Tax Advisers' Negligence

Tax Advisers' Negligence — II

When has an adviser breached the duty owed to his client? KEITH GORDON MA, ACA, CTA, barrister discusses this aspect of negligence claims. HAVING CONSIDERED THE circumstances in which a tax adviser would owe a duty of care to a client and others affected by his actions or omissions in the first article of my series on negligence ('Tax Advisers' Negligence — I', Taxation , 8 July at pages 384 to 386), this article considers the second ingredient of a successful claim: whether the adviser has breached the duty owed.

Breaching the duty

It is well known that negligence law uses as its basis 'the reasonable man' or, in the more colourful description generally attributed to Sir Charles Bowen QC, later Lord Bowen, 'the man on the Clapham omnibus'.

However, while many fine tax advisers probably travel to or from south west London in a scarlet-painted vehicle, it would be inappropriate to use the reasonable man's skill and care as the standard when considering tax advice. Instead, one should consider the standard of the reasonably competent tax adviser, i.e. the reasonable person carrying out the task in hand.

While there is no clear determination of what constitutes a reasonably competent tax adviser, Mr Justice Oliver (as he then was) in Midland Bank v Hett, Stubbs & Kemp [1979] Ch 384 said:

'It may be that a particularly meticulous and conscientious practitioner would, in his client's general interests [act beyond the terms of his retainer] … But that is not the test. The test is what the reasonably competent practitioner would do having regard to the standards normally adopted in is profession.'

Specialist or general practitioner?

However, the tax profession, like most others, is generating specialisms. If a general practitioner undertakes a task for which specialists are often engaged, the question to be asked is what is the required standard of skill and care? See the Example , which sets out the facts of Whiteoak v Walker [1988] 4 BCC 122.

The decision in Whiteoak v Walker shows an apparent difference in approach between claims against the accountancy profession and claims against medical practitioners. In the latter, a higher standard would be expected from someone in a senior position than a junior doctor. In Whiteoak , the distinction was justified on the basis that, in medicine, different tasks are generally carried out by practitioners who have different levels of seniority. Within the tax profession, it is also common for tasks to be delegated to staff in accordance with their level of experience. However, ultimately, that is the decision of the firms themselves and not an excuse that can be proffered to clients if things subsequently go wrong.

While the decision in Whiteoak on this point was probably correct on the facts, the 'one size fits all' approach to the standard of skill and care seems wrong. In Whiteoak , the court was referred to Wilsher v Essex Area Health Authority [1987] QB 730 (which was subsequently heard by the House of Lords, see [1988] AC 1074). However, the Wilsher test is not necessarily the appropriate one for tax advisers. More relevant to the issues of specialisms within a profession is the House of Lords authority in, for example, Sidaway v Governors of Bethlem Royal Hospital [1985] AC 871. In that case, Lord Bridge held:

'the [appropriate] test clearly requires a different degree of skill from a specialist in his own special field than from a general practitioner.'

Applying this test, if Mr Whiteoak's shares had been valued by a specialist valuation firm, the appropriate level of skill and care would have been that of a competent share valuation expert. This appears to have been the reasoning behind the decision in Matrix Securities v Theodore Goddard [1998] STC 1. There, Mr Justice Lloyd held that a City firm of solicitors offering tax advice should be judged according to the standard of (a reasonably competent) firm of solicitors with a tax department.

Example

In 1982, a director/shareholder of a company instructed the company's auditor to value the company's shares, which he would then sell to another director under a pre-emption provision in the company's articles. The appointment of the auditor for this task was provided for in the articles. The director subsequently felt that the shares had been undervalued and sought to obtain damages from the auditor. A well-known share valuation expert gave evidence in support of the plaintiff.

However, the court held that the appointment of the auditor meant that the higher standard of skill and care which would have been exercised by the share valuation expert did not represent the right threshold in this case. As Terence Cullen QC said in his judgment, 'I have no doubt that [the parties] intended their auditor to apply his skills and did not intend that he should bring to bear the skills of a specialist valuer'.

Differences of approach

As anyone who has worked in more than one practice (or, sometimes, for more than one principal in a large practice) will know, there is more than one way of doing something. In the context of a tax practice, this might involve adopting different methods for ensuring that time limits are adhered to, or the employment of different tactics in the face of an Inland Revenue investigation.

Provided that a person acts in a competent way, the courts will not find him negligent even if, with the benefit of hindsight, it turns out that the client has suffered as a result of a particular course of action. This is neatly illustrated in Duchess of Argyll v Beuselinck [1972] 2 Lloyd's Rep 172. That case concerned a solicitor who was asked to advise on the risk of libel in respect of the plaintiff's proposed publications. The solicitor, having read some of the material, raised the issue of copyright and, seeing the volume of the material, considered raising the possible tax consequences. However, in the circumstances, he chose not to. The plaintiff consequently incurred a tax liability which she was not expecