In the recent third party claim of McClean v Thornhill (2022) the court had to determine a plethora of legal issues, including whether a leading tax barrister instructed by the promoter of three film finance schemes owed an actionable duty of care to various third party investors.
The Claimants were all members of one or more of three limited liability partnerships (‘LLPs’) that had been created for the purposes of distributing films in the US, UK and Canada (‘Schemes’).
The Schemes were promoted by Scotts Private Client Services Ltd and Scotts Atlantic Management Ltd (collectively ‘Scotts’) and were marketed to the Claimants on the basis that their investment would entitle them to tax relief against their income or capital gains, for trading losses that the LLPs were expected to make.
Andrew Thornhill QC was a leading tax barrister who had been engaged by Scotts to advise on the merits of the Schemes and who had provided written opinions dated 28 January 2003, 20 October 2003 and 27 February 2004 (‘Opinions’).
The Schemes had been promoted to the Claimants using information memorandums, which Mr Thornhill had confirmed were not inconsistent with his Opinions and in which Mr Thornhill had been content to be named as a tax adviser to Scotts. Mr Thornhill had also consented to his Opinions being made available to any potential investor upon request.
However, in September 2016 HMRC issued a Closure Notice in respect of at least one of the Schemes, confirming its decision to refuse the tax relief claimed in relation to it. HMRC subsequently issued a settlement offer, which all the Claimants accepted.
Professional negligence proceedings were then issued against Mr Thornhill on 5 July 2018. Although the total number of individual Claimants exceed one hundred, a sample of ten claims were initially selected for trial.
Issues for determination
The court was invited to determine a number of issues that were common to all claims, as well as certain issues specific to the ten individual cases comprising the sample. These issues included:
- Whether Mr Thornhill owed the Claimants, as investors in one or more of the Schemes, a duty to take reasonable care in advising upon tax matters relating to the Schemes;
- Whether Mr Thornhill had been negligent in providing the Opinions and in endorsing the information memorandums;
- What advice Mr Thornhill should have given and, if he had, whether the Schemes would have been promoted by Scotts and invested in by the Claimants;
- In deciding to invest in the Schemes, whether the Claimants relied upon Mr Thornhill’s advice and/or endorsement;
- Whether the claims were in any event time-barred under the Limitation Act 1980;
- What recoverable losses the Claimants could recover from Mr Thornhill.
Decision of the High Court
After a 14-day trial in November and December 2021, Mr Justice Zacaroli handed down his reserved judgment on 8 March 2022.
Duty of care
In assessing whether or not Mr Thornhill owed any duty of care to the Claimants, the judge observed that the information memorandums used to promote the Schemes, expressly stated (amongst other matters) that:
- The Schemes were only directed at investment professionals who had experience of participating in unregulated collective investment schemes;
- Prospective members of the Schemes were advised to consult their tax advisers in relation to the taxation consequences of investing in the LLPs;
- There was no guarantee that HMRC would agree that the tax reliefs described in the document would be applicable to the individual member.
The judge also noted that within the subscription documents, the Claimants were required to confirm (again, amongst other matters) that:
- They were experienced in business matters and recognised that the Schemes were speculative ventures;
- They had only relied on the advice of, or had only consulted with, their own professional advisers with regard to tax, legal, currency and other economic considerations related to subscription in the LLPs;
- Neither Scotts nor the LLPs were responsible for assessing the suitability of the Schemes for the prospective member, any needs or any purpose or aim of the prospective member;
- It was the responsibility of the prospective member to obtain appropriate advice, recommendations and assessment from an independent financial adviser or other suitably qualified person.
In addition, the judge noted that the nature of the Schemes were such that the Claimants had in reality been acting as buyers in a commercial transaction in which Scotts, by whom Mr Thornhill was retained, was acting as seller and on the opposite side.
Having considered various case authorities, including the seminal case of Hedley Byrne & Co Ltd v Heller & Partners Ltd  AC 465 and the more recent decision of the Supreme Court in NRAM Ltd v Steel  UKSC 13, the judge observed that in determining whether a duty of care is to be imposed on a person, it is necessary to have regard to all the circumstances of the case. Moreover, and while there were certain facts that militated towards imposing such a duty in this case, they could not be viewed in isolation.
The judge concluded that of more critical importance here were the terms of the information memorandums and subscription documents (the material parts of which are set out above). These documents were known to Mr Thornhill and acutely relevant to the issue of whether or not Mr Thornhill could reasonably foresee that the Claimants would rely upon his advice. Taking these documents into account, the judge determined that it was objectively reasonable to assume that independent professional advice would indeed be taken by the Claimants, as they were advised to do and were required to warrant that they had done.
Accordingly, the judge found that no duty of care had been assumed by Mr Thornhill to those Claimants who received a copy of his opinions. The judge also found that there could be no duty of care owed to those other Claimants who had not received copies of the Opinions, as no advice from Mr Thornhill had ever been communicated to them.
Breach of duty
Although, absent any duty of care, the Claimants were unable to establish any liability on the part of Mr Thornhill, the judge nevertheless went on to consider the Claimants’ assertion that no reasonably competent tax QC could have advised in the terms set out in the Opinions, such that Mr Thornhill had acted in breach of duty.
