When a tax avoidance scheme doesn’t work, who can you blame? The designer? The promoter? The introducer? How about the eminent QC whose robust opinion (provided, of course, to the promoter) influenced you to believe that it was a slam-dunk no-brainer?
As any lawyer will tell you, a successful claim under the tort of negligence requires four basic elements to be proven:
- Did the alleged tortfeasor owe you a duty of care?
- Was that duty breached?
- Have you suffered a loss?
- Is the loss sufficiently proximate to the breach of duty to have been its legal cause?
While clearing those hurdles doesn’t guarantee success (things like limitation clauses or being too late might deny you) failing on any of those points is fatal to your claim.
In David McClean and others v Andrew Thornhill QC [2022] EWHC 457 (Ch) the claimants had been participants in a tax avoidance scheme that failed. Mr Thornhill, described by the court as ‘undoubtedly one of the leading tax QCs in the country at the time he advised’, had provided his advice to the scheme promoters, and the existence and tenor of that advice had been referred to in the Information Memorandum (‘IM’) given to the claimants as potential participants in the scheme.
The judgement is a lengthy one, dealing with the many and varied arguments put on behalf of the claimants. But the upshot is that the claim failed at the first hurdle: Mr Thornhill owed no duty of care to the claimants. Or – what amounts to the same thing – he was held not to have assumed responsibility towards them.
Although the court identified a number of factors pointing towards a duty of care being owed, there were two key aspects that negated any such duty.
The first was that the IM explicitly advised potential investors to consult their own tax advisers on the tax aspects of the scheme. The second was that any investor was required, as a condition of participating in the scheme, to warrant that he or she had relied only on the advice of, or had only consulted with, their own professional advisers. Furthermore, as the scheme could be marketed only via independent financial advisers (‘IFAs’), it was reasonable for Mr Thornhill to have believed that, even if the significance of these matters might not have been immediately apparent to a participant, it would have been brought home to him or her by the IFA.
In these circumstances, the failure of the claimants to persuade the court that Mr Thornhill had assumed responsibility towards them was unsurprising.
However, there is one aspect of the case that those who advise on tax planning – and especially tax schemes, to the extent that any still exist – should particularly note. It’s this. It was argued on behalf of the claimants that the reputation and eminence of Mr Thornhill, and the robustness of his opinion, meant that, despite what the IM and the warranties said, there could be no reasonable expectation that any investor would really make his or her own independent enquiry: in reality, investors ‘would consider that going to anyone else for advice would be pointless, since they already had advice from the best.’
That argument was, in the court’s view, ‘nonsense’:
‘An adviser, asked by a potential investor for their advice, as required by the terms of the IM and subscription agreement, could not reasonably advise simply that the Schemes would achieve the Tax Benefits because that was Mr Thornhill’s opinion, however strongly Mr Thornhill held that opinion. Similarly, I reject the contention that it was not the job of the investors’ IFA to “repeat” Mr Thornhill’s work. That is precisely what an adviser to an investor would be required to do, if they had the requisite expertise. If they did not, then it was their duty to advise the investor to seek advice from someone who did have the requisite expertise.’
Thus, not only was a participant in a scheme unable to rely on the advice Mr Thornhill had given to the scheme promoter: so too was any adviser to a participant. That may have some advisers who have introduced clients to failed tax schemes looking anxiously over their shoulder.
For more information, please get in touch with your usual BKL contact or use our enquiry form.