Tax mitigation schemes – Beware of time limits
The recent decision in Halsall & Ors v Champion Consulting Ltd & Ors (Rev 1)  EWHC 1079 (QB) (19 May 2017) makes interesting reading on a variety of issues.
The Judgment will be of particular interest to clients considering bringing an action against their tax or financial advisers for negligent advice to invest in film schemes.
The HMRC have successfully challenged the structure of film partnership sale and leaseback schemes in several high profile cases. The revenue also continue to pursue the individual members of these schemes not only for a return of the tax relief that was originally received but also for additional tax on income the members have never physically received, so called “dry tax”.
The claimants were partners in a firm of solicitors. The defendants, an accountancy firm, were all part of the Champion group.
The claim involved alleged defective tax advice to enter into 2 tax mitigation schemes, a “charity shell scheme” and a “Scion” film scheme.
In a fairly lengthy judgment, HHJ Moulder sitting in the London Mercantile Court found that claims succeeded on liability and causation but ultimately failed on limitation.
Scion Film Scheme
The Court agreed with the claimants that advice was provided and found that the defendants represented and advised the claimants that there was a 75% chance that the Scion film scheme would successfully mitigate the claimants’ liability to tax.
The claimants’ expert witness placed the Scion film scheme at the high end of the risk scale and that a reasonably competent adviser would not have placed the prospects at more than 50%. The defendants’ expert witness concluded that the prospects were in the region of 60-75%.
HHJ Molloy preferred the evidence of the claimants’ expert concluding that the advice of the defendants’ employee that the prospects of success of the film scheme were 75% was outside the range open to her and amounted to a breach of duty being advice such as no reasonably well-informed and competent member of that profession could have given.
As in all advice cases, each case involving film schemes will turn on its own facts including; the specific advice provided, the environment at the time of the advice and the precise structure of the scheme.
The Court in this case was prepared to find that the Scion scheme had a higher percentage chance of failure than was represented by the adviser.
The sting in the tail was limitation.
Proceedings had been issued by the claimants in March 2015. HHJ Moulder confirmed the position as set out in a line of authorities, that the cause of action in negligence accrued on the date that the claimants entered into the contractual documentation for the film scheme in July 2007. At that point the “defect” in the form of the advice was incapable of cure and they were tied into the “commercial straightjacket” (paragraph 344 of HHJ Moulder’s Judgment). To be within the primary limitation period under section 2 of the Limitation Act 1980, proceedings were required to be brought within 6 years (i.e. by July 2013).
The claimants relied on s14A of Limitation Act, which allows 3 years from the claimants “date of knowledge” to bring a claim. The test as stated by the Court was “at what point did the claimants know enough for it to be reasonable to begin to investigate further. The claimants do not have to know for certain that the scheme would fail, the claimant must know enough for it to be reasonable to begin to investigate further; there needs to be something which would reasonably cause the claimants to start asking questions about the advice they were given in relation to the Scion film scheme.” (paragraph 350 of HHJ Moulder’s Judgment).
The Court found that in June 2011, as a consequence of correspondence that the Revenue did not accept that the claimants were due any relief and that they had a number of grounds for challenging both the losses and the relief claimed. The implications were explained by the defendant that HMRC were offering only to allow their 20% contribution as loss relief. The judge concluded that there was no need for the claimants to consult “experts” in order to understand the position. They did not know for certain that the Revenue’s position would prevail but they knew enough for it to be reasonable to begin to investigate further.
The application of s14A is fact specific and depends on a variety of factors relevant to the Court assessing when a claimant became aware that there was something which would reasonably cause the claimant to start asking questions about the advice they were given.
The decision should be seen as a warning sign to any claimant considering bringing a claim against their adviser. It may seem reasonable for a potential claimant to wait until HMRC investigations or negotiations are finalised prior to considering bringing a claim, after all the extent of the losses suffered may be currently unclear. This Judgment highlights the acute danger in this approach and the prospect that a good claim may ultimately fail due to being brought out of time.
Any claimant with a potential claim against an adviser should seek advice as a matter of urgency.
If you have suffered losses as a consequence of defective financial advice or services please contact Pradeep Oliver at firstname.lastname@example.org or call 01892 765453 for a no obligation consultation.