Bad advice, limitation and tax avoidance
When does the claimant’s cause of action accrue in a professional negligence case? In particular, at what point has the claimant suffered a recoverable loss? This question is of course most relevant when a potential limitation defence arises under section 2 of the Limitation Act 1980, and is an issue that the courts have struggled with for some time. The recent case of Halsall v Champion Consulting Limited  EWHC 1079 (QB) serves as a useful reminder of the difficulties that can arise in this area.
Four lines of authority
The cases on this issue do not speak with one voice, and the courts have made several attempts to classify the different lines of authority, none of which are completely satisfactory. At least four distinct strands of reasoning can be seen in the cases.
First are the cases following Forster v Outred  1 W.L.R. 86; these are cases in which the court is able to identify an immediate loss suffered by the claimant upon entering into a transaction. In Forster, the claimant guaranteed a loan to her son with a mortgage on her house, having been advised (negligently) by solicitors to do so. The money was invested in her son’s business. When the business subsequently failed, the guarantee was called in, and the claimant brought a claim against her solicitors for her losses. It was held that the claimant had suffered an immediate loss by allowing the bank to take a charge over her house; accordingly, the cause of action was complete at that time, and the claim was now statute-barred.
The second is exemplified by Nykredit Mortgage Bank Plc. v Edward Erdman Group Ltd. (No.2)  1 W.L.R. 1627. These are cases where the claimant enters into a transaction “on which there are benefits… as well as burdens.” In such a case, a loss arises only when the burdens outweigh the benefits, such that the claimant is in a financially worse position than they otherwise would have been. In Nykredit, the claimant lender had advanced sums against security over a property. It was later discovered that the property had been negligently overvalued by the defendant, as a result of which the claimant had insufficient security when the borrower (almost immediately) defaulted. It was held that the claimant’s cause of action arose only when the value of the security fell below what was required to secure the sums advanced (and any associated costs).
The third is illustrated by Law Society v Sephton & Co  UKHL 22. These are cases in which the claimant incurs a liability which is ‘purely contingent’ upon some future event. A loss will only arise when that contingency occurs. That case arose out of the misappropriation of client funds by a solicitor. His returns to the Law Society were audited by the defendant accountants, Sephton & Co; they (negligently) did not pick up the fraud. The Law Society were obliged to make payments out of its funds to cover claims by clients of the malfeasant solicitor, and they brought a claim against Sephton in respect of this loss. It was held that the Law Society’s cause of action did not accrue until claims were made against it.
A fourth type of case is exemplified by Shore v Sedgwick Financial Services Ltd  EWCA Civ 863. In these cases, it has been held to be enough if the claimant suffers some sort of commercial disadvantage (not necessarily an immediate financial loss) as a result of the negligent advice. In Shore, the claimant had transferred his pension pot into a personal pension income withdrawal scheme, having been negligently advised that the scheme would give him a safe investment and steady income. In fact, the new scheme was risky, and subsequently suffered loss. It was held that the claimant suffered an immediate loss on transfer into the new scheme, because the scheme was immediately less advantageous to him than the safe investment that he had wanted.
“Commercial disadvantage” as sufficient damage
None of these cases sit easily alongside one another, but perhaps the biggest surprise is that the fourth category exists at all. It appears to be inconsistent with earlier authority, not least the House of Lords’ decision in Sephton.
For example, in Shore Dyson LJ said that:
“It is the possibility of actual financial harm that constitutes the loss. That possibility is present even if there is also the possibility that the claimant will be financially better off as a result of being exposed to the risk.”
This line of reasoning appears difficult to reconcile with Lord Mance’s statement in Sephton that
“Even where negligence brings about a specific transaction and thus a change in the claimant’s legal position, Lord Nicholls observed in the Nykredit (No 2) case  1 WLR 1627, 1631 c – d in the passage cited in para 73 above, that the mere entry into the transaction under which ‘Financial loss is possible, but not certain’ is not sufficient detriment.”
