When is a duty of care owed to non-clients?

Background
The Claimants in the claim were members of one or more of three limited liability partnerships (“LLPs”), which were founded and formed for the purposes of participation in the distribution of films.

The LLPs marketed participation in the distribution of films as an investment opportunity to potential investors. Investors would be entitled to avoid payment of, or recover large amounts of, tax on other income by claiming tax relief against trading losses that the LLPs were anticipated to make. The schemes run by the LLPs were promoted by two limited company entities (the “Promotion Companies”).

The defendant, Andrew Thornhill QC, is an eminent and experienced barrister specialising in tax, and was engaged by the LLPs and the Promotion Companies to provide tax advice in relation to the schemes which the LLPs were opening for subscription by investors.

The letter of instruction seeking Mr Thornhill’s advice was such that he knew he was being instructed by the LLPs / Promotion Companies in circumstances where his tax advice might be made available to potential investors.

Each of the schemes promoted to potential investors by the LLPs was promoted by means of an information memorandum (“IM”). Mr Thornhill confirmed and endorsed in advice to the Promotion Companies that having reviewed the IMs, there was nothing inconsistent with his opinions on the tax avoidance schemes and the explanations set out in the tax consequences section of the IMs to be provided to potential investors.

Mr Thornhill was not engaged directly by any of the potential investors / Claimants to advise and they were not his clients. However, he consented to being named as tax adviser to the Promotion Companies and two of the three LLP entities within the IMs for those schemes, and to his opinions for all of the three schemes being made available to potential investors, if they asked for it.

In order to participate in the tax avoidance schemes, the Claimants were required to do so through an IFA. However, after the Claimant investors invested in the schemes, HMRC refused the tax reliefs they claimed such that the anticipated tax benefits were not achieved and the investments effectively wasted.

Mr Thornhill QC’s Opinion(s)

In summary, in order to be able to claim tax relief for the losses expected to be incurred by the LLPs, the LLPs would need to: (1) be carrying on a trade, (2) trading on a commercial basis and (3) trading with a view to a profit.

Mr Thornhill in essence advised that the LLPs would be carrying on a trade on a commercial basis with a view to profit, and as such potential investors would be able to claim tax relief from HMRC in respect of their investments in the schemes.

The Claim by the Claimants

The Claimants essentially contended that Mr Thornhill owed a duty of care to them in tort in respect of the advice that he gave to the Promotion Companies. They contended that, in breach of that duty of care:
a) The advice given that the LLPs would be carrying on a trade on a commercial basis with a view to profit was advice that no reasonably competent tax QC could have given; and/or

b) Mr Thornhill negligently failed to advise that there was a significant risk that the schemes would be successfully challenged by HMRC.

For there to be a duty of care for negligent advice or a negligent misstatement by a third-party who has not instructed the individual giving the advice or making the statement, there must be an assumption of responsibility by the person.

The Court’s reasoning

The court noted that there were several factors which indicated that a duty of care might be owed by Mr Thornhill to the Claimants, including:
1. Mr Thornhill was a person with special skill;

2. He gave his advice in the knowledge that it was to be made available to potential investors who asked for it;

3. He knew that the IM was a marketing document intended to attract investors to the scheme;

4. He was aware that potential investors were likely to take comfort from the fact that he, as a leading expert in the field, was named as tax adviser to the Promotion Companies and that he had given positive advice on the prospects of the tax benefits being achieved;
5. Mr Thornhill accepted that his advice assisted investors and their IFAs, in the case of the latter by helping them to evaluate whether their clients should go into the arrangement; and

6. He knew his advice was on the very point of critical importance to any potential investor: obtaining the tax benefits which the schemes promised.
There were two groups of Claimants – those who had seen his legal opinion who had asked for it (the “First Group”), and those who only had access to the tax consequences section of the IMs which Mr Thornhill had endorsed (the “Second Group”).

The First Group
Significant factors leading to the conclusion by the Court that no duty of care was owed to the First Group, were that:

a) the schemes were high enough in value for it to be reasonable to assume that the investors either had their own advisers, or were in a position to appoint them;

b) the IMs clearly advised potential investors to consult their own tax advisers on the tax aspects of the schemes;

c) no investor could subscribe to the LLP without warranting that he or she had relied only on the advice of or had only consulted with their own professional advisers;

d) whilst Mr Thornhill’s advice did not include express exclusions of liability, his advice was only available via the IMs where it was referred to and it was only because of the IM that the investors might ask to see it;

e) whilst there was a common interest between the Promotion Companies and the potential investors on the tax advice from Mr Thornhill, the Promotion Companies were selling the investment and the potential investors were buying it, and the terms of the IM were positively disclaiming any responsibility to give advice to the investors. The reasonable investor should know in such circumstances that Mr Thornhill was not assuming responsibility to advise them; and

f) the schemes could only be marketed via an IFA, so that every investor had the benefit of an IFA assisting them. Given the warranty as part of subscribing to the scheme that they were only relying upon the advice of their own advisers, it would be reasonable to expect the tax position would be advised upon by an IFA and they would either assist by providing independent tax advice themselves or by locating a suitable specialist to advise on that point.
The court concluded that given these factors, Mr Thornhill could not reasonably foresee that potential investors would rely on his advice without making independent inquiry. He did not therefore assume responsibility towards them, and no duty of care was owed.

