In the recent decision of David McClean & Ors v Andrew Thornhill KC [2023] EWCA Civ 466, upholding the decision of Zacaroli J at first instance, the Court of Appeal found that no duty of care was owed to investors by a barrister, specifically a tax silk, advising the scheme promoter.

The background in McClean v Thornhill

The appeal arose out of the consequences of a number of failed film finance tax schemes, whose marketing involved the issue of an Information Memorandum (IM) inviting investors to subscribe for membership of one or more of three limited liability partnerships (LLPs).

The LLPs were to be used as vehicles to carry on a trade comprising the acquisition of licences and the exploitation of distribution rights to films. The schemes were promoted to potential investors on the basis that each investor would be entitled, as a partner of an LLP, to tax relief for anticipated trading losses that they could then set off against their personal tax liabilities.

The appellants were some of the investors who subscribed for membership of one or both of two of these LLPs, which had been promoted by Scotts Atlantic Management Limited (Scotts) between 2002 and 2004. The respondent was Andrew Thornhill KC, a well-known specialist tax silk who was engaged by Scotts to advise the promoters on devising and setting up the three LLPs and on the tax consequences of these schemes. The respondent did so in a series of written opinions.
Mr Thornhill confirmed that there was no statement contained in the IM for each LLP in relation to taxation matters, including the section headed "Taxation Consequences of Investing in the Partnership”, which was inconsistent with his opinions. Additionally, even though he was not engaged by or instructed to advise any of the appellants, Mr Thornhill KC specifically consented to being identified as Scotts’ tax adviser and the LLP in the two relevant IMs, and to a copy of his written opinions being made available to prospective investors in the scheme on their request.

Following a decision made by HMRC several years later that the first LLP was neither carrying on a trade or business on a commercial basis with a view to profit — representing the statutory test on which the availability of tax relief for investors through trading losses incurred by the LLPs were predicated — the appellants entered into a settlement with HMRC relating to all three LLPs in 2017. In this way, the appellants agreed to pay an amount lower than that which they would otherwise have had to pay on the premise that the tax benefits were disallowed in their entirety.

The appellants alleged that Mr Thornhill KC had assumed a duty of care to them in that he had approved and endorsed the IMs, consented to being identified as tax adviser to Scotts and to his opinions being provided to prospective investors, via their independent financial advisers (IFAs) upon request. It was also alleged that Mr Thornhill negligently advised that relief would materialise and failed to identify a significant risk of the schemes being successfully challenged by HMRC. It was argued that had he advised differently, the appellants would not have invested.

At first instance, Zacaroli J dismissed the claim, finding that Mr Thornhill KC did not owe a duty to the investors in respect of the advice given in connection with the schemes and that his advice was not negligent in any event. The claimants appealed to the Court of Appeal.

The Court of Appeal's decision

In unanimously dismissing the appeal, the Court of Appeal found that no duty of care was owed by Mr Thornhill KC, applying the assumption of responsibility test re-stated in Steel v NRAM Ltd (formerly NRAM Plc) [2018] UKSC 13. Accordingly, the Court concluded that it was “...objectively unreasonable for investors to rely on Mr Thornhill’s advice without making independent inquiry in relation to the likelihood of the [schemes] achieving the tax benefits” and that “...Mr Thornhill could not reasonably have foreseen that they would do so.”

In considering whether Mr Thornhill KC had assumed a duty of care to the claimant investors, the Court relied on the fact that the schemes were unregulated and could only be promoted via IFAs, who themselves owed professional obligations to each investor. Further, the IM was the only means through which Mr Thornhill’s advice to Scotts could be obtained by a third party, where each prospective investor was required to warrant that they had taken appropriate professional tax advice.

The takeaway from McClean v Thornhill

The decision in McClean v Thornhill does not in any way represent new law, but rather illustrates the application of established principles as set out in Steel v NRAM, namely, that in order for a professional to assume a duty to a non-client recipient of advice, it must have been:
• reasonable for the recipient to rely upon it, and
• reasonably foreseeable to the professional that the recipient would do so.

Still, this decision does emphasise the fact-sensitive nature of this legal analysis, which necessarily requires a consideration of several factors, including: the relationship between the parties; the circumstances in which the advice was received; the communications around sharing the advice; and whether it was reasonable for the third party to rely on the advice without independent inquiry.

Legal disclaimer
The matters contained within this article are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions. Before acting on any of the information contained herein, expert advice should always be sought.

© Melissa Worth, June 2023