England and Wales: Scheme promoter's tax advisor is not liable to investors for their losses

Thursday, 10 March 2022
A barrister who advised a film investment partnership scheme promoter on the tax effects of its schemes did not owe any duty of care to the schemes' investors, the England and Wales High Court has ruled.
High court

More than a hundred investors sued Andrew Thornhill over his advice that the schemes, marketed 20 years ago by promoters Scotts, would provide tax benefits. The investors are members of one or more of three limited liability partnerships (LLPs) formed for the purpose of participation in the distribution of films, and potential investors were told they would be entitled to tax relief against their income or capital gains for trading losses that the LLPs were anticipated to make.

Thornhill is an eminent and experienced specialist tax barrister. Scotts hired him to provide advice on the tax consequences of the schemes to itself and to one of the LLPs, but he was not engaged to advise any of the claimants, and none of the claimants was his client. However, he did agree to being named as Scotts' tax advisor in the information memoranda given to potential investors as part of the promotional material.

HM Revenue & Customs subsequently disallowed the schemes – along with many other film partnership schemes – on the grounds that the partnerships were not really trading, even though Thornhill's quoted opinion was that they were.

This caused the investors heavy financial losses, and they sued Thornhill, alleging that he owed them a duty of care in respect of the advice he gave to Scotts and consented to being made available to potential investors, and that they relied on his advice in entering into the schemes. They argued that he breached that duty. His defence was that they were not his clients and they should have got their own legal advice. Moreover, he said, his advice was not negligent because it was correct. In fact, some claimants had taken their own advice, which was that the schemes should achieve tax benefits.

Ten of the claimants who had between them invested GBP3 million in the schemes had their cases tried as sample claims. All have now been dismissed by Zacaroli J, who concluded that Thornhill did not owe a duty of care to the claimants in respect of his advice, and even if he had, he would not have breached it in providing his opinion that the schemes would achieve the claimed tax benefits. The investors could not reasonably rely on his advice without making their own independent inquiry, said the judge. Moreover, Scotts' information memorandum to potential investors had clearly advised them to consult their own tax advisors. Investors were not allowed to join the LLP without warranting that they had relied only on the advice of, or had only consulted with, their own professional advisors.

The judge did not accept that this latter requirement was invalidated by the Unfair Contract Terms Act. His conclusion that no duty of care was owed was not based on a disclaimer of responsibility, he said. It was based on the fact that in all the circumstances, including the terms of the memorandum and subscription agreement, it was not reasonable to expect investors to rely on Thornhill's advice without independent enquiry (McClean v Thornhill, 2022 EWHC 457 Ch).


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