A similar point could be made in relation to Pegasus Management Holdings SCA v Ernst & Young  EWCA Civ 181, another case concerning tax advice. The claimant acquired shares as part of a series of transactions intended to mitigate his capital gains tax liability on disposal of his business. In fact, he acquired shares (on the negligent advice of E&Y) that did not have the necessary characteristics to make the tax planning work. The claimant remained able to mitigate his capital gains tax charge, but the process was more complicated than had been anticipated. Rimer LJ said:
“The alleged flaw in E&Y’s advice was therefore a material one, which immediately reduced Mr Bradbury’s flexibility. It left him in a materially worse commercial position than he ought to have been in by inhibiting the way in which he might go about acquiring qualifying trades… Mr Bradbury was not thereby inevitably doomed to suffer the Adverse Consequence [incurring an increased capital gains tax liability] but he was thereby tied into a commercially disadvantageous straightjacket.”
That, again, is difficult to square with the following passage from Lord Walker’s judgment in Sephton:
“In Nykredit the expression “worse off” was used by Lord Nicholls (in discussing the authorities mentioned at p1634E and H) and by my noble and learned friend Lord Hoffmann (at pp1638D and 1639D: in the last reference the phrase is “financially worse off”). This latter formulation seems to me to be preferable, if I may respectfully say so, since the colloquial phrase “worse off” (like “detriment”) is imprecise. A bank or building society which (in reliance on a negligent valuation) lends £1m on a property said to be worth £1.5m but actually worth £1.25m is in a sense worse off (or has suffered a detriment) in that it has a margin of security of only one-fifth of the sum secured, rather than one-third. But so long as the borrower’s covenant is good, it has suffered no loss.”
Halsall v Champion Consulting Limited
These difficulties surfaced once again in the recent case of Halsall v Champion Consulting Limited  EWHC 1079 (QB), a case concerning negligent tax advice. In that case, the claimant investors had been given advice about a tax avoidance scheme known as “charity shells.”
Under the scheme, the claimants subscribed for shares in a shell company, which would in turn acquire a target. The shell company was then floated on AIM at a significantly increased price (four times the price at which the claimants had subscribed), and the shares were gifted by the claimants to a charity. The investors would then claim gift relief, using the listing price on AIM as the value of the shares for the purposes of the relief claim.
The defendants, Champion, advised the claimants (rather boldly) that the scheme was “not susceptible to challenge by HMRC” and gave a “100% assurance” that tax relief would be obtained. In the face of this strong advice, the claimants entered into the scheme, investing in around 2003.
In 2009, HMRC began an inquiry into the valuation placed on the shares, and the claimants contacted Champion to seek clarification of the position. Champion gave reassurances that the tax relief would ultimately be confirmed. The inquiry continued for a further seven years, and the scheme was challenged before the tax tribunal in April 2014. HMRC won that case, and the claimants had to pay the tax due on the amounts for which they had claimed gift relief reflecting the inflated value of the shares.
The investors sought to bring a claim against Champion for the advice it had given in respect of the scheme; that claim was defended on the basis that it was issued outside the limitation period, on 6 March 2015.
In a substantial judgment running to some 374 paragraphs, HHJ Moulder examined a range of issues: scope of duty, breach, causation, contributory negligence, and limitation. She found for the claimants on liability, but held that the claim was statute-barred. The judgment is impressive for the sheer amount of ground that it covers, but for present purposes it is the reasoning on limitation that is of most interest.
In addressing the limitation issue, HHJ Moulder adopted the reasoning of Pegasus and Shore, following the passages set out above. She concluded that the claimants were ‘tied into the commercial straightjacket’ from the date on which they contracted to purchase the shares. When they did so:
“they suffered damage, not because the shares were then worth less than the claimants paid for them, but because the purchase of the shares would not give the claimants the result that the defendants had assured the claimants would result i.e. the tax relief.”
