Tax avoidance negligence: Can a tax avoidance advisor be liable to a third party?
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Andrew Thornhill QC provided advice to three limited liability film distribution partnerships regarding tax relief. As part of the marketing strategy, this advice was provided to a number of investors who then invested money into what they believed would be a tax relief scheme. Unfortunately, the schemes were later shut down by HMRC who refused the tax relief sought, causing the investors “dire financial consequences”. The investors sued Andrew Thornhill QC for negligence in McLean & Others -v- Thornhill .
Not unsurprisingly, the tax avoidance negligence claim was dismissed.
The main reason for it being dismissed is that Thornhill was providing advice to the film distribution partnerships, not the investors. As such, he did not owe the investors a duty of care. Whilst it was accepted that, being a leading tax QC in England & Wales, Thornhill’s advice would carry great weight, it was considered not to be reasonably foreseeable that potential investors would rely solely on his opinion. Alongside the opinion, all investors were strongly advised to consult their own tax advisers and – importantly – on subscribing to the investments, were warranting that they had relied only on the advice of their own professional advisers.
A second argument raised by the investors was that no reasonably competent tax QC would have reached the conclusion Thornhill did. Thornhill had stated that he had “no doubt” that the investment would generate profits in the early 2000s and, given his standing, seemed to be an “unequivocal endorsement” which was said to be “as effectively as good as an advance ruling from HMRC”. Fortunately, the court disagreed with the claimants, concluding that there was a range of opinions that at tax QC could have:
“in cases concerned with tax avoidance schemes, that generally means identifying the basis of challenge made by the revenue and the arguments presented by them in support of that challenge. That does not mean, however, that the reasonably competent tax QC is required to anticipate all possible approaches the revenue might take”.
This case is a useful reminder of the duty of care owed by one party to another and the duty that a tax advisor has to possible investors. Having said that though, the stand out feature of the case is the advice that the investors should consult their own tax advisers, a point that the judge considered “critical”. In addition, in this instance, all the proposed investors were seasoned investors and had some understanding of the investment scene. Without the recommendation to seek their own advice and with less sophisticated investors, the outcome may have been different.
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