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Tax QC beats claim for negligent advice

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The recent High Court ruling that Andrew Thornhill’s advice was not negligent sheds light on whether tax advisers owe a duty of care to tax scheme users.

1st Apr 2022
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Back in the glory days of tax avoidance schemes, Andrew Thornhill QC was one of the leading advisers to tax scheme promoters. The High Court has recently ruled that the advice he gave in relation to one particular set of schemes did not constitute negligent breach of a duty of care – McClean and others v Andrew Thornhill QC.

The judge’s decision casts some welcome light on questions of the duty of care owed by a professional to third parties, and the extent to which those third parties can claim to have relied on advice given, not to them, but to someone else.

Getting into the movies

In 2003–2004, three Limited liability partnerships (LLPs) were established to take advantage of the tax benefits of distributing motion pictures. Such “film partnerships” were extremely popular owing to generous tax breaks offered by the Government, and much ingenuity went into devising ways of tapping into those breaks.

These three schemes are known by the somewhat unfortunate acronyms of SAD 1, SAD 2 and SAD 3. Thornhill was engaged by the promoters (Scotts) to advise them on the tax consequences of investing in the three partnerships. 

In its Investment Memorandum (IM), Scotts made it clear that their relationship with investors was execution only, and required any investor to warrant that they had “only relied on the advice of, or has only consulted with, his or her own professional advisers with regard to tax, legal, currency and other economic considerations”.

Trading with view to a profit

The exact benefits anticipated by the LLPs, and how they were to be acquired, are unimportant other than to dedicated students of film partnerships. Suffice it to say that the success of the schemes depended on each LLP being accepted as trading on a commercial basis with a view to a profit.

By 2003, HMRC had not challenged such arrangements with any vigour or success. But by 2017, HMRC had achieved several victories in the courts, and felt sufficiently bullish to issue closure notices to the partners of the SAD LLPs, denying the tax relief. The partners accepted the settlement agreement offered, paid back the tax, and chose to sue Thornhill for damages.

Duty of care 

The judge noted that some of the claimants had sought detailed independent advice, which generally agreed with Thornhill’s opinion. It was this advice they had relied on, not Thornhill’s.

In most instances all that had been read was the promoter’s memorandum, which included the statement: “Whilst no advance ruling procedures are available in the UK for transactions such as this, advice has been received from Mr Andrew Thornhill QC, a senior UK Tax Counsel and head of Pump Court Tax Chambers in respect of tax.”

For such investors, all they received was Scotts’ opinion, and the statement that Thornhill agreed with it. “There can be no duty owed, because no advice from Mr Thornhill was ever communicated to a claimant,” said the judge.

Even for investors who had actually read Thornhill’s opinion, the judge was equally content that Thornhill owed no duty of care. “He was expressly identified as tax adviser to the Sponsor. Any reasonable investor would have understood that.”

Breach of duty

While ruling that there had been no duty of care to begin with, the judge went on to analyse how such a duty (had it existed) might have been breached.

The analysis centred on whether a “reasonably competent tax QC” could have reached the conclusion reached by Thornhill on whether the LLP was trading on a commercial basis. 

Thornhill’s approach followed the arguments from Ensign Tankers (Leasing) Ltd v Stokes (1992) that the activity carried on by the LLPs was inherently one of trading, and then to see whether there were factors that might “denature” that conclusion. Analysed thus, the LLPs were trading.

This approach, uncontroversial in 2003, was no longer being followed by HMRC in 2017, when it persuaded the claimants to accept a settlement that abandoned much of the tax relief they had claimed. HMRC’s more aggressive attitude towards film partnerships was based on three recent tax cases. The doctrine of these cases was that “the question whether what the taxpayer actually did constitutes a trade has to be answered by standing back and looking at the whole picture”. 

Analysed through the lens of these three cases, it is entirely possible that the SAD Partnerships might have been ruled never to have been trading. Regrettably, since the claimants settled with HMRC out of court, we will never know. The claimants argued that the seeds of such a new approach would have been obvious back in 2004 to a “reasonably competent tax QC”. However, at the time he gave his opinion Thornhill was faced, not with those more recent authorities, but with Ensign Tankers, which was “the most recent word from the highest appeal court” and thus “the current state of the law”. 

In the six years following his opinion, Thornhill observed three HMRC challenges to film partnerships, none of which advanced an argument that the LLPs in question were not trading. The judge saw this as supporting Thornhill’s argument that HMRC “had not by the time he advised changed its approach to challenging the trading aspect of such schemes”.

In conclusion, the judge ruled that Thornhill had not breached his (non-existent) duty of care through negligence or insufficient competence. 

Too much reliance

The claimants here seem to have placed far too much reliance on the inclusion, in an investment prospectus, of a Counsel’s opinion.

