In response to HMRC's controversial campaign to tackle tax avoidance, the media has been awash with headlines about the challenges made to various tax mitigation schemes. While the campaign has been largely successful for both HMRC and the public purse, it has come at the expense of hundreds of investors, many of whom claim to have acted entirely in good faith. In turn, and perhaps inevitably, some of those investors have questioned the advice they received from the individuals and companies who devised and promoted such schemes.
In the recent case of Halsall & Others v Champion Consulting Ltd (2017) the court was asked to consider whether the promoter of two tax mitigation schemes had acted negligently when advising the Claimant investors and whether the claims made were time-barred under the Limitation Act 1980.
The background facts
Unusually, the Claimants were all solicitors and partners in the firm Michael W Halsall Solicitors. The Defendant was a subsidiary company providing business consultancy and accounting services.
In 2003 the Defendant introduced the Claimants to a charity shell scheme ("CS Scheme"), which it said would reduce their tax liability through the mechanism of gift aid. It required investors to subscribe for shares in a shell company, which would then buy shares in other target companies before being listed on the AIM or the CISE, whereupon the shares (which would increase in value as a result of the targeted acquisitions) could be gifted to charity and tax relief claimed against their transactional value.
In 2007 the Defendant introduced the Claimants to a Scion film scheme ("SF Scheme") as a further mechanism for reducing their tax liability. It involved the purchase of film distribution rights, with resultant losses being available for sideways loss relief.
The Claimants each invested in both schemes, which were later challenged by HMRC.
The Claimants alleged that they were assured in 2003 that the CS Scheme would be 100% effective and were not warned that the valuation of their shares on flotation was critical and could be challenged by HMRC. The Claimants further alleged that the advice they were given in relation to the FS Scheme, that it had a 75% - 80% prospect of success and that any loss would be limited to the amount invested, was negligent.
Legal issues arising
In addition to various factual disputes, the court was required to consider the full gambit of legal issues arising in professional negligence claims, including the scope of the duty of care owed by the Defendant, whether this had been breached, whether loss had been caused, whether contributory negligence had occurred, whether the claims were time-barred and whether the loss was excluded by the Defendant's terms of business.
Findings of the court
In a lengthy judgment, HHJ Moulder examined each of the factual and legal issues in turn.
The CS Scheme
The first key issue for the court to determine was whether an express warning within the Defendant's letters of engagement, to the effect that it could not in fact guarantee the success of the particular CS Scheme, was incorporated into those contracts where it had not been deleted by the Defendants. Interestingly and while noting a lack of consistency within the documentation, the court found that the later terms did not serve to correct or subvert the earlier assurance, notwithstanding that each charity shell investment was independent of the other, staggered in time and governed by its own letter of engagement.
The next issue for the court to determine was whether the loss claimed was of a type that fell within the scope of the Defendant's duty of care. Having regard to the judgment in SAAMCo v York Montague Ltd (1997) the court observed that it was not necessary in order to fall within the 'advice' category for the adviser to have taken the transactional decision and that it was sufficient for him to have guided the decision. On the facts here, it concluded that the Defendant was an experienced tax adviser and had guided the whole decision-making process.
As regards breach of duty, the experts were agreed that no reasonably well-informed and competent tax adviser could have provided the assurance of success given by the Defendant. However, expert opinion was divided as to the need to explain the importance of, and procedure for obtaining, an increased valuation on floatation. The court confirmed that the proper approach to the standard of care was the test enunciated in Bolam v Friern Hospital Management Committee (1957), namely, whether a significant body of practitioners could have acted as the Defendant did and that the Defendant had breached its duty of care in this instance.
The court had little difficulty determining causation. It found as a matter of fact that the Claimants had relied on the assurances given by the Defendant and that it was reasonable for them to have done so. While the court rejected the submission that, in a case such as this where the negligence took the form of a positive act, it was required to consider what the Claimants would have done had the Defendant advised correctly, it nevertheless found that the Claimants would not have participated in the CS Scheme.
