Limitation: tax avoidance scheme professional negligence claims

Don’t delay in bringing a tax avoidance scheme professional negligence claim, says solicitor David Paull

Following the flurry of media interest in the wake of the Paradise Papers, HMRC has responded by cracking down on so called tax avoidance schemes.

It remains the case that tax evasion is illegal whereas tax avoidance is not. However the line between the two is often blurred and can change from one day to the next depending on the interpretation of HMRC and the Courts.

A recent legal decision has highlighted the risk that tax avoidance schemes pose and the consequences for financial advisors, accountants and solicitors who provide negligent advice. The case also underlines the importance of bringing a tax avoidance scheme negligence claim before limitation expires.

The case in question is Halsall & Ors v Champion Consulting Ltd & Ors. It involved an allegation of negligent advice on a “charity shell” scheme and a “Scion” film scheme, both designed to avoid a liability to pay tax.

The claim succeeded on liability and on causation. This meant that the defendant’s had been negligent and their negligence had caused loss to be suffered. However the claim failed on limitation and was accordingly dismissed..

In summary, the defendant advised the claimants that the film scheme had a 75% chance of being successful, whereas the Court, having heard from an expert on that point, adjudged that the prospects of success were not more than 50%. As a result the claimants would have won the case but for the fact that the Court decided the claim had been issued too late. In other words the case had been brought out of time as the limitation date had already expired. The claim therefore failed completely.

There are two limitation periods that can apply to professional negligence claims. The first is six years from the date that you have a cause of action (i.e. the negligence that results in you having a claim) and the second is three years from the date that you have knowledge that you have a claim; whichever is later. Both limitation periods are subject to a maximum limitation period of 15 years from the cause of action. The three year period is designed to cover a scenario where a claimant may not know that they had a claim when the negligence initially occurred and provides them with the opportunity to pursue a claim, even if they are outside the standard six year period.

In the Halsall case, the claimants brought their claim after the six year period had expired, relying on the three year ‘date of knowledge’ period. Unfortunately for the claimants the Court decided that the three year period started before they thought it did. As a result their claim was brought too late and so failed.

The test for when the three year period starts to run is not straightforward and can turn on the facts of each individual case. The “date of knowledge” in this case was at the point at which the claimants knew enough for it to be reasonable to begin to investigate further. The claimants did not have to know for certain that the scheme would definitely fail. A claimant must simply know enough for it to be reasonable to investigate further. There needs to be something which would reasonably cause the claimant to start asking questions about the advice they were given. The Court concluded that as a result of correspondence from HMRC stating that they did not accept the claimants were due the tax relief sought and that HMRC had grounds to challenge both the losses and the relief claimed, the claimants knew enough for it to be reasonable to begin to investigate further, even if they did not know whether HMRC were correct or not.

The message that this case sends in relation to limitation is a straightforward one: It remains the case that as soon as a claimant thinks that they have a claim for negligence then they should get legal advice immediately. A claimant has a duty to take reasonable steps to try and mitigate their loss or, if possible, avoid any loss arising from the negligence. It is therefore vital to ensure that any professional negligence claim is brought in time and if necessary before those steps have been completed.

It may well be the case that the claimants entered into correspondence with HMRC to try and avoid or reduce their liability or to appeal or otherwise challenge the decision. However taking those steps, whilst they may have been necessary to mitigate loss, do not have any impact on the actual limitation date. The same message applies whatever type of professional negligence claim you wish to pursue. Get legal advice as early as possible.         

David Paull is a solicitor in our professional liability team who specialises in bringing tax avoidance scheme professional negligence claims. We offer a free case assessment service. Simply submit brief details of your claim by email to [email protected] or call us on 0808 139 1595.

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