atlantic Management Limited (together “Scotts”). The Schemes were marketed to investors on the basis that an investor could offset any losses incurred by the Schemes against their own taxable income (known as “Sideways Loss Relief”).

The Schemes were promoted by way of an Information Memorandum (“IM”), which provided warnings of the potential risks of investing. The Defendant advised Scotts on the tax aspects of the Schemes, including his view that the Schemes were carrying on a trade with a view to profit. He did not advise any of the claimants directly. He did, however, consent to being named as a tax adviser to Scotts in the IM and for his advice to be made available to potential investors. Each IM identified the Defendant as a “taxation adviser” to Scotts.

Before investing, each investor was required to provide warranties in their subscription agreement that:

- they recognised the Schemes were a speculative venture;

- they had taken appropriate professional advice from their own adviser;

- they had read and understood the terms of the IM; and

- they were aware of the risks attached to becoming a member.

In 2016, HMRC refused the tax relief claimed by the claimants and HRMC subsequently reached a settlement with the claimants in 2017 in respect of the tax they had underpaid.

Claimants’ case

The claimants alleged the Defendant owed them a duty of care because his advice was referred to in the IM and made available to potential investors. They argued that the Defendant had negligently advised that the Schemes would achieve a tax benefit and that no reasonably competent counsel could have given this advice and that the Defendant had negligently failed to advise that there was a significant risk that the Schemes would be challenged by HRMC.

In addition, the claimants submitted that insofar as the Defendant relied on the warranties contained in the subscription agreements, they could only do so to the extent that they satisfied the requirements of reasonableness in Section 2 of the Unfair Contracts Terms Act 1977.

Decision

The Court rejected the claims and held that the claimants had failed to establish the existence of a duty of care or a breach.

Duty of care

The Court applied the “assumption of responsibility” test of Hedley Bryne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465, taking into account: the relationship between the parties; the circumstances in which any advice came into existence and was communicated; the presence of other advisers; any opportunities for the adviser to issue a disclaimer and whether any disclaimer was made. The Court also considered the decision in NRAM Ltd v Steel [2018] UKSC 13, where the Supreme Court held that a representor is not to be held to have assumed responsibility towards a representee unless it was reasonable for the representee to have relied on the representation and the representor should have reasonably foreseen he/she would do so.

The Court considered there to be a number of factors which pointed towards a duty of care being owed by the Defendant. These included the Defendant giving his advice in the knowledge it was made available to potential investors and potential investors were likely to take comfort from the fact the Defendant was named as a tax adviser. However, these factors were outweighed by the terms of the IM, which clearly advised investors to consult their own tax advisers and the requirement that the investor warrant that they had relied only on the advice of their own adviser before investing. The claimants could not reasonably rely on the Defendant’s advice without making their own enquiries and the Defendant could not reasonably foresee that they would rely solely on his advice. It was objectively reasonable to assume that independent professional advice would be taken by investors.

Unfair Contract Terms Act (“UCTA”)

The Court held the warranties were entirely clear and UCTA did not apply, but even if it did, the warranties would have been fair and reasonable in all the circumstances.

Breach

The Judge also rejected the claim that the Defendant’s advice had been negligent. The Defendant had acted reasonably in following the approach in Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] 1 A.C. 655, which established that distributing and producing a film was a trading activity. Although the Ensign approach could no longer reasonably be adopted today, it was one which a reasonably competent tax counsel could have taken at the time.

The claimants also argued the Defendant had breached his duty of care in failing to give a specific warning that there was a significant risk that the Schemes would be challenged by HMRC. The Court held that there was no duty to warn as the claimants had never been the Defendant’s clients and he knew nothing about their individual circumstances. Even if a duty of care had existed, it did not extend to advising the claimants on the risks to them of acting on his advice.

Conclusion

The claim is an example of a group action which was managed by a docketed Judge. The decision provides helpful guidance regarding the duties of advisors who provide opinions or advice which are relied on by third parties. In particular, the question of whether a duty is owed to third parties will be fact specific and depend on whether the adviser reasonably foresaw the third party would rely upon its advice and whether the third party did reasonably rely on it. The factors considered by the Court in determining whether a duty of care was established will be important for advisers to consider and build into their terms of engagement and disclaimers, particularly where they are aware their advice will be shared with third parties.

pon its advice and whether the third party did reasonably rely on it. The factors considered by the Court in determining whether a duty of care was established will be important for advisers to consider and build into their terms of engagement and disclaimers, particularly where they are aware their advice will be shared with third parties.