Halsall v Champion Consulting – High Court of England and Wales finds that knowledge that advice – that investing in a tax shelter was a “no brainer” - was negligent, commenced when HMRC started investigating

Investors in a UK charitable gift tax shelter subscribed for shares of a shell company and then, a short number of days later after the shell company had been listed on the AIM, donated their shares to a charity and claimed tax reductions on the basis that the shares had appreciated in value by four times. The scheme depending on this appreciation in fact occurring, and this 4X valuation was based on small trades that had contemporaneously occurred in those shares on the AIM market. However, trading was extremely thin, and the claimants’ expert speculated that the trades were bogus, i.e., had occurred between related persons. However, this point was never tested as the HMRC's complete denial of the claimed tax relief had ultimately been accepted by the investors.

The tax accountant, whose firm was sued in negligence, had orally advised the investors that it was a “no brainer,” which referred to there being “100% assurance that their tax liability would be reduced,” rather than to the acumen of the investors, who were lawyers who had not read the prospectus and claimed to have not appreciated the risk.

Moulder J accepted a statement in the House of Lords that there is no liability of a professional “for damage resulting from what in the result turns out to have been errors of judgment, unless the error was such as no reasonably well-informed and competent member of that profession could have made," but, unsurprisingly, found that that standard had been breached here given the failure to warn that the scheme had a share valuation risk. She also rejected an argument that this valuation risk should have been apparent to the claimants.

However, she dismissed the claims on the basis that (under the applicable limitations rule) they had not been made within three years of knowledge of negligence coming to light. Moulder J found that this time occurred when the claimants became aware that the charity scheme was under investigation by HMRC - and at that point they should have investigated rather than accepting the tax accountant’s assurances “that the Revenue was misguided and they would achieve substantial tax mitigation.”

Moulder J arrived at similar conclusions respecting a 2nd tax shelter that the claimants had participated in, notwithstanding that another tax accountant at the same defendant firm had more conservatively advised “that the prospects of success of the film scheme were 75%.”

Neal Armstrong. Summary of Halsall & Ors v Champion Consulting Ltd & Ors [2017] EWHC 1079 (QBD) under General Concepts – Negligence.