Thornhill escapes tax mitigation negligence claimby
While tax barrister Andrew Thornhill’s endorsement of tax mitigation schemes was considered too bullish, he was not found to owe a duty of care to the third-party investors.
The thorny issue of whether (and to what extent) a barrister owes a duty of care to third parties re-emerged when the case of Andrew Thornhill KC came before the Court of Appeal.
Thornhill, a senior tax barrister with a massive history of advising on tax mitigation schemes, had been the adviser to Scotts, the promoters of a suite of film partnership schemes in 2003–2004. His advice to Scotts, which he permitted the promoter to share with any investors who asked for it, was that the schemes would offer investors the desired tax benefits, crucially on the grounds that the partnerships were trading on a commercial basis with a view to a profit. This opinion was based on the case law current at the time, Ensign Tankers (Leasing) Ltd vs Stokes (1992).
By 2017, HMRC had developed a new, more aggressive policy towards film partnerships, and prevailed on investors in the three partnerships (known by the sadly prescient acronyms of SAD1, SAD2 and SAD3) to settle for losing the anticipated tax relief. A number of the disappointed investors sued Thornhill, alleging negligence.
The High Court judge ruled that Thornhill owed no duty of care to the investors, as it was clear that he was the tax adviser to Scotts, and potential investors were both advised and required to seek their own individual tax advice. Furthermore, even if he had owed such a duty, his advice was not negligent; it was advice such as could have been expected from a “reasonably competent tax QC”.
The investors refused to accept defeat, and appealed to the Court of Appeal.
Going for a retake
The three judges were faced with four grounds of appeal. Was the High Court correct to find the following?
- Thornhill owed no duty of care to investors.
- A reasonably competent tax silk could have given the tax advice given by Thornhill.
- If Thornhill had included warnings of significant risk, the scheme would still have been promoted, and the investors would still have invested in the scheme.
- In deciding to invest in the scheme, the appellants were not relying on Thornhill’s advice and on the fact that he endorsed the scheme.
Is there a duty of care?
The rule is that a lawyer owes a duty of care to his client but generally not to the opposite party. A duty of care might exceptionally arise “where the legal adviser for one party makes representations to the other party on which that other party relies”, but even then only where there is an “assumption of responsibility”.
Referring to the decided case law, Lady Justice Simler pointed out that such an assumption of responsibility could only arise if:
- it was “reasonable for the representee to have relied on the representation”, and
- if “the representor should reasonably have foreseen that it was likely he or she would do so”.
“When it comes to assessing the reasonableness of the reliance (looked at objectively), the question whether it was reasonable for the representee to act without making any independent check or inquiry is highly relevant, and in many cases, likely to be determinative.”
Investors were advised by Scotts to seek out independent advice, and had to sign a warranty that “they had relied on their own advice as to the tax analysis and benefits of the scheme.”
Taking all this into account, “it was objectively unreasonable for investors to rely on Mr Thornhill’s advice without making independent inquiry in relation to the likelihood of the scheme achieving the tax benefits; and Mr Thornhill could not reasonably have foreseen that they would do so.” No duty of care was owed by him to them.
Since there was no duty of care, this question of whether Thornhill was reasonably competent had been rendered moot. Nonetheless, Simler LJ chose (as had the High Court before her) to consider it.
She noted that the bullish manner in which Thornhill expressed his opinion (“in my view, there is no doubt that it is [trading]”) could be seen as undermining the risk warnings given in the investment memorandum. “These were of a general nature only and contained no detail as to the three statutory tests of trading, commercially or with a view to a profit. That meant there were no specific warnings given to investors as to the satisfaction of those tests.”
For that reason, she felt that, in order for Thornhill’s opinion to be characterised as fully non-negligent, it would need to have contained stronger caveats. The High Court was “wrong to conclude that had a duty of care been owed by Mr Thornhill to the appellants, it would not have been breached.”
Causation and reliance
The question of causation and reliance was again moot but worthy of consideration. “Even if Mr Thornhill negligently overstated his advice, I am not persuaded that non-negligent advice would have warned that there was a significant risk of a successful challenge to this scheme.” While the investors suggested that a less robust endorsement might have put them off participating, they came nowhere close to demonstrating this.
Lady Justice Carr sounded the warning that “a specialist professional who voluntarily provides unequivocally positive advice to their client in the knowledge:
- that the advice would be made available to a third party without any express disclaimer of responsibility, and
- that the third party would be likely to ‘take comfort’ from that advice and (with their advisers) be assisted by it in deciding whether to enter into a financial transaction,
exposes themselves to the risk of a claim that they owed the third party a duty of care based on an assumption of responsibility.”
Nonetheless, she agreed that on the facts of the present case that risk had not been triggered.
No duty of care
Andrew Thornhill KC has long had a reputation for bullish support of those schemes which he endorsed. Perhaps, in the view of the Court of Appeal, a little too bullish.
That said, the fundamental point remained that he owed no duty of care to these investors, and so could not be said to have let them down when – some 13 years down the line – HMRC managed to overturn the settled law on which his advice rested.