The Court of Appeal recently handed down their judgment in respect of claims by investors in certain tax schemes against the tax barrister, Andrew Thornhill KC. Mr Thornhill KC acted for the promoter of the schemes. The Court of Appeal found that he had not owed the investors a duty of care in providing his opinion to the promoter that the schemes were viable and would, if challenged, be found to be in compliance with relevant tax law requirements.
As well as being of interest to the tax bar who are frequently called to give a view on the viability of prospective tax arrangements, the decision will be of interest to other professionals. The decision provides a helpful practical application, by an appellate court, of the existing legal test regarding assumption of duty of care to a third party, namely that in order for a duty to arise it must have been; (1) reasonable for the third party to have relied on the professional’s advice; and (2) reasonably foreseeable to the professional that the third party would do so. While it does not change the law, it is a helpful signpost to professionals grappling with these issues, whether that is in determining the terms of a retainer, or in light of a third party claim.
In or around 2002, Mr Thornhill KC was instructed by the promoter of three ‘film finance’ tax schemes to advise in respect of their viability under tax law. He advised that they were viable. The promoter provided an information memorandum (IM) to potential investors advising they had taken advice from Mr Thornhill KC regarding the viability of the schemes and a copy could be provided on request. Some investors saw the opinion via their IFAs and proceeded to invest in the schemes. Subsequently, HMRC disallowed the schemes and the investors did not receive the anticipated tax relief. The investor claimants – including those who had not seen his opinion – issued proceedings against Mr Thornhill KC alleging that he had assumed a duty of care to them in tort and had breached that duty of care.
In March 2022, the High Court held that Mr Thornhill KC did not owe a duty of care to the investors and that, even if a duty were owed, it had not been breached. The investors subsequently appealed to the Court of Appeal.
The Court of Appeal has dismissed the investors’ appeal, finding that Mr Thornhill KC did not owe them a duty of care. That is to say (as noted above), the Court of Appeal applied the test in NRAM v Steel  UKSC 13, i.e. that in order for a duty to arise it must have been:
(a) reasonable for the third party to have relied on the professional’s advice; and
(b) reasonably foreseeable to the professional that the third party would do so.
Where the Court of Appeal judgment is perhaps of most use is in interpreting how this test applies in practice. The Court of Appeal placed emphasis on whether, in assessing reasonable reliance (part (a) above), it was reasonable for a third party to rely “without making any independent check or inquiry”. In considering this, the Court of Appeal had regard to the following factors.
- Whether there had been an opportunity to issue a disclaimer and whether one had been issued – Mr Thornhill KC had not attached a disclaimer to his opinion. However, the IM and related documentation (which were the primary documents seen by the investors) contained various disclaimers and so it was in this context that the lack of disclaimer in Mr Thornhill KC’s advice had to be considered.
- The level of sophistication of the third party– the investors were all high-net-worth individuals who had, or had access to, their own professional advisors. It was reasonable to expect that potential investors in a tax avoidance scheme of this kind could understand the risk warnings in the IM and would readily have access to independent advice.
- Whether the professional’s client and the third party are on opposite sides of a transaction – Mr Thornhill KC was identified at all times as the promotor’s tax advisor – the standard position is that it would be inappropriate for one party to a transaction (here, the investors) to rely on representations from the other party’s legal adviser (i.e. here, Mr Thornhill KC as adviser to the promoter). In other situations there are of course exceptions to that rule, such as where a trust arises on payment of completion monies to a conveyancing solicitor on the other side of a transaction.
- Knowledge of the professional – the professional must know that the advice is likely to be communicated to and relied upon by the third party (though this will be assessed objectively). Relevant to this question will be whether the advice is qualified or explained, for example as a statement of belief rather than fact. Again the various disclaimers in the IM were relevant.
- Conflict of interest – If there is a conflict of interest in respect of the subject matter of the advice between the professional and the third party then this will be a significant factor against the professional assuming a duty to the third party.
Whilst this is perhaps to point out the obvious, the third party must actually have seen the professional’s advice for assumption of responsibility to be considered. In this case the large majority of the investors had not actually seen his advice, and the Court of Appeal did not demur from the first instance finding that this was fatal to their claims.
Although the issue of breach of duty fell away given the decision on whether a duty was owed at all, the Court of Appeal found that if Mr Thornhill KC had owed a duty of care to the investors then he would have breached it. They considered that a reasonably competent tax silk should not have provided advice in unequivocal terms and should have given a warning of the potential for HMRC to disallow the schemes.
The basis of the leading judgment is set out above. In her concurring judgment, Lady Justice Carr appeared tempted to find against Mr Thornhill KC on the issue of whether a duty was owed. Her judgment stated that a professional who voluntarily provides unequivocal advice to their client in the knowledge that (1) the advice would be made available to a third party without any express disclaimer of responsibility and (2) the third party would be likely to ‘take comfort’ from that advice – both of which conditions were present in Thornhill – then the professional exposes themselves to the risk of a claim that they owed the third party a duty of care. She acknowledged however that this was only a factor and that the other factors noted above militated in favour of finding against the investors on the issue of duty.
It remains to be seen whether this decision may be appealed further by the investors. For now, it is worth bearing this judgment in mind if you are a professional acting on a matter where third parties have an interest, particularly unrepresented third parties, and particularly where there is any hint that the third parties may see your advice or other work product, or may otherwise ‘take comfort’ from it. Ideally, a professional should make an active choice about whether to offer to act for those third parties or not:
- If a professional offers and is appointed to act, the third parties would become clients. That being the case, a direct duty would be owed, but the professional will benefit from the terms and conditions of a retainer letter which would also describe the scope of work. While thus accepting a duty, the professional delineates the duty and will be actively looking to the interests of the third party which has become a client. Obviously, the professional would first need to consider whether it could properly act for both the existing client and the third party.
- On the other hand, if the professional decides not to or is otherwise unable to act, then how it engages with the third parties will depend on the circumstances. Whilst a retainer letter with appropriate liability exclusions may help avoid inadvertently owing a duty, as above it is only one of the factors and may not be conclusive particularly if it is not seen by the third party. Other steps to take could include; (1) issuing an appropriate disclaimer to the third parties (which ideally would be acknowledged by them before seeing any advice); (2) ensuring that the professional does not act consistently with owing a duty to the third parties/inconsistently with the disclaimer, such as taking responsibility for matters which are solely/mainly of benefit to the third party; or (3) recommending and seeking to ensure that independent advice is actually taken, even at an additional cost; and (4) where other professionals are instructed, ensuring that responsibility for advice on areas common between the client and the third party is properly delineated and agreed.
- Professionals should be particularly careful about individuals who have a dual capacity, and who may receive advice in one capacity but use it in another.
If professionals and their insurers are dealing with these issues retrospectively, e.g. when facing a claim by the third party, the NRAM and Thornhill judgments (which both contain helpful summaries of the law in this area) should prove helpful in identifying the facts which will be most important to the issue of whether a duty was owed, and will permit defence of the claim accordingly.
Further reading: McClean and Others v Thornhill  EWCA Civ 466