David McClean and Others v Andrew Thornhill KC
| Jurisdiction | England & Wales |
| Judge | Lady Justice Simler,Lady Justice Carr |
| Judgment Date | 28 April 2023 |
| Neutral Citation | [2023] EWCA Civ 466 |
| Docket Number | Case No: CA 2022 001113 |
| Court | Court of Appeal (Civil Division) |
| Year | 2023 |
[2023] EWCA Civ 466
Sir Julian Flaux
CHANCELLOR OF THE HIGH COURT
Lady Justice Simler
and
Lady Justice Carr
Case No: CA 2022 001113
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BUSINESS & PROPERTY COURTS OF ENGLAND & WALES
MR JUSTICE ZACAROLI
Royal Courts of Justice
Strand, London, WC2A 2LL
Roger Stewart KC, Nik Yeo and Harry Winter (instructed by Stewarts Law LLP) for the Appellants
Tom Adam KC and Max Schaefer (instructed by Herbert Smith Freehills LLP) for the Respondent
Hearing dates: 20, 21, & 22 March 2023
Approved Judgment
This judgment was handed down remotely at 10.30am on 28 April 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Introduction
This appeal arises out of the consequences of a number of failed film finance tax schemes. Their 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.
The appellants are some of the investors who subscribed for membership of one or both of two LLPs: The Second Scotts Atlantic Distributors LLP (“SAD2”) and The Third Scotts Atlantic Distributors LLP (“SAD3”). Scotts Atlantic Management Limited (“Scotts”) were the sponsor and promoter of these partnerships as investments. SAD2 opened for subscriptions on 27 October 2003 and closed on 4 April 2004. SAD3 opened for subscriptions on 27 October 2003 and closed on 5 April 2004. I shall refer to SAD2 and SAD3 together as the “Scheme”. For limitation reasons explained below, the claims relating to Scotts Atlantic Distributors LLP (“SAD1”) are no longer in issue on this appeal.
The respondent is Andrew Thornhill KC, a well-known specialist in tax, and at the material times, head of Pump Court Tax Chambers. He was engaged by Scotts to advise Scotts on devising and setting up the three LLPs and on the tax consequences of the schemes. He did so in a series of opinions. He also confirmed in letters to Scotts that he had read the IM for each LLP (in particular the section headed “Taxation Consequences of Investing in the Partnership”) and confirmed that there was no statement contained in it in relation to taxation matters which was inconsistent with his opinions. Although not engaged by or to advise any of the appellants, Mr Thornhill consented nonetheless to being identified as tax adviser to Scotts and the LLP in the IM for SAD2 and SAD3, and to a copy of his opinions being made available to prospective investors in the Scheme on request.
The availability of tax relief for investors through trading losses incurred by the LLP was predicated on the LLP meeting three statutory tests: (i) it had to be carrying on a trade, (ii) on a commercial basis and (iii) with a view to profit. In about October 2004, Her Majesty's Commissioners of Inland Revenue (subsequently merged with HM Customs & Excise to form Her Majesty's Commissioners of Revenue and Customs, and referred to throughout as “HMRC”) began investigating SAD1. An enquiry was opened into SAD1's tax return for the tax year ending 5 April 2003, and further enquiries were opened by HMRC in relation to subsequent tax years for SAD2 and SAD3. The opening of enquiries into the LLP returns were deemed opening of enquiries into the tax returns of the partner members of each LLP. The enquiries into SAD1 concluded on 13 September 2016 with a closure notice in which HMRC stated (among other things) that SAD1 was not carrying on a trade or business on a commercial basis with a view to profit. Following a settlement offer for an amount lower than that which the appellants would otherwise have had to pay on the premise that the tax benefits were all disallowed, the appellants entered into a settlement with HMRC in 2017 relating to all three LLPs.