The court also rejected the defence of contributory negligence. In doing so, it observed that this was not a case where certain risks had been disclosed for which the Claimants had failed to seek an explanation. It also observed that even if the Claimants had read the prospectus for the CS Scheme, it would not have enabled them to form a view on its likely success or the valuation risks inherent in it.
In assessing primary limitation under section 2 of the Limitation Act 1980, the court relied on the decisions in Pegasus Management Holdings SCA v Ernst & Young (2010) and Shore v Sedgwick Financial Services Ltd (2008). In the latter, Dyson LJ had said:
"…the fact that the risk to which the Claimant was exposed by the Defendant's negligence might not eventuate did not mean that the Claimant did not suffer loss as a result of being exposed to that risk…It is the possibility of actual financial harm that constitutes the loss."
In doing so, the court held that damage was suffered when the Claimants contracted to purchase the shares, not because they were then worth less than the Claimants had paid for them, but because at that point they were tied into a "commercial straitjacket". Accordingly the claim, which had been issued on 6 March 2015, was outside the primary limitation period.
As to secondary limitation under section14A of the Limitation Act 1980, the court relied on the decisions in Hayward v Fawcetts (2006) and Jacobs v Sesame (2014). It found that the damage here was the failure of the CS Scheme to work effectively. It also found that the First Claimant knew enough to begin investigating further and had therefore acquired actual knowledge by at least June 2011 when the First Claimant sought confirmation that the Defendant had notified its professional indemnity insurers and had requested details of what would be owed if the CS Scheme was not accepted. Accordingly, the claim was also outside the secondary limitation period.
Finally and for completeness, the court considered whether or not clause 13 of the Defendant's terms of business prevented the Claimants relying on section 14A of the 1980 Act. This provided that any claim for breach of duty "shall be brought against us within six years of the act or omission alleged to have caused the loss in question." The court found that this clause was not simply declaratory of the law and did subvert section 14A. It also found that it satisfied the requirements of reasonableness in section 11 of the Unfair Contract Terms Act 1977. Accordingly, those claims arising from schemes where clause 13 had been a term of engagement would also be time-barred on this basis.
The SF Scheme
Relying on SAAMCo, the court held that the Defendant was again acting in the capacity of an adviser. It also held that in giving the assurances that it had, the Defendant had breached its duty of care to the Claimants. In doing so, it rejected the opinion of the Defendant's expert that the advice was within an acceptable range, in part due to the significant risk that it was coloured by his involvement, which he had declared, in devising the SF Scheme in the first place.
On the issue of limitation, the court found again that damage was suffered when the Claimants entered in the contractual documents in 2007 and that the claim was outside the primary limitation period. As to secondary limitation, the court held that the damage was the advice that the scheme had a 75% chance of success. It further held that the Claimants knew enough for it to be reasonable to begin investigating further in June 2011, when HMRC rejected the Claimants' entitlement to relief and asserted that they had a number of grounds to challenge both the losses and relief claimed. Accordingly, these claims were also time-barred.
While this decision does not create any new law, it provides a thorough and methodical analysis of many of the key legal issues and authorities arising in professional negligence claims. From a limitation perspective, it reminds us that the threshold for establishing actual knowledge for the purpose of section 14A of the Limitation Act 1980 is a relatively low one and requires neither the crystallisation of loss nor a firm belief that an actionable error or omission has occurred.
From an evidential perspective, the decision highlights the inherent uncertainties that arise when it is necessary for the court to decide between competing factual accounts many years after the event. Here it is notable that the professional standing of each of the Claimants was a factor taken positively into account by the court and that considerable reliance was placed on the contemporaneous documents available. Therefore, the preservation of documents can be vital.
Finally and from a practice management perspective, the decision highlights the importance of putting in place and maintaining a robust engagement process, which ensures not only that letters of engagement and terms of business are systematically despatched for each new engagement, but that these are signed and retained. Such letters are more than a regulatory requirement and can provide a real defence to claims.