The Court of Appeal has confirmed that tax barrister Andrew Thornhill KC owed no duty to investors in film finance partnerships for which he acted as adviser to the scheme promoters.
The schemes were intended to attract sideways loss relief, so that the investors could write off their film losses against their other income. The marketing involved the issue of an information memorandum (IM) inviting investors to submit applications and subscribe for membership of one or more of three limited liability partnerships (LLPs).
The LLPs were formed as a vehicle to carry on a trade consisting of the acquisition of licences and exploitation of distribution rights to films. The schemes were promoted to potential investors on the principal basis that the investor would be entitled (as a partner of the LLP) to tax relief for trading losses the LLP was anticipated to make that they could set off against their personal income or capital gains to reduce their tax liability.
However, in 2017, HM Revenue & Customs (HMRC) ruled that the partnerships were not really trading and sideways relief was not available.
This caused the investors heavy financial losses. A group of investors sued Thornhill for professional negligence. Thornhill had been retained between 2002 and 2004 by the promoters, Scotts Atlantic Management, to provide advice on whether the schemes were trading commercially with a view to profit. His advice was that they were.
The promoters then showed that advice to potential participants in the schemes. According to the claimants, this implied that Thornhill had assumed a duty of care to them and negligently advised that relief would materialise, making him liable to pay them compensation.
Thornhill defeated the investors’ claims in the High Court in March 2022, but some of them appealed.
Appeal denied
Gerry Brown, trust and estate planning specialist at QB Partners, said: “The Court of Appeal reviewed the earlier High Court decision.
“Did Mr Thornhill owe a duty of care to the investors and if he did was that duty breached by his giving negligent advice?
“The Court of Appeal considered the documentation, which had previously been reviewed by the High Court. The ‘subscription agreement’ required the investors to give the following warranties;
“‘… he or she has only relied on the advice of, or has only consulted with, his or her own professional advisers with regard to the tax, legal, currency and other economic considerations related to subscription to the partnership;
“The subscriber hereby confirms that he or she has read and understood the terms of the IM and has taken appropriate professional advice before submitting this application and is aware of the risks attached to his or her becoming a member in the partnership. …’”
Duty of care
The Court of Appeal also rejected the argument that Thornhill owed a duty of care to potential investors.
It said: “As for Thornhill’s position, he was at all times identified as the seller’s tax adviser in the IM. The fact that he was also described as the LLP’s adviser does not alter that position. Potential investors were being invited to subscribe to membership of a partnership, but they were not yet members of it.
“Investors could not reasonably have thought that he was their adviser in any relevant sense: they did not pay him, meet him or even communicate with him. Moreover, there was nothing in the IM or other documents that suggested he was an independent expert of any kind.
“Significantly, Thornhill’s consent to potential investors receiving copies of his opinions was given in the knowledge that the commercial and regulatory context was as I have summarised. These were unregulated schemes outside the protection of FSMA and investors were therefore required by law to have independent advisers.
“Further, and of central importance, the IM was the only means through which Thornhill’s advice to Scotts could be obtained by third parties, and Thornhill only gave his consent to his tax advice being provided to prospective investors (if asked for) on the terms of the IM and other documents that expressly required those investors to take and rely on their own tax advice relating to the scheme.”
Lessons learned
Brown added: “That was enough to decide the case in Thornhill’s favour. However, the court did go on to consider his analysis of the tax position and concluded, ‘his approach overall was one which, at that time and on this basis, a reasonably competent tax silk could have taken’.
“What can advisers learn from this case? Promoters of tax avoidance schemes will take every step to limit their liabilities should things not pan out as expected.
“Having the client take additional advice will be costly but in the light of this case, necessary.”
