Accountant Negligence Action Fails

An Accountant Negligence Action Needs To Show A Duty Breached And A Loss

In the matter of Knights v Townsend Harrison Ltd [2021] EWHC 2563 (QB) an accountant negligence action fails.

The Claimants (“Cs”) sought damages against Townsend Harrison Limited (“D”) concerning introductions to three tax avoidance schemes.

C’s said that D owed it a duty of care when introducing it to the tax schemes.

There were two notable witnesses, Mr Knights, one of the C’s and Mr Elliott. The judge said he had to exercise caution in respect of both these witnesses.

It appears that D introduced one or more of the C’s to various tax avoidance schemes and there appears to have been a difference of perception as to the degree of encouragement and representations made as to the likely success or failure of such schemes.

So far as the Claimants’ introduction case is concerned, it is in my judgment significant that although the experts in relation to the Tax Schemes Claim would not have introduced their own clients to these particular tax schemes, there was no support in the expert evidence for the proposition that these were the type of tax schemes that, at the time that the Claimants were introduced to the same, ought not to have been introduced by a general practitioner accountant acting reasonably in any event. Although the legislation was tightening in respect of disguised remuneration schemes, HMRC had, up to that point, been unsuccessful in respect of the Rangers Litigation. It could not therefore be said that the OneE and Qubic Schemes would “inevitably fail”. Further, the schemes in question, including the Elysian Scheme, were underpinned by legal advice from eminent leading tax Counsel. In the circumstances, I do not consider that it could fairly be said that introductions to the Tax Schemes ought not to have been made in any event.

Further, so far as Mr Knights is concerned, whilst the OneE Scheme was the first tax avoidance scheme that he had become involved in, and he had not been involved in relatively aggressive tax planning of this kind before, it cannot in my judgment fairly be said that he was an unsuitable person to at least introduce to promoters of tax schemes like the Tax Schemes at the time that the introductions were made. There were cogent reasons for the Claimants, given the increasing profitability of Evergreen, to consider tax planning, and Mr Knights was an experienced businessman who subsequently at least demonstrated a significant level of sophistication and attitude to risk with regard to investments. There is certainly no evidence to suggest that he was particularly risk averse.

In the circumstances, I do not consider that the Claimants’ introduction case can succeed, and I consider that Mr Chaisty QC was correct to focus on the advice case.

So far as the advice case is concerned, the first consideration must be as to what advice Mr Elliott in fact provided to Mr Knights in respect of the three Tax Schemes. As I have indicated in considering the credibility and reliability of the witnesses, I do not consider the relevant exercise to be simply one as to whose evidence is believed as between Mr Knights and Mr Elliott based upon the credibility of their evidence. Rather, applying Gestmin I consider that the focus must necessarily be upon the documentation and the inherent probabilities of the situation, applying the burden of proof but recognising however that things must have been said as between Mr Elliott and Mr Knights prior to Mr Knights causing Evergreen in the case of the OneE Scheme and Qubic Scheme, and himself in the case of the Elysian Scheme, to enter into the same.

I am satisfied that Mr Elliott probably did generally encourage Mr Knights to give consideration to the Tax Schemes and, as Mr Elliott accepted under cross-examination, that Mr Elliott mentioned his/THL’s involvement in the Tax Schemes in order to provide some comfort to Mr Knights in respect thereof. Further, I consider it quite plausible that Mr Elliott said to Mr Knights that he would only suggest tax schemes that were conducted “by the book”.

However, I am simply unable on the evidence properly to conclude that Mr Elliott went further, and advised Mr Knights that he/Evergreen had nothing to lose in entering into the schemes, or that the only real risk, in the case of the OneE and Qubic Schemes, was that there might be a liability for corporation tax.

However, leaving aside the matter of ‘duty’ when it came to ‘causation’ the problem for Cs was that Mr Knights appears in respect of one of the tax schemes to have said he may have still gone ahead with the schemes had he known about the risk. In view of that the judge appears to have suggested that Cs’ case on causation in effect evaporated:

I am not persuaded that even if Mr Elliott did act in breach of a duty of care in advising Mr Knights that there was nothing to lose in entering into the OneE or Qubic Scheme, or that the only risk in doing so was that there might be a liability to corporation tax if the relevant scheme failed, the Claimants have established causation in fact.

I have referred in paragraph 37 above to the cross-examination of Mr Knights as to whether, had he known of the risk that PAYE and NIC might be payable, he would still have entered into the OneE Scheme. His initial response was “may be not”, and “we may not have done”, but he also accepted that “we may have done, yes”. Ultimately, the burden of proof is on the Claimants to establish causation on the balance of probabilities, i.e. that on the balance of probabilities they would not have entered the relevant scheme had they not been advised as alleged. On the basis of these responses alone, I cannot be satisfied on the balance of probabilities that this is the case.

Given the responses to this line of cross-examination, I consider that the same considerations arise in respect of the Qubic Scheme.

The Elysian Scheme is different, in that the nature of the advice given was different as it was not a disguised remuneration scheme, but a scheme intended to enable the release of monies from a pension tax free. However, as we have seen, under cross-examination Mr Knights admitted that he was aware that there was a risk that tax would be payable in respect of the distribution in the event that the Elysian Scheme failed, that he was not aware of the likely quantum thereof, but that he proceeded to enter the Elysian Scheme in any event. On the basis of this evidence, I do not consider that causation in fact can be established respect of the claim relating to the entry into of the Elysian Scheme.

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