In a recent professional negligence case concerning tax schemes, the High Court has provided further guidance on the application of the assumption of responsibility test in holding that a leading tax QC did not owe a duty of care to prospective investors.
The facts
Mr Thornhill QC advised Scotts Private Client Services Limited (Scotts) who were the promoters of a tax scheme involving a film distribution business (the Scheme). He also advised two out of the three LLPs which were formed for the purposes of the Scheme. Participation in the LLPs was marketed to potential investors on the basis that they would be entitled to tax relief against their income or capital gains for trading losses that the LLPs were anticipated to make. HMRC subsequently refused the tax reliefs claimed by the investors in the Schemes. On or around 22 September 2017 HMRC wrote to the individual investors in each of the three LLPs making a settlement offer.
Assumption of responsibility
The Claimants were over 100 individuals, each of whom were members of one of the three LLPs. Mr Thornhill QC was not engaged to advise any of the Claimants, although he did consent to: (i) being named as tax adviser to Scotts as well as to two of the LLPs in the Information Memorandums (the IMs) and; (ii) the tax opinions he had provided being made available to potential investors, if they requested them.
The Claimants claimed that Mr Thornhill owed them a duty of care concerning advice he gave to the promoters and the LLPs and consented to being made available to potential investors, and that they relied on his advice in entering into the Schemes. The Court disagreed:
- It applied the principles regarding when a professional adviser might assume responsibility to a third party as set out by the Supreme Court in NRAM Ltd v Steel [2018] UKSC 13 and concluded that it would not have been reasonable for investors, in the face of the language of the IM and subscription agreement, to rely on Mr Thornhill QC's advice without independent inquiry, or that Mr Thornhill QC ought reasonably to have foreseen they would do so.
- It was critical that the IM clearly advised potential investors to consult their own tax advisers on the tax aspects of the Scheme and that no investor could subscribe to the LLP without warranting that they had relied only on the advice of or had only consulted with their own professional advisers. The Court also placed importance on the fact that the Schemes could only be marketed via independent professional advisers so that, by definition, all investors would have the benefit of an IFA to help them (either by advising them directly or by assisting them in obtaining such advice).
- This decision was not based on a disclaimer of responsibility, but all the circumstances of the case, such that Unfair Contract Terms Act 1977 was not engaged.
On that basis, no duty of care was owed to the Claimants.
Additional issues
The Court also considered a number of other issues:
- Even if Mr Thornhill QC had owed a duty of care to the Claimants, he could not be said to have breached it because a reasonably competent tax QC could have reached the conclusion Mr Thornhill QC did in 2002 – 2004 as to the tax benefits of the Schemes.
- The Court considered whether a professional adviser has a "duty to warn". In this case, the Court held that Mr Thornhill QC would have been aware that Scotts (his clients) were highly sophisticated and likely to have been fully aware from their experience in promoting tax avoidance schemes of the issues to which they gave rise, and the risks associated with them, such that there was no duty to include an appropriate risk warning for the Schemes. But, the Court also held that, had Mr Thornhill QC owed a duty to the Claimants to include an appropriate risk warning, then the wording in the opinions did not meet that duty.
- The Court concluded that the Claimants had not demonstrated that they would not have invested in the Scheme had Mr Thornhill QC included a risk warning in his opinions and therefore had failed to make out their case as to causation. The Court also considered limitation and found that claims relating to the first Scheme were time-barred under section 14B of the Limitation Act 1980, which sets out a 15 year long-stop date for bringing negligence claims not relating to personal injury.
Conclusion
Issues of assumption of responsibility commonly arise in professional engagements. Care should of course be taken properly to limit the parties to whom an adviser owes a duty of care. While the factual circumstances of the relationship will need to be considered, this decision reflects a continued willingness of the English Courts to place appropriate weight on limitations set out in writing documents; the language of the IM was critical here.
It of course follows a further example a few months ago in Knights v Townsend Harrison Limited EWHC 2563 QB, in which the Court upheld the terms of an engagement letter in respect to the scope of advice to be given. The case provides useful commentary on the extent of a professional adviser's duty of care and will be welcome news for professional advisers.
