Altus Group (UK) Ltd v Baker Tilly Tax and Advisory Services LLP and another
| Jurisdiction | England & Wales |
| Judge | H.H. Judge Keyser,JUDGE |
| Judgment Date | 07 January 2015 |
| Neutral Citation | [2015] EWHC 12 (Ch) |
| Docket Number | Claim No: HC-2013-000097 |
| Court | Chancery Division |
| Date | 07 January 2015 |
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice, Rolls Building,
Fetter Lane, London, EC4 1NL
His Honour Judge Keyser QC
sitting as a Judge of the High Court
Claim No: HC-2013-000097
David Yates & David EwartQC (instructed by Bird & Bird LLP) for the Claimant
David Turner QC & Aparna Nathan (instructed by Taylor Wessing) for the Defendants
Hearing dates: 11, 12, 13, 14 & 17 November 2014
H.H. Judge Keyser Q.C.:
Introduction
The claimant claims damages for professional negligence on the part of the defendants, who carry on the business of accountants with expertise in the field of taxation, in failing to give advice that would have enabled the claimant to implement a restructuring proposal with a view to mitigating its tax liabilities.
The defendants admit that they were in breach of duty, although they raise an issue concerning the time at which the breach occurred. However, they deny that the claimant would have implemented the proposal for which it contends. And they contend that, even if the restructuring proposal had been implemented, it would have been ineffective as a matter of law for purposes of tax mitigation and would have been successfully challenged by HMRC.
In addition to relatively limited factual evidence, the parties adduced written and oral expert evidence in respect of the efficacy of the restructuring scheme and the likely attitude of HMRC towards it. The claimant called Ms Toni Dyson, a tax specialist at FTI Consulting LLP, and Mr Bas Kundu, a tax specialist at AuHg Consulting Limited (previously at FTI Consulting LLP). The defendants called Mr David Sayers, a tax specialist at Mazars LLP. I shall address their evidence when considering the specific issues in the case.
I shall summarise the principal facts before identifying and explaining the issues in more detail and setting out my conclusions with respect to them. There is a short summary of my decision and the conclusions on which it is based at paragraph 181 below.
I am grateful to Mr Yates, Mr Ewart QC (who attended on the final day of the trial to make submissions on behalf of the claimant in relation to one specific point of law), Mr Turner QC and Ms Nathan for their most helpful and, in the circumstances, remarkably succinct written and oral submissions.
The Facts
The claimant is part of the Altus corporate group ("the Altus Group"), which has its headquarters in Canada. It is a UK subsidiary of Altus Group Limited ("AGL"), a Canadian company.
The claimant is also a member of Altus UK LLP ("the Existing LLP"). The Existing LLP was incorporated on 24 September 2007 as the corporate structure whereby AGL acquired the property consultancy business of a firm called Edwin Hill. The other members of the Existing LLP are Altus Group (UK2) Limited ("AGUK"), the Altus UK LLP Employee Benefit Trust, and various individual members, who were formerly partners in Edwin Hill. Through the claimant and AGUK, AGL exercises corporate control over the Existing LLP.
The profit-sharing arrangements are set out in section 10 of the LLP Agreement dated 1 October 2007. For the purposes of this judgment it will suffice to summarise the main effect of that provision. The individual members are first paid out a profit share in priority ("priority profit share"). Any remaining profits are then distributed to the claimant and AGUK in proportion to their respective interests: 99.99% to the claimant and 0.01% to AGUK.
The acquisition of the business of Edwin Hill gave rise to an asset in the Existing LLP's accounts in respect of the goodwill of that business; the total cost of the goodwill was approximately £26.5 million. In late 2007 it was decided that the goodwill would be amortised over a five-year period concluding at the end of the third quarter of 2012. This resulted in amortisation of goodwill at the rate of approximately £5 million per annum.
For an understanding of the decision to amortise the goodwill and of the significance of the events that followed, it is necessary to say something about aspects of the tax position as it applied to the Existing LLP and its members in 2007.
For the purposes of UK tax law, an LLP that carries on a trade is treated in the same way as a partnership and is not itself liable to tax. Rather its profits and losses arise to the members. Individual members are subject to the income tax regime. Corporate members are subject to the corporation tax regime.