The IM commenced with a notice stating that the investment may not be promoted or sold directly to the public, so that “applications will therefore only be considered when received via a duly authorised intermediary”. The target investors were sophisticated High-net-worth individuals (HNWIs) with access to private tax advice.

The existence of a Counsel’s opinion represented little more than a touchstone of the promoters’ quality assurance processes. No one seriously believed that Counsel’s opinion was a guarantee of success in the event of litigation. In the words of the old proverb, every case to appear before the courts has the opinion of two Counsels, of which one is wrong.

Replies (26)

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By Justin Bryant
01st Apr 2022 14:45

Clearly the right decision on a pretty ambitious and unmeritorious claim that was probably just a try-on to get the insurers to settle (as happened with a pervious PCTC film schemes tax barrister and Guy Hands et al).

https://www.accountingweb.co.uk/any-answers/looks-like-a-resounding-win-...

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By ireallyshouldknowthisbut
01st Apr 2022 14:30

So in short, Counsel's opinion is confirmed as not worth the paper its written on, and anyone relying on it is a naïve idiot.

About what I have been saying for years to clients who approaches with a pre-packaged tax planning scheme which purports to have Counsel opinion confirming its wonderful.

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Replying to ireallyshouldknowthisbut:
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By sammerchant
04th Apr 2022 09:42

If it looks too good to be true ......

There have been very many cases which look beyond the structure to determine the purpose of the set-up.

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By carnmores
01st Apr 2022 16:16

I agree with Ireallyshouldknow and totally disagree with Justin. Yet again lawyers / QCs pocketing huge fees and walking away from the car crash unhurt. There is so much wrong with the legal system as its abuse by oligarchs has clearly shown. My main gripe is their extravagant charge out rates for mundane tasks. The best example of this is probably the costs of divorce where I have helped 3 couples in the past year achieve agreement for a fraction of the cost of inefficient lawyers.

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Replying to carnmores:
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By Justin Bryant
01st Apr 2022 17:27

You may be morally right, but I assure you I'm legally right here (as is the judge of course).

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Replying to Justin Bryant:
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By meadowsaw227
04th Apr 2022 10:14

Are opinions "right" or just opinions

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Replying to meadowsaw227:
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By Justin Bryant
04th Apr 2022 11:20

What's that got this do with this? The judgment was legally right regardless.

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Replying to carnmores:
Ray McCann
By Ray McCann
04th Apr 2022 12:48

But the point is that the lawyer gave advice to his client, the fact that they then stated in whatever marketing material they gave to their prey that he had done so is neither here nor there, as HMRC have argued for years in the context of penalties. This curious period when tax schemes were sold like new cars is thankfully drawing to a close.

What’s wrong is not that lawyers get big fees, it’s that too many punters have in the past believed any old rubbish as long as their is a big tax saving to be had.

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Replying to RayM55:
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By Justin Bryant
04th Apr 2022 13:54

"...the fact that they then stated in whatever marketing material they gave to their prey that he had done so is neither here nor there, as HMRC have argued for years in the context of penalties."

That's wrong. All else being equal, HMRC do not claim that a counsel opinion does not help re reasonable excuse defence for potential pre 2017 tax avoidance (or more accurately from 2017 tax advantage) penalties* (for negligence/carelessness/deliberate misconduct) cases, or at least have not done so since the Mercury tax case, where the FTT said counsel opinion counts in that regard (as per Patrick Cannon's Taxation Magazine article at the time).

*For ITSA periods from 6.4.17 onwards** see :https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch81124

** I recall this was prompted by Margaret Hodge's outrage at this very defence re counsel opinions. See:

https://www.accountingweb.co.uk/tax/hmrc-policy/leading-tax-qc-faces-mis...

"Q35 Chair: The four I have are Jonathan Peacock, Rex Bretten, Andrew Thornhill and Giles Goodfellow. They seem to be the guys who prostitute themselves to these schemes.

Aiden James: It is not limited to them; there are more-David Ewart."

https://publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/788/121...

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By Hugo Fair
01st Apr 2022 18:13

"In the words of the old proverb, every case to appear before the courts has the opinion of two Counsels, of which one is wrong."
I thought in many (most?) cases it will transpire that they were both wrong.

What punters don't get (and why it morally feels like a confidence trick) is that an "opinion" is just that - no more and no less. A QC may (or may not) be in a better position to hold an opinion on a particular scenario, but that doesn't (or shouldn't) be treated as any sort of imprimatur of truth.