As with Pegasus and Shore, this appears entirely at odds with the reasoning in Sephton and other cases. Daniels v Thompson  EWCA Civ 307 is authority that an individual does not suffer a loss purely because negligent advice frustrates the purpose for which it was sought. Applying this reasoning, the fact that “the purchase of the shares would not give the claimants the result that the defendants had assured the claimants would result” appears insufficient. Subjectively, the purpose for which the claimant entered into the transaction has been undermined – what they have acquired does not have some attribute which was material (perhaps crucial) to them when they decided to proceed. But objectively, they have suffered no financial loss – the Halsall claimants have shares that are worth what they paid for them, in the same way that the bank in Nykredit still has sufficient security and therefore suffers no loss.
Contingent liability in tax cases
Halsall also touches on another question, which is peculiar to tax cases. Does a claimant who enters into a failed tax avoidance scheme on the basis of negligent advice suffer an immediate loss, or does their loss only arise when the tax avoidance scheme subsequently fails? In the case of Daniels, the Court of Appeal said (obiter) that the cause of action would accrue when the claimant “did not take steps which would have ensured” that the tax position was mitigated, which suggests an early accrual date.
In Halsall, HHJ Moulder did consider an argument that the case was one of a purely contingent liability. She rejected the suggestion that damage to the claimant was contingent upon the outcome of the HMRC inquiry and the investigation. She relied upon the case of Integral Memory Plc v Haines Watts  STI 1385, a case concerning liability to interest charges on unpaid NIC. In that case the court said:
“There was either an actual liability to pay NIC and interest on arrears or there was not. The existence of such liability is not contingent on HMRC succeeding or failing in a tax tribunal… All the tribunal or court is deciding is whether or not there is an actual liability.”
This reasoning appears to be correct insofar as it rejects the idea that liabilities are contingent on the outcome of court cases. However, any analogy between interest on NIC interest charges and the facts of Halsall is a bad one, and overlooks an important distinction. Unlike NIC interest (which arises automatically), the gift relief upon in Halsall must be claimed by the taxpayer through their tax return. The tax liability position of the claimants was not affected at all until they made such a claim.
A powerful argument could be made that the claimants suffered a loss when they gifted the shares to the charities, on the basis of advice that they would be able to claim gift relief. Although their tax liability was not affected at that point, they had suffered a genuine loss – a loss of the (true) value of the shares. Indeed, the judgment in Halsall was put on this basis as an alternative.
It is, however, difficult to see an argument that a loss was suffered any earlier, as it is still dependent upon subsequent events or steps being taken. If, having purchased the shares, the claimants decided simply to keep them, could they truly have brought a claim on the basis that the charity shells scheme would have failed had it been carried through? It is submitted that such a claim would be premature.
The court’s reasoning on the issue of when a cause of action will accrue for the purposes of section 2 of the Limitation Act 1980 illustrates the difficulties with the Pegasus and Shore lines of cases. It is hoped that the Supreme Court will take an opportunity in the near future to review this line of authority, and insist once again upon actual financial loss before a cause of action will arise, in line with the House of Lords’ decision in Sephton.
 Per Lord Hoffmann in by Law Society v Sephton & Co  UKHL 22, at paragraph 
 Shore v Sedgwick Financial Services Ltd  EWCA Civ 863, at paragraph 
 Law Society v Sephton & Co  UKHL 22, at paragraph 
 Pegasus Management Holdings SCA v Ernst & Young  EWCA Civ 181, at paragraph 
 Law Society v Sephton & Co  UKHL 22, at paragraph 
 Champion also advised on a second scheme, the “Scion film scheme,” but substantive discussion of the issues under section 2 of the Limitation Act 1980 related solely to the charity shells scheme.
 In that case, it was held that a testator who acts on the basis of negligent inheritance tax advice does not suffer a loss, because the liability to inheritance tax is that of those who inherit.
 Integral Memory Plc v Haines Watts  STI 1385, at paragraph 32
 As was pointed out in Integral Memory, we would not conventionally speak of liability under a normal contract being contingent on the outcome of a court case in which the validity of the contract was challenged.
 Income Tax Act 2007, s.431(1)(b).
 Halsall v Champion Consulting Limited  EWHC 1079 (QB), at paragraph 
 An argument could be made for immediate recovery of the transaction costs, but that was not the basis of the reasoning in Halsall.
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