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Overview Of Negligence Claim Against Leading Tax Barrister Fails

A negligence claim against a leading tax barrister fails in the matter of McClean & Ors v Thornhill [2022] EWHC 457 (Ch) by various investors from a film tax scheme.

None of the investor claimants can claim that they were clients of AT.

AT advised the promoter, Scotts Private Client Services Limited (“the Promoter”). However AT consented to being named as a tax adviser to the Promoter and provision of his opinions upon request.

The Negligence Claim

The negligence claim was summarised as follows in the judgment:

The claimants claim that Mr Thornhill owed them a duty of care in respect of the advice he gave to Scotts and consented to being made available to potential investors, and that they relied on his advice in entering into the Schemes. They contend that he breached that duty. The Tax Benefits which the claimants sought to gain from the Schemes were dependent upon the LLPs (1) carrying on a trade (2) on a commercial basis and (3) with a view to a profit. The claimants contend (in summary) that Mr Thornhill negligently advised that the Schemes would achieve the Tax Benefits because the LLPs would be carrying on a trade on a commercial basis with a view to profit, which was advice that no reasonably competent tax QC could have given, and/or that he negligently failed to advise that there was a significant risk that the Schemes would be successfully challenged by the Inland Revenue. 

Central to this case was the presence of other advisers and the reliance upon representations. In NRAM Ltd v Steel [2018] UKSC 13; [2018] 1 WLR 1190 (“NRAM”), the Supreme Court made it clear that a representor is not to be held to have assumed responsibility towards the representee unless (i) it was reasonable for the representee to have relied on what the representor said and (ii) the representor should reasonably have foreseen that he would do so.

No Duty Of Care To Investors

The potential investors were advised to consult their own tax advisers on the tax aspects of the Scheme.

No investor could subscribe without warranting that he or she had relied only on the advice of or had only consulted with their own professional advisers:

… the Schemes could only be marketed via independent professional advisers so that, by definition, all investors would have the benefit of an IFA to assist them. This meant it would be reasonable for Mr Thornhill to expect, even if the terms of the IM might be unfamiliar to any individual investor, that the significance of the recommendation to the investor to take his or her own advice, of their warranty that they had relied only on their own adviser, and of the fact that Scotts was acting on an execution only basis, would be brought home to them by their IFA. Moreover, it was reasonable to expect that the investor’s IFA would appreciate the importance of independent advice, and could either provide that advice on the tax aspects of the Scheme itself (there being at least some IFAs in the market with sufficient expertise to do so) or assist the investor in obtaining independent advice from a suitably qualified specialist. It is relevant to note that at least some claimants did take their own advice (as detailed in Appendix 2 to this judgment) and, where they did so, that advice was to the effect that the Schemes should achieve the Tax Benefits.

In light of the above, I consider that it was objectively reasonable to assume that independent professional advice would indeed be taken by investors, as they were advised to do (and were required to warrant that they had done) in the IM and subscription agreement.

The fact that Mr Thornhill’s advice (in particular as to whether the LLP was trading) was given in unequivocal terms, while relevant to the question of breach, has no relevance to the reasonableness of potential investors ignoring the recommendation and warranty in the IM and subscription agreement as them consulting their own tax advisers. I do not accept, in particular, Ms Day QC’s submission that potential investors’ own advisers would be led to believe that they need not ask for the underlying documents because of the confidence with which Mr Thornhill expressed his opinion. An adviser, asked by a potential investor for their advice, as required by the terms of the IM and subscription agreement, could not reasonably advise simply that the Schemes would achieve the Tax Benefits because that was Mr Thornhill’s opinion, however strongly Mr Thornhill held that opinion. Similarly, I reject the contention that it was not the job of the investors’ IFA to “repeat” Mr Thornhill’s work. That is precisely what an adviser to an investor would be required to do, if they had the requisite expertise. If they did not, then it was their duty to advise the investor to seek advice from someone who did have the requisite expertise. Importantly, it was not reasonably foreseeable by Mr Thornhill that a potential investor’s IFA would fail in their duties to their client in this respect.

While Mr Thornhill’s opinion on the issue of trading was stated in unequivocal terms, that does not undermine the conclusion that it was nevertheless presented as (and would have been reasonably understood to be) an opinion as to the legal effect of the Scheme.

