In 2003, three limited liability partnerships (LLPs) were formed for the purpose of participation in the distribution of films. Participation in the LLPs was marketed to potential investors on the basis that they would be entitled to tax relief against their income or capital gains for trading losses that the LLPs were anticipated to make.
HMRC subsequently refused the tax reliefs claimed by the investors.
Andrew Thornhill QC, an experienced barrister specialising in tax, was engaged to provide advice on the tax consequences of the investments to Scotts, the promoters of the film distribution arrangements, writes Gerry Brown, trust and estate planning specialist at QB Partners.
Thornhill was not engaged to advise any of the investors, and none of them were his clients. He consented, however, to being named as tax adviser to Scotts and to his advice being made available to potential investors, if requested.
The investors in the LLPs claimed that Thornhill owed them a duty of care in respect of the advice he gave to Scotts and made available to potential investors. The investors claimed to have relied on his advice.
The tax benefits which the investors sought to gain were dependent upon the LLPs:
- Carrying on a trade;
- On a commercial basis; and
- With a view to a profit.
It was argued that Thornhill negligently advised that the arrangements would achieve the hoped for tax benefits because the LLPs would be carrying on a trade on a commercial basis with a view to profit.
This, the investors claimed, was advice that no reasonably competent tax barrister could have given, and/or that Thornhill negligently failed to advise that there was a significant risk that the arrangements would be successfully challenged by HMRC.
The judge held that Thornhill owed no duty of care to the investors saying: “Critical to this conclusion are the facts that the investment memorandum provided to potential investors clearly advised potential investors to consult their own tax advisers on the tax aspects of the scheme and that no investor could subscribe to the LLP without warranting that he or she had relied only on the advice of or had only consulted with their own professional advisers.”
The judge found that “it was objectively reasonable to assume that independent professional advice would indeed be taken by investors, as they were advised to do”, noting that some claimants did take their own advice which was to the effect that the schemes should achieve tax benefits.
It was acknowledged that Thornhill was “undoubtedly one of the leading tax QCs in the country at the time” and that his opinion ‘”as likely to carry more weight” given this eminent status, but “it does not follow, however, that he should have reasonably foreseen that investors would rely on his opinion without consulting their own tax adviser.”
Even if there had been a duty of care, the judge held that Thornhill’s approach on the key issue – the correct approach to determining whether an entity was trading on the basis of the authorities in 2002-2004 – was one that “a reasonably competent QC could have taken”.
This article was written for International Adviser by Gerry Brown, trust and estate planning specialist at QB Partners.