Tax: negligence and its limitations

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Donald-Drysdale By Donald Drysdale for ICAS

12 October 2017

Donald Drysdale finds that a recent High Court judgment relating to professional negligence contains useful lessons for tax practitioners and their clients.


On 19 May this year the Mercantile Court, part of the Queen’s Bench Division of the High Court, delivered its judgment in Halsall & Others v Champion Consulting Ltd & Others [2017] EWHC 1079 (QB).

The claimants had been partners in a firm of solicitors. They alleged that they had been negligently induced by the defendants (a tax advisory firm and its associated firm of chartered accountants) to invest in two different types of tax mitigation scheme which were later defeated by HMRC. The schemes were referred to as the ‘charity shell’ schemes and the ‘Scion’ film scheme.

HMRC had pursued enquiries which resulted in the scheme users facing liabilities they had not expected. As a result, the users sought to recover their losses from the scheme promoters.

Assurances of success

According to the claimants, the defendants had assured them that the charity shell schemes would work effectively, reduce their tax liability and improve their overall financial position as well as being able to benefit charities of their choice. They argued that the defendants had been negligent in failing to advise them of grounds on which there was a significant risk that the schemes would be successfully challenged by HMRC.

They also claimed that the defendants had advised them that the film scheme was robust, with a 75% or 80% prospect of success, that the Scion tax schemes had a history of successful implementation, and that if the film scheme failed the maximum loss would be the amount of cash invested. In the event it became apparent that HMRC would deny substantial tax reliefs that had been anticipated. The claimants argued that the advice had been negligent and as a result they had suffered loss and damage.

Was there negligence?

On the evidence before her the judge, HHJ Moulder, found that the defendants had advised the claimants to participate in the charity shells, giving them a 100% assurance that their tax liability would be reduced as a result of this investment and that the schemes were not susceptible to a risk of successful challenge by HMRC. The defendants had failed to advise that aspects of the schemes were particularly at risk of challenge. There had been no contributory negligence on the part of the claimants.

Regarding the defendants’ assurance that the prospects of success of the Scion film scheme were 75%, the judge concluded that this amounted to a breach of duty, being advice that no reasonably well-informed and competent tax adviser could have given. Again there had been no contributory negligence by the claimants.


In England and Wales, the Limitation Act 1980 (LA 1980) s 2 provides that in general ‘an action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued.’ For this purpose the cause of action accrues at the date on which the wrong is done, even if no-one is aware of it at that time.

In the case of the charity shells, the Court held that this six-year period ran from the date on which the relevant claimant entered into the contract to subscribe for shares in the relevant shell or, at the latest, the date on which the shares in the shell were gifted to charity. The claim, which was brought on 6 March 2015, fell outside this limitation period.

In the case of claims such as this, for negligence not involving personal injuries, LA 1980 s 14A disapplies s 2 and provides for two alternative periods of limitation – either six years from the date on which the cause of action accrues or, if later, three years from ‘the earliest date on which the plaintiff or any person in whom the cause of action was vested before him first had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action.’ Although not relevant in Halsall v Champion, LA 1980 s 14B also imposes a separate long-stop time bar on such claims.

The Court found that the claimants had failed to discharge the burden of proof on them that each of their claims in respect of the charity shells was brought within the alternative three-year period offered by LA 1980 s 14A.

In relation to the film schemes, the Court concluded that there was no doubt that the primary six-year period had expired. It also held that the claims in respect of these schemes had been brought outside the alternative three-year limitation period and must therefore fail.

The position in Scotland

Had such a case arisen in Scotland, the position would have been different. The Limitation Act 1980 does not apply north of the border. Instead, the relevant statute is the Prescription and Limitation (Scotland) Act 1973 (PLSA 1973).

Most claims in Scots law, including claims for professional negligence or breach of contract, extinguish after a fixed time limit (the ‘prescriptive period’) – usually five years (PLSA 1973, s 6). In exceptional circumstances this period may be extended, suspended or interrupted. There is also a long-stop prescriptive period which extinguishes any claims after 20 years, regardless of when awareness arose (PLSA 1973, s 7).

It could be risky to try to read across from the judgment in Halsall v Champion to the circumstances in which a potential limitation period might apply to any negligence claim arising in Scotland, and specific legal advice should be sought in any particular case.

Lessons to be learnt

The findings of negligence against the defendants in Halsall v Champion should act as a wake-up call to practitioners. The fact that the claimants were unsuccessful as a result of the Limitation Act 1980 should be a salutary warning to anyone taking professional advice and finding it wanting.

Tax advisers are already well aware of changed attitudes to tax avoidance. There are stringent requirements for the disclosure of tax avoidance schemes (DOTAS), and severe sanctions such as follower notices and accelerated payment notices.

Even in cases where relatively straightforward tax planning seems unlikely to attract the wrath of HMRC, the risks that clients may seek recompense for unexpected tax liabilities and related costs and losses should not be ignored but must be actively managed.

Advisers should guard against such risks, and in doing so they should adhere strictly to the published guidance on Professional Conduct in Relation to Taxation (PCRT).

A word about engagement letters

Most practitioners rightly regard their engagement letters as crucial in defining their relationships with their clients and setting out the terms and conditions under which they work.

The PCRT states (at paragraph 4.26): ‘A member should understand his client’s expectations around tax advice or tax planning, and ensure that engagement letters reflect the member’s role and responsibilities, including limitations in or amendments to that role.’

Established case law distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action, and a duty to advise someone as to what course of action he should take. In Halsall v Champion the engagement letters did not define the scope of the duty owed to the claimants.

The Court held that, irrespective of whether the defendants were under any contractual duty to provide advice, they did in fact provide advice. The letters did not have the effect of correcting oral assurances that the defendants had given to the claimants at the outset.


HHJ Moulder’s judgment runs to 71 pages and is certainly no easy read. However, it contains some instructive messages – both for tax advisers and for those they advise.

Article supplied by Taxing Words Ltd


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