These proceedings commenced in 2018 (the claim form was issued on 5 July 2018). The appellants alleged that Mr Thornhill owed them a duty of care which he breached, by negligently advising on the tax implications and asserted tax benefits for investors in the schemes; by approving statements about those implications and tax benefits in the IM by which each scheme was promoted; by expressly agreeing to be named in the IM as having provided advice and for that advice to be made available to potential investors; and subsequently by reconfirming his advice. They claimed that if Mr Thornhill had acted competently, he would have declined to endorse the schemes and/or advised and warned of the significant risk that the schemes would be successfully challenged. Had he done so, the schemes would not have been promoted at all and/or the appellants (who relied on Mr Thornhill's advice) would not have invested in any of them.
The claims of ten of the claimants (now appellants) (from a total of over 100) were chosen to be taken to trial first as sample claims. The remaining claims were stayed pending judgment on the sample claims on the basis that the judge's determination of common issues would be binding on all claimants. The trial itself extended over 14 days in November and December 2021. The judge, Zacaroli J, had significant volumes of contemporaneous and other documentary material, and heard evidence from each sample claimant and Mr Thornhill himself. His conspicuously clear and careful judgment (cited as [2022] EWHC 457 (Ch), [2022] BTC 5, [2022] STC 1110) extends to 412 paragraphs over 156 pages, together with an appendix setting out the provisions for distribution of income received from the films and the way these worked (“the payment waterfalls”); and a second appendix containing the findings he made on reliance, causation and limitation in respect of each sample claimant extending to a further 163 paragraphs over 28 pages. The judgment reflects a thorough and detailed analysis of the facts and arguments on both sides. I shall not even attempt to replicate the detailed consideration given by the judge to these matters. Neither side challenges the findings of fact he made. To the extent that his evaluative assessment is challenged, this court will only interfere if it considers the decision to be “wrong by reason of some identifiable flaw in the judge's treatment of the question to be decided, ‘such as a gap in logic, a lack of consistency, or a failure to take account of some material factor which undermines the cogency of the conclusion’” (see Re Sprintroom [2019] EWCA Civ 932; [2019] BCC 1031 at paragraph 76).
In the judgment, the judge dismissed the claims. His conclusions on the main issues were in summary:
i) Duty of care: the judge applied the assumption of responsibility test re-stated in Steel v NRAM Ltd (formerly NRAM Plc) [2018] UKSC 13, [2018] 1 WLR 1190 (“ NRAM”). He held that Mr Thornhill did not owe a duty of care to the claimants in respect of advice given in connection with the schemes. Although a number of factors pointed towards a duty of care being owed, the terms of the IM were critical, and clearly advised potential investors to consult their own tax advisers on the tax aspects of the schemes. Further, no investor was able to subscribe without warranting that they had relied only on the advice of, or had consulted with, their own adviser. It was objectively reasonable for Mr Thornhill to assume that independent professional advice was or would have been taken by investors.
ii) Unfair Contract Terms Act 1977: the judge rejected the argument that the warranties contained in the subscription agreements were insufficiently clear disclaimers of responsibility to satisfy the requirements of reasonableness in section 2. His conclusion that no duty was owed was not based on a disclaimer but rather on the fact that in all the circumstances it was not reasonable to expect investors to rely on Mr Thornhill's advice without independent enquiry and UCTA 1977 did not therefore apply. Even if it did the warranties would have been clear, fair and reasonable in all the circumstances.
iii) Breach of duty: Mr Thornhill's advice that the LLPs were carrying on a trade on a commercial basis with a view to profit was based on the approach in Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] 1 AC 655, [1992] 2 WLR 469 (“ Ensign Tankers”), which had established that making and exploiting a film was inherently a trading activity. The judge considered the authorities between 2002 – 2004 and concluded that although the approach in Ensign Tankers could no longer reasonably be adopted, it was one which a reasonably competent tax silk could have taken at that time. The judge also held that Mr Thornhill had not failed to consider all the facts and circumstances. A reasonably competent tax silk could have concluded that the LLP had a genuine commercial trading purpose and was trading with a view to profit.
iv) The judge rejected the alternative case advanced that Mr Thornhill breached his duty of care by failing to warn of the significant risk that one or more of the statutory tests would not be met and the schemes would be challenged by HMRC. The duty to warn was affected by the fact that the claimants were not Mr Thornhill's clients and he knew nothing about them, whereas Mr Thornhill would have been aware that his actual clients...
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