Again, however, the judge was unpersuaded by the Claimants’ contentions. He considered, based on the state of the authorities in 2002-2004 amongst others matters, that the approach which Mr Thornhill took (and the advice that Mr Thornhill gave) was that which a reasonably competent tax QC could have taken.
The judge also considered the Claimants’ alternative assertion that Mr Thornhill breached his duty of care by failing to give a specific warning that there was a significant risk that the tax benefits promised would not be available. However, he rejected this assertion too and on the grounds that no duty to warn the Claimants arose. In doing so, the judge observed that the case authorities upon which the Claimants placed their reliance concerned the duty of a solicitor to issue a warning to his client, which in this case was not in fact the Claimants but Scotts, which were themselves highly sophisticated and likely to have been fully aware from their experience of promoting tax avoidance schemes of the issues to which they gave rise and the risks associated with them.
On the assumption that, contrary to his conclusions, Mr Thornhill owed a duty of care to the Claimants which he had breached, the judge proceeded to address the issues of causation and reliance.
However, the judge rejected the Claimants’ principal assertion that if Mr Thornhill had given an appropriate risk warning, then the Schemes would not have been marketed at all and so none of the Claimants would have invested. This was on two footings:
Firstly, the judge concluded that such an assertion was wrong as a matter of law. This was because it relied upon a duty being owed to the Claimants to take care that the advice given to Scotts was correct, whereas the duty relied on by the Claimants was a duty to take reasonable care to ensure that advice provided to them was correct.
Secondly, and on the basis of the limited evidence presented, the judge concluded that the Claimants had failed to establish as a matter of fact that there would have been no Scheme in the event that Mr Thornhill had advised differently.
As to any reliance the Claimants would have placed on an appropriately worded risk warning, the judge was mindful not only that the Schemes had ultimately failed with disastrous results for the Claimants, which could taint their evidence, but also that any assertion of reliance would depend on events that had occurred some 18 years prior and be at odds with the Claimants’ decisions to invest in the Schemes, despite the other risk warnings contained within the subscription documents.
He also observed that some Claimants had not received copies of the Opinions at the time, while for others they had been filtered through an IFA, from whom no evidence had been adduced.
Ultimately, therefore, he concluded that none of the Claimants had established causation on a balance of probabilities.
Finally, the judge turned his attention to Mr Thornhill’s assertion that the Claimants’ claims were time-barred in any event under the Limitation Act 1980 (‘1980 Act’).
For the purposes of section 2 of the 1980 Act, the judge concluded that the Claimants suffered damage upon making the investment at the time they entered into the Schemes, which in each case was more than six years prior to the issue of their Claim Form on 5 July 2018.
The judge also concluded that section 14B of the 1980 Act barred any claim which was brought more than 15 years after the date on which there occurred any act or omission alleged to constitute negligence and here, that covered the claims relating to Mr Thornhill’s first opinion dated 28 January 2003.
As regards section 14A of the 1980 Act, the judge considered that none of the Claimants were fixed with knowledge of their claims upon receipt of the Discovery Assessments issued by HMRC to some members of the LLPs in December 2009 or upon receipt of a related letter from Scotts to all members on 14 December 2009, which advocated a need to appeal them. Otherwise, the judge addressed section 14A on a Claimant specific basis, concluding that with one exception, none of the claims relating to Mr Thornhill’s second and third opinions would have been time-barred.
In view of the judge’s findings on liability, he did not consider any of the issues raised in the written submission he had received in respect of loss and damage.
Comments and observations
It remains to be seen whether the Claimants seek permission to appeal. Given the significant level of investments collectively made by the Claimants (reportedly over £100 million) and the losses likely to flow from them, as well as the substantial litigation costs liability that the Claimants are likely to have incurred, this would not be surprising. That said, the judgment given is thorough and well-reasoned, and the Claimants will have to overcome multiple hurdles if they are ever to achieve success.
As it is, this decision arguably and more broadly reflects the cautionary approach consistently taken by the courts in this area. While in the right circumstances third party claims have succeeded, and will continue to succeed, the goalposts have been kept intentionally narrow. This itself is a reflection of wider public policy and (it is often argued) the need to maintain a sustainable professional services sector, in which claims exposure is both proportionate and insurable.
This decision also reflects the customary approach taken by the courts, particularly in professional negligence claims and when determining events that occurred many years prior to trial, to place greater evidential weight on the contemporaneous documents than on the testimony of witnesses. Further, the decision emphasises that when determining whether a duty of care exists (as well as the scope of any duty of care), engagement documents will almost always be germane and an appropriate starting point of any analysis.
For anyone interesting in reading the full judgment (which runs to c.114 pages), this can be found here: David McClean and others v Andrew Thornhill QC  EWHC 457 (Ch)
Film finance schemes have received considerable media attention in the last 10 years, not least because of the number of high-profile celebrities that have invested in them, only later to be villainized as tax dodgers in the court of public opinion.
Further information about the history of film finance schemes and how they were arranged can be found in the following insightful articles:
- FT Adviser – High drama as film tax relief flops
- Tax Journal – Tax relief for film investment
- HMRC – HMRC wins blockbuster tax avoidance cases
- Confluence Tax – Rise and fall of film partnerships
In addition, more general information about the nature and continued prevalence of marketed tax avoidance schemes in the UK can be found in the following report recently published by HMRC: Use of marketed tax avoidance schemes in the UK
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