The Second Group

In relation to the Second Group who had only seen the IMs, the factors that might give rise to a duty of care were the statement within the IMs:

a) that Mr Thornhill was tax adviser to the Promotion Companies (and two of the LLPs);

b) that these entities had received advice from Mr Thornhill as to the tax consequences of the schemes; and

c) implicit from these two statements in the IM was that the Promotion Companies’ understanding of the tax consequences of the schemes were consistent with Mr Thornhill’s advice.
However, as no advice was ever communicated from Mr Thornhill to the Second Group Claimants, no reasonable investor could have understood that he was making any statement or providing any advice to them at all. He had not assumed responsibility towards them, and no duty of care was therefore owed.

Given that no duty of care was owed to either group of Claimants, the claims failed at this hurdle.

Duty to warn
There was no possibility of obtaining advance clearance from HMRC as to whether the schemes would be accepted by them, and the tax relief granted to the investors. However, Mr Thornhill had not advised in his legal opinions that there may be a risk that the LLPs did not satisfy the requirement that they be carrying on a trade on a commercial basis with a view to profit.
The nature and content of an appropriate warning by an adviser to their client is fact specific and will depend on matters such as the terms of the instructions and the adviser’s knowledge of the client’s circumstances, their sophistication and existing understanding of the issues.

In this case, the Promotion Companies were highly sophisticated and had experience in promoting tax avoidance schemes. The Promotion Companies were likely to have been fully aware of the issues arising in such schemes and the risk associated with them, and Mr Thornhill was likely to be aware of this.

However, the individual investors (the Claimants) were not clients of Mr Thornhill, and he knew nothing about their individual circumstances other than that they were likely to be high net worth individuals, and that they had been warned to take (and warranted that they relied only upon), advice from their own professional advisers.

In the circumstances, the court held that even if a duty of care was owed generally by Mr Thornhill to the Claimants (which it did not find), the duty did not extend to warning them on the risks that the LLPs might not satisfy the criteria that they be carrying on a trade on a commercial basis with a view to profit (i.e. that his advice might be wrong).

The Court went on to observe that, if it was wrong about the extent of Mr Thornhill’s duty, it would consider the advice given was likely to be a breach of duty, since the warning within Mr Thornhill’s opinion did not extend to warning that the current law on the meaning of trading commercially, with a view to a profit, was based on the challenges so far made to film partnership schemes by HMRC, that there was a risk that HMRC would investigate the schemes, particularly if used by individuals to avoid substantial amounts of tax, and that it was possible that a change in HMRC’s approach to challenging such schemes might lead to a different conclusion being reached by the courts. However, the Court went on to state that, even if such warning had been given, the Claimants would still have proceeded to invest in the schemes (so the claims would fail on causation grounds).

Implications for Solicitors, Barristers and IFAs

Solicitors and Barristers

The following implications for legal professionals emerge from the judgment:

a) legal professionals should have sight of all of the documents in respect of a given scheme they are advising upon where their advice might feature or be referred to, and ensure that appropriate disclaimers and exclusions of liability exist with respect to reliance by an investor on any advice given by the legal professional;

b) legal professionals should not allow their status or expertise to be relied upon or traded against to give legitimacy, enhance the attractiveness of, or give the appearance of warranty of a given outcome in respect of a tax avoidance scheme;

c) legal professionals should ensure a disclaimer is inserted upon any advice or opinion that might be seen or reviewed by a non-client/third party requiring that the third-party take their own advice from their own professionals. This is particularly the case when the professional is aware that such an event may occur; and

d) where a given statutory test, fact or circumstance which is a key component of any advice is thought obvious or certain, a risk warning should be given as to the relevant assumptions that inform that conclusion. For example, that the conclusion is based on the law at the time, that HMRC might investigate a given scheme, that HMRC’s approach may change, that a court may take a contrary view etc. Such a risk warning must not simply be generic and general in nature as to the common risks encountered in such tax avoidance schemes.

IFAs
The following implications for IFAs emerge from the judgment:

a) IFAs should be mindful and pay attention to any warranty or representations within subscription or other agreements relating to reliance upon advice of a professional, when advising clients on entering into a tax avoidance scheme;

b) Even where a specialist such as a tax barrister advises on the tax position of a particular scheme, IFAs should not simply seek to rely upon such advice unless it makes clear on its face, or in another document that a potential investor may rely upon it. IFAs should make enquiries if appropriate as to whether investors can rely upon it and if not, carry out their own assessment of the tax implications of a given scheme, or seek advice from a third party with the requisite expertise to do so;

c) IFAs should be aware that the mere fact that there may be a common interest between the promoter of a tax avoidance scheme and its investors does not give rise to any duty of care on the part of a barrister or solicitor who acts for or advises the promoter of the scheme, unless there is a clear indication of an intention to assume responsibility on the part of the legal professional to the investors; and

d) If a given scheme is only accessible via an IFA, that is likely to be a factor weighing against the notion that a legal professional assumed responsibility to a prospective investor. IFAs must ensure they discharge their duty of care towards the client they are advising on the matter relevant to their instructions, as it will be reasonable for another professional to rely upon this fact and assume that an IFA has done so where they are aware an IFA is instructed.

Disclaimer

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