Knowledge is power

Tension between clients and their tax advisers has been running high ever since the public spotlight was cast on high-value tax-planning schemes undertaken by public figures including Jimmy Carr and Gary Barlow. Couple the public disdain for, and the political pressure directed against, those involved in tax planning with the increased powers given to HMRC in 2015, and tax advisers face the perfect storm.

While this has always threatened to herald claims on a colossal scale, the actual liabilities to HMRC have taken a long time to begin to crystallise. Recently, however, HMRC has started to demand substantial repayments from taxpayers. It is in that light that we review the importance of the recent decision in Halsall and others v Champion Consulting Ltd and others [2017] EWHC 1079 (QB).

In the first significant claim against an allegedly negligent tax adviser to reach trial in the post-Barlow world, claims were advanced by four solicitors who had sought to shelter income amounting to several million pounds by participating in ‘charity tax shells’ and in film finance tax structures between 2004 and 2008.

The claimants sought to argue both that (a) they could not suffer damage in relation to either scheme until the court or tribunal had decided that they were ineffective and that (b) in any event, they did not have sufficient knowledge for the purpose of section 14(A) of the Limitation Act 1980 until shortly before issuing proceedings.

While the position remains fact sensitive, in a judgment which will give hope to tax advisers, the court found that claimants must suffer damage for the purpose of section 2 of the Limitation Act as soon as they are ‘tied into the commercial straitjacket’. In other words, the claimant suffers damage at the date on which they enter into the transaction, not the date on which HMRC, or a competent tribunal, concludes the scheme to be ineffective (often several years later).

That being the case, the court had to grapple with the question of when time began to run for the purpose of section 14A. The claimants adopted the position that, as they had been reassured by their tax adviser that they would achieve a positive result at a tribunal, they could not have known they had suffered a loss until they were advised, in terms, that HMRC was likely to be successful in its challenge, or the tribunal held that the structure was ineffective (whichever was earlier).

Neither argument found favour with the court. After a thorough review of the case law, the court summarised that, in relation to the charity tax shells, ‘the authorities are clear that knowledge does not mean knowing for certain, the claimant must know enough for it to be reasonable to begin to investigate further’. The court found that the claimants must have had sufficient knowledge to justify investigating the position once it was clear that HMRC did not accept the value sought in their claims for tax relief, with the spectre of negotiations and potential litigation with HMRC looming.

In the film schemes, the court held that the claimants must have had sufficient knowledge to justify investigating the position once HMRC had made an offer to settle the dispute, resulting in them not achieving the relief they had expected and, again, with the prospect of future litigation in the background. Notwithstanding the continued reassurances received by the claimants, the court held that the claimants ‘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’.

Equally important, and of general commercial relevance, is the fact that the Champion defendants incorporated a clause in their standard terms and conditions which contractually prohibited any claims being brought outside of a six-year period. In effect, the clause removed the protection offered to clients by section 14A regardless of the date on which the potential claimant became aware that they might have suffered loss.

The court held that the term was clear, unambiguous, intended to limit the time in which any claim could be brought to a finite six-year period, and, notably, was reasonable for the purpose of the Unfair Contract Terms Act 1977. It therefore appears that, provided it is reasonable, standard retail clients can now be required to contract out of the protections of section 14A, potentially offering considerably increased certainty to commercial entities.

The claimants’ application for permission to appeal was rejected at first instance. The matter is now subject to an application for permission to appeal. For now, as Francis Bacon famously said, ‘knowledge is power’, and it appears that a reasonable amount of knowledge can provide a solid defence.

Alasdair Dick is an associate partner at Plexus Law and part of the Plexus professional indemnity team, headed by Peter Court, who together represented the successful defendants in Halsall

plexuslaw.co.uk