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By Paul Crowley
02nd Apr 2022 17:43

These incredibly rich wannabe tax evaders knew the issue and confirmed that they took their own legal opinions
They "invested" in trades that were intended to make profit
Clearly bad investors

Fair play to the insurance company

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Replying to Paul Crowley:
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By dwgw
04th Apr 2022 12:52

Agreed. This seems to be a desperate attempt to recoup 'losses' from a failed avoidance scheme.
It's absolutely right that Counsel's opinion is ultimately just another opinion and over-reliance on it is unwise. I think it was Thornhill himself who said that the only 100% certainty is to pay the tax and 75% probability of success is the most he would ever give, even in the most apparently rock solid of circumstances.
The scheme promoters seem to have been clear enough that Thornhill was their QC, not the investors', who must take independent advice.
The investors' seeming attempt to ignore this and apply hindsight deserved to fail, whatever one's views of the legal profession.

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By AndrewV12
04th Apr 2022 09:47

“He was expressly identified as tax adviser to the Sponsor. Any reasonable investor would have understood that.”

Bad luck on those trying to sidestep large tax bills, all Andrew Thornhill did was to tell 'investors' what they wanted to hear, they must have realised it was all to good to be true.

The recent law has changed if anyone takes Tax, investment advice which is patently to good to be true, back luck and don't expect the courts to save their bacon, its one bunch of greedy scroats fleecing another.

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Replying to AndrewV12:
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By dwgw
04th Apr 2022 12:52

Thornhill told the promoters what they wanted to hear, not the investors. Key distinction.

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By justsotax
04th Apr 2022 10:38

if only we were all lucky enough to live in a world where we were immune from prosecution.......yet regularly I see 'normal' accountants get fined significant sums for what appear to be minor oversights, when chancers who put their name to things for no doubt large amounts of money walk away with a clean bill of health.....the modern society.

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By moneymanager
04th Apr 2022 10:41

Althoungh important in its own right, the background of the case highlights the gross iniquity of government policy in tax incentives and the changing of policy, often driven by politics of a later time, in the taxing authority; it was Brown's desire to build the British film industry that offered the incentives which initially failed, it was the ingenuity of the tax/investment sector that was able to package the aspects which lead to a tremendous and much applauded growth and with many notable productions including Band of Brothers, Shackelton, and the Wallace & Gromit series. There were certainly opportunistic abusers who sought tax reliefs twice on the same product or "tried it on" with the DCMS in terms of what constituted a British film and got slapped down and rightly so, the "going after" any sector of taxpayer on the basis of a retrospective change of view, as noted in the piece, is wholly wrong.

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Ray McCann
By Ray McCann
04th Apr 2022 13:55

It’s not wrong, indirect tax advice has always been problematic.

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Replying to RayM55:
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By Justin Bryant
04th Apr 2022 14:11

If you're right, why was there the above (fairly radical) law change for potential tax avoidance/advantage penalties for 2017 onwards (I'm ignoring VAT etc.) and why did PC write the above article saying mine was the correct view (up until then at least)?

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Replying to Justin Bryant:
Ray McCann
By Ray McCann
04th Apr 2022 15:46

You know Justin you have a bad habit of just jumping in without properly considering what is said. I said it was problematic not impossible that HMRC regard indirect advice as not being in effect a get out of jail free card. I fully accept that there are bound to have been times when Inspectors accepted indirect advice as providing something by way of mitigation, probably quite a few times, but equally it is only in relatively recent years that HMRC has taken a harder line on seeking penalties where tax planning was involved.

But in my experience many Inspectors drew a distinction between direct advice and indirect advice and the law change was also intended to ensure that a wider range of circumstances were captured than the simple direct/indirect description would include.

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Replying to RayM55:
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By Justin Bryant
05th Apr 2022 15:43

As usual I don't know what you mean. I am clearly correct though per the following from the link below:

"Promoters are able to use a QC’s opinion that a scheme does not have to be reported as a “reasonable excuse”, preventing HMRC from applying a penalty. HMRC is consulting on how it could strengthen its disclosure regime, including by raising the hurdle for pleading a reasonable excuse. It should model the impact of the changes under consideration and should design an evaluative framework to measure the effectiveness of DOTAS, including by assessing the level of compliance."

https://publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/788/788...

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Replying to Justin Bryant:
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By Justin Bryant
12th Apr 2022 11:41
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By Mr J Andrews
05th Apr 2022 09:27

No doubt those HNWs who ''suffered'' recouped somewhat in some other wheeze ?

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By petestar1969
11th Apr 2022 10:52

Another example, if one were needed, that people who got involved in these schemes (and still do) were/are complete mugs. No sympathy from me.

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By Justin Bryant
24th Aug 2022 14:07

Interestingly the claimants have got permission to appeal. See:

https://casetracker.justice.gov.uk/getDetail.do;jsessionid=BAF1007B59D09...

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Replying to Justin Bryant:
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By Justin Bryant
02nd May 2023 11:09
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Replying to Justin Bryant:
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By carnmores
02nd May 2023 11:23

LOL

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