Limitation - Claim Against Accountant Out Of Time

The Court of Appeal has held that a £15 million claim against Ernst & Young is time-barred. This was because the claim was brought more than 6 years after the Claimant first suffered "damage".

The case has particular application where an accountant advises a client to enter into a particular scheme or transaction that is then alleged to have been flawed. The case highlights that time for limitation purposes will almost always run from when the client, on the back of its accountant's advice, first enters into the allegedly flawed scheme or transaction, which may be well before an easily quantifiable financial loss arises.

Background

The Claimant had sold his business and made a sizeable gain. Ernst & Young advised the Claimant how to avoid or defer Capital Gains Tax by reinvesting the sale proceeds and claiming roll-over relief. Accordingly:

the Claimant reinvested the money from his original business sale into the Claimant company, Pegasus; Pegasus then acquired companies that carried on businesses that qualified for roll-over relief and hived those businesses up into itself; some of those businesses were then sold at a loss. The scheme worked, in the sense that the Claimant was able to roll-over his original capital gain. Unfortunately, however, when the Claimant came to sell the businesses at stage 3, he found that he had to pay CGT even though he sold the businesses at a loss. The liability could have been avoided if the scheme had been structured differently; in particular if Pegasus had been set up from the start with subsidiaries to purchase the qualifying businesses.

The question facing the Court of Appeal was: when did the Claimant first suffer "damage", being the date when time will run in a professional negligence claim? If damage accrued at stage 1, when the Claimant first reinvested his money, the claim would be out of time. The Claimant argued this couldn't be the case; he only became liable to pay tax at stage 3. Further, up until the point when Pegasus acquired the companies at stage 2, the Claimant could also have avoided the tax liability by purchasing the assets of the businesses rather than acquiring the companies themselves. In that sense, any loss before stage 2 was only possible, future loss. Accordingly, he could not be said to have suffered damage at stage 1.

The decision

The Court disagreed with the Claimant. It held that from the moment he entered into the first transaction, when he reinvested his money into...