A Taxing Question: Just When Does A Duty Of Care Arise?

• Published date: 05 June 2023
• Subject Matter: Litigation, Mediation & Arbitration, Media, Telecoms, IT, Entertainment, Court Procedure, Broadcasting: Film, TV & Radio
• Law Firm: Cooley LLP
• Author: Mr Benjamin Sharrock

The decision of the Court of Appeal in the closely watched case of David McClean & Ors v. Andrew Thornhill KC¹helpfully rearticulates the established principles governing when a duty of care may arise and the scope of such a duty. It is widely understood that any professional advice needs to be given with sufficient confidence as to allow the recipient to act upon it, but in addition, that the risks associated with that advice also need to be clearly outlined, so that the recipient is not blind to potentially adverse consequences. How this balance is navigated is difficult and only becomes more so when the recipient of the advice wants to share it with third parties to give them comfort on the issues at hand.

Factual background

In 2003, three limited liability partnerships were formed to acquire distribution rights to films. The schemes were promoted by Scotts Private Client Services Limited and Scotts Atlantic Management Limited.

The schemes were advertised to potential investors through information memoranda which, in addition to other promotional materials, explained that any investor in the schemes would be entitled to certain tax relief benefits. With more than '100 million being invested in the schemes, the potential tax benefits that could be sought amounted to almost '40 million.

Andrew Thornhill QC (as he was at the time) was engaged by Scotts to provide advice on the tax benefits, and Thornhill confirmed in a letter to Scotts that there was nothing inconsistent between the information memoranda and his advice on the tax benefits. Thornhill also consented to Scotts naming him as their tax adviser in the information memoranda and for his advice to be shared with any potential investor in the schemes.

The tax benefits were dependent upon the schemes meeting certain statutory tests. In 2004, Her Majesty's Commissioners of Inland Revenue opened an investigation into the schemes. The opening of enquiries into each of the schemes was treated by Her Majesty's Revenue & Customs (HMRC) as an enquiry into each member of the schemes. It was determined by HMRC that the schemes did not meet the statutory tests necessary to achieve the tax benefits, and, in 2017, the investors in the schemes entered into a settlement agreement with HMRC.

The investors in the schemes brought a claim against Thornhill in 2018 on the basis that he owed the investors a duty of care, which he had breached by negligently advising on the tax benefits of the schemes. It was claimed...