In the context of tax planning, it’s not unusual for a promoter of a particular scheme to show potential investors a legal opinion provided by an experienced tax barrister, to add weight and credibility to the proposed tax planning scheme. You may be forgiven for assuming that, when this happens, the investors would then be entitled to rely on the advice provided by the tax barrister, so that if that advice ultimately turned out to be negligent, the investors would have a right to claim against the tax barrister professional negligence claim.
However, in reality, it is not always that simple. In any professional negligence claim, one of the first questions that will need to be considered is, who did the negligent professional actually owe a duty of care to?
The film finance tax scheme
The recent Court of Appeal case of McClean v Thornhill involved a film finance tax scheme that its promoter claimed would provide investors with certain beneficial tax reliefs. The promoter had engaged a specialist tax barrister to advise it on the tax consequences of the proposed scheme. Once the barrister provided his opinion to the promoter, the promoter made the barrister’s opinion available to potential investors (with the barrister’s consent) and identified the barrister as being its tax advisor in its promotional materials.
Ultimately, the film finance scheme failed to provide its investors with the intended tax reliefs after HMRC determined that it was a tax avoidance scheme. Although the original High Court judge did not consider that the barrister’s advice had been negligent, when the case eventually reached the Court of Appeal, the Court commented that the barrister’s advice had been negligent because “no reasonably competent tax silk could have expressed such an unequivocal view”, and that “reasonably competent tax advice should have identified the risks”.
However, the key question before the Court of Appeal was not whether the tax barrister had been negligent, but whether he owed a duty of care to the scheme’s investors.
Duty of care
In McClean v Thornhill, it has been the promoter (rather than the investors) who had engaged the barrister to advise on the tax scheme. Also, not only had the promoter’s materials expressly instructed the investors to consult their own tax advisors, but the investors had also been required by the promoter to warrant that they had obtained their own tax advice and that they were aware of the risks.
Therefore, when the investors sued the barrister for negligence after the tax avoidance scheme failed, he argued that he had not owed the investors a duty of care, because not only were the investors not his client, but they had also been instructed to obtain (and had warranted that they had obtained) their own independent tax advice.
The investors, on the other hand, argued that because the barrister had consented to his advice being shared with the investors by the promoter, and because he was aware that the promoter’s materials identified the barrister as being the promoter’s tax advisor, the barrister had voluntarily assumed a duty of care to the investors, because it was reasonable for him to foresee that the investors would rely on his advice when deciding to enter into the tax scheme.
At the original trial, the High Court agreed with the barrister that he had not owed a duty of care to the investors, and so the investors appealed to the Court of Appeal.
Court of Appeal’s judgment
The Court of Appeal upheld the High Court’s decision that the barrister had not owed a duty of care to the investors. Crucially, the Court of Appeal ruled that it was “objectively unreasonable for investors to rely on [the barrister’s] advice without making independent inquiry in relation to the likelihood of the Scheme achieving the tax benefits; and [the barrister] could not reasonably have foreseen that they would do so”. The fact that the investors were required by law (because the tax scheme was unregulated) to have independent advisers of their own meant that the barrister’s consent to his opinion being shared with the investors was not itself enough for him to have assumed a duty of care to the investors.
Therefore, the Court of Appeal agreed that the barrister did not owe a duty of care to the investors, because he had remained at all times an advisor to the promoter only, and there was nothing to suggest that he had assumed a role as an independent advisor to both sides of the transaction (i.e. the promoter and the investors).
Negligence alone not enough
Although the Court of Appeal disagreed with the High Court’s comment that if a duty of care had been owed, the advice in any event had not been negligent (the Court of Appeal commenting instead that if a duty of care had existed, it would have been breached by the barrister’s negligent advice), those comments were no doubt of little comfort to the investors, whose claim failed due to the absence of a duty of care.
This decision is a harsh reminder that proving that a professional advisor has been negligent is only the first step in establishing a valid claim. Even where (as in this case) the Court of Appeal agrees that the advice was negligent, a claim will still fail if the other necessary elements of a professional negligence claim (such as a relevant duty of care, or evidence that the damage suffered was caused by the negligence and not by some other factor) are missing.
Lessons to be learned
For professional tax advisors, the Court of Appeal decision is a reminder of the importance of providing reasonable advice on risks as part of any opinion on tax planning. Both the High Court and the Court of Appeal agreed that the barrister’s views on the relevant tax provisions were not themselves inherently negligent, but the Court of Appeal commented that the failure to adequately identify the relevant risks and the “unequivocal” way in which the views had been expressed were what had made the advice negligent.
For investors, the case is a cautionary reminder about the need to obtain independent advice on any potential tax scheme, rather than simply relying on what the promoter says. Fundamentally, a legal opinion is just that – an “opinion” – and even when one is from an experienced tax advisor, there are no guarantees that HMRC will not form a different opinion about the relevant tax provisions, and so it is vital that you understand the risks involved in any proposed tax planning scheme.
This article is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.