For each claimant who saw (and whose adviser saw) only the IM, then the only relevant matters concerning Mr Thornhill’s advice that crossed the line were: (1) he was tax adviser to Scotts (and in SAD2/3 the LLP); (2) Scotts (and in SAD2/3 the LLP) had received advice from Mr Thornhill as to the tax consequences of the Schemes; and (3) it is implicit from these two statements in the IM that Scotts’ understanding of the tax consequences was consistent with Mr Thornhill’s advice. (Mr Thornhill’s advice on certain specific issues is stated in the IM, but it is not alleged that his advice on any of those issues was negligent.)

In these circumstances, I accept Mr Adam QC’s submission that there can be no duty owed, because no advice from Mr Thornhill was ever communicated to a claimant. No reasonable investor could have understood that Mr Thornhill was making any statement or providing any advice to them at all. An implicit statement by Scotts that the tax analysis in the IM was consistent with Mr Thornhill’s advice to Scotts is insufficient, in my judgment, to amount to the provision of advice by Mr Thornhill to any potential investor.

Insofar as the claim is based on Mr Thornhill’s failure to warn that there was a significant risk that his views might be wrong, any claim by those who saw (or whose advisers saw) only the IM is hopeless for the additional reason that the implicit statement that Scotts’ understanding of the tax analysis was consistent with Mr Thornhill’s opinion told potential investors nothing about the terms in which Mr Thornhill’s opinion was expressed, or the extent to which it was caveated by such risk warnings.

Duty To Warn

The claimants’ case included the point that AT breached a duty of care in failing to give a specific warning that there was a significant risk that one, other or all of the statutory tests would be failed, so that the tax benefits promised would not be available. But the Court said:

That was not, however, the role expected of Mr Thornhill, even if he owed a duty of care to the claimants in respect of the advice he gave. The claimants were not his clients. In circumstances where no advance clearance from the Revenue could be obtained, the promoters of the Scheme sought the view of an eminent tax QC on the question whether the Scheme would achieve the Tax Benefits. That was what Mr Thornhill did. 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, sophistication and existing understanding of the issues. Mr Thornhill would have been aware, for example, that his actual clients, Scotts, were themselves 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. In contrast, not only were the investors not Mr Thornhill’s clients, but 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 on) their own advice.

Causation And Reliance

The claimants’ principal case on causation is that if AT had given a warning about the risk of the Schemes not working then the Schemes would not have been marketed by Scotts at all, and so none of the claimants would have invested.

This position was rejected by the Court and again the proximity of AT to the investors featured as an issue:

The duty relied on by the claimants is the duty to take reasonable care that advice provided to them was correct. This causation argument depends, however, on a duty being owed to the claimants to take care that the advice given to Scotts was correct. Such a duty would sidestep established jurisprudence as to assumption of responsibility, because no question of reliance on the advice by the claimants, reasonable or otherwise, would arise. It would instead impose on a range of advisers a duty as “gatekeeper” to prevent their client from doing things that might cause other people loss, as long as it could be proved that the client would not have done those things but for the professional’s advice. It would in effect render the professional adviser liable “in an indeterminate amount for an indeterminate time to an indeterminate class”, in the words of Cardozo CJ in Ultramares Corpn v Touche (1931) 174 NE 441, 444 cited with approval by Lord Bridge in Caparo Industries plc v Dickman [1990] 2 AC 605, itself cited with approval by Lord Sumption in Playboy Club London Ltd v Banca Nazionale del Lavora SpA [2018] 1 WLR 4041, at [8]. For these reasons, Mr Adam QC contended, no such duty of care existed.

Rejection Of The Claim

In summary, the Court rejected the key aspects of the tort claim as follows:

(1) Duty

Mr Thornhill owed no duty of care to the claimants in respect of the advice he gave in relation to the Schemes.

(2) Breach

a) Had Mr Thornhill owed a duty of care to the claimants, he would not have breached that duty in providing his opinion that the Schemes would achieve the Tax Benefits.
b) So far as concerns a duty to warn the claimants of the risk that his advice may be wrong, Mr Thornhill owed no such duty but, if he did, he would have breached it in failing to include the Relevant Risk Warning.

(3) Reliance and causation

a) In the event that a duty to include the Relevant Risk Warning was owed, and was breached, none of the sample claimants has established that the loss suffered by them was caused by any breach of duty by Mr Thornhill.
b) The claimants are unable to claim on the basis that the Schemes would not have been promoted at all if Mr Thornhill had given advice which they contend would have been competent, both as a matter of law and because the claimants have not established that there would have been no Schemes as a matter of fact.

A separate point about limitation was considered but this is not covered in this post.

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