One material difference between the two regimes is that for the purposes of corporation tax amortisation of goodwill is an allowable deduction against profits, whereas it is not an allowable deduction for the purposes of income tax. According to the HMRC Manual, amortisation of goodwill for the purposes of the tax liability of a corporate member is taken into account in computing the profits and losses of the LLP; it is not calculated by reference only to the profits and losses of the corporate member.
It is possible, but not certain, that until 2009 there was another material difference between the two regimes, with respect to the allocation of losses from an LLP.
As regards individual members, the basic rule was set out in section 850(1) of the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA"):
"For any period of account a partner's share of a profit or loss of a trade carried on by a firm is determined for income tax purposes in accordance with the firm's profit-sharing arrangements during that period."
However, the remainder of section 850 provided a machinery whereby, if the effect of the profit-sharing arrangements would be to allocate profits to one partner and losses to another, those losses would be reduced to nil and the profits would be allocated to the members on a pro rata basis.
As regards corporate members, by contrast, there was no similar machinery in the relevant provisions, which until 2009 were those of section 114 of the Income and Corporation Taxes Act 1988 (" ICTA 1988"). Section 114(2) provided:
"A company's share in the profits or loss of any accounting period of the partnership, or in any matter excluded from the computation by subsection (1)(b) above, shall be determined according to the interests of the partners during that period, and corporation tax shall be chargeable as if that share derived from a trade, profession or business carried on by the company alone in its corresponding accounting period or periods; and the company shall be assessed and charged to tax for its corresponding accounting period or periods accordingly."
On one view, the absence from the provisions relating to corporate members of any machinery corresponding to that in section 850 of ITTOIA indicated that corporate and individual members were treated differently. However, that was not HMRC's view. Paragraph 72245 of the HMRC Business Income Manual (BIM), headed "Partnerships—computation and assessment: allocation must not create or increase a loss", stated:
"Although the allocation of profit follows the commercial profit sharing arrangement the use of this arrangement alone might produce a spurious result. For instance it would be possible to have an allocation in which one or more partners are allocated an aggregate (but notional) profit greater than the actual profit made by the partnership, and the remaining partners are allocated an aggregate (but notional) loss.
For tax purposes the allocation of profit (or loss) between partners must result in a straight apportionment of the actual profit (or loss) made by the partnership. If the initial allocation using the commercial profit sharing arrangement for all the partners produces a mixture of notional profits and losses, you must reallocate the actual partnership profit (or loss) between the profit making (or loss making) partners alone. This re-allocation is made in proportion to the notional profit (or loss) initially allocated to those partners. …
In the case of PDC Copyprint v George… the Special Commissioners held that it was not open to partners to inflate loss claims by payment of a 'salary' to one or more of their number. …"
ITTOIA was a product of the Tax Law Rewrite Project, which was established in 1996 with the aim of rewriting the UK's primary tax legislation to make it clearer and easier to use, but without making significant changes to its effect. The rewrite of the corporation tax legislation did not occur until 2008/9. HMRC's view was that the machinery in section 850 of ITTOIA did no more than put the existing law and practice on a statutory footing.
By an Engagement Letter dated 7 January 2008 the first defendant was engaged to prepare the claimant's corporation tax returns. The second defendant replaced the first defendant in that regard pursuant to an Engagement Letter dated 23 March 2011. I shall say something about the terms of the Engagement Letters later in this judgment. For the purposes of these proceedings the distinction between the first defendant and the second defendant is generally unimportant.
In February 2008 Ms Dale Lawr, the Chief Financial Officer of AGL, and Mr Steve Corrin, a director of the first defendant, agreed that the claimant's corporation tax returns would be prepared on the basis that the two corporate members of the Existing LLP were allocated 100% of the deduction for the amortisation of goodwill. In practice, this inevitably resulted in the claimant incurring a loss, which it could then carry forward to set aside its liabilities for corporation tax in future years. Throughout the relevant period, the priority fixed shares of the individual members of the Existing LLP exceeded its actual profits once the deduction...
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