Court of Appeal upholds decision that tax silk advising investment scheme promoter owed no duty of care to investors: McClean & Ors v Andrew Thornhill [2023] EWCA Civ 446

Mr Andrew Thornhill KC, an experienced barrister specialising in tax law, was instructed to advise on the consequences of three film finance tax schemes (collectively the "Scheme") which were intended to enable investors to offset the Scheme's losses against their personal income. The written advice of Mr Thornhill KC, who had been appointed to advise the Scheme's promoter, was shared with investors in the form of Information Memorandums which stated unequivocally that investors in the Scheme would benefit from reduced tax liabilities. HMRC ultimately rejected the tax reliefs claimed by investors under the Scheme, which led to the investors bringing proceedings against Mr Thornhill KC, despite not having directly engaged his professional services.

The Claimants alleged that Mr Thornhill KC had assumed a duty of care to them in tort; that his advice in relation to the consequences of the Scheme was negligent, and on the matter of causation, that the Scheme would not have been promoted but for his alleged breach. In March 2022, Zacaroli J – whilst acknowledging the significance of Mr Thornhill KC's tax law expertise and his knowledge that the Information Memorandums containing his advice would be shared with prospective investors – held that the silk did not owe a duty of care to the investors. Further, and in any event, had a duty of care been established between Mr Thornhill KC and the investors, Zacaroli J concluded that Mr Thornhill KC would not have breached that duty as his advice was not negligent. Similarly, even if Mr Thornhill KC's advice had been negligent so as to breach that duty, on the matter of causation, Zacaroli J held that the Claimants had failed to demonstrate, first, that the Scheme would not have been promoted if Mr Thornhill KC had provided a stronger warning of the risks of a successful challenge by HMRC, and second, that the Claimants would not have invested had they received such a warning. The Claimants subsequently appealed to the Court of Appeal.

Duty of care

The Claimants' central argument (which had not been advanced at first instance) was that this was a 'prospectus-type' case. The Claimants contended that Mr Thornhill KC, by consenting to the inclusion of his advice in the Information Memorandums in the knowledge these would be received by third parties, induced the Claimants to invest in the Scheme. Accordingly, the Claimants' argument proceeded on the basis that Mr Thornhill KC owed a duty of care to the investors that was analogous to the statutory duty owed by those responsible for the preparation of a prospectus to those subscribing to the issue of shares. The Court rejected this argument as 'untenable' on the basis that the Scheme constituted an unregulated investment and that Parliament had expressly limited the statutory regime's application to regulated investments.

Applying the principles set out in the Supreme Court's judgment in NRAM v Steel, the Court also held that it was neither objectively reasonable for the investors to rely on Mr Thornhill KC's advice as if it was advice given to them, nor foreseeable that they would do so. The Claimants and the Scheme's promoter were 'commercial counterparties' on opposite sides of an arm's length transaction and it was therefore 'presumptively inappropriate' for the investors to rely on Mr Thornhill KC's advice. The Court emphasised that the Scheme had only been marketed to wealthy and sophisticated prospective investors who were able to access independent tax advice; the Information Memorandums stated plainly that prospective investors should consult their own tax advisers, and all investors were required to warrant that they had done so. The Court further held, in agreement with Zacaroli J at first instance, that the warranties were neither 'no reliance clauses', nor a disclaimer of responsibility, and that UCTA 1977 did not render these warranties unenforceable.

Breach and causation

The Court of Appeal then addressed, obiter, the question of whether Mr Thornhill KC's advice was negligent so as to breach a hypothetical duty of care owed to the investors. The Court departed from Zacaroli J's earlier conclusion and criticised the unequivocal nature of Mr Thornhill KC's advice as falling below the standard of a 'reasonably competent tax silk'.

However, ultimately, the Claimants' success on breach provided little consolation in circumstances in which their arguments on causation were rejected by the Court of Appeal. Contrary to the Claimants' submissions, Mr Thornhill KC was not required to warn investors of a significant risk that HMRC would challenge the Scheme successfully. Non-negligent advice would have involved Mr Thornhill KC giving a far gentler warning of the risks of a successful challenge by HMRC, such that the Claimants 'came nowhere close' to establishing that they would have acted differently (and avoided the loss) in the counterfactual.

Whilst the questions of whether and when a professional can be held to owe a duty to those other than their client have been the subject of much judicial consideration, including in the case of NRAM v Steel (as relied on in the Court of Appeal's judgment), the Court of Appeal's decision in McClean & Ors v Thornhill re-emphasises that the process of applying these principles in a given case is highly fact-sensitive.

This question of when professional advisers owe a duty of care to third parties was also addressed in our case briefing on another recent Court of Appeal decision, in Ashraf v Lester Dominic Solicitors. Here the Court of Appeal held that it was arguable that a solicitor owed a duty of care to a third party where that solicitor had stepped outside their role as solicitor to the client and instead assumed a role acting for the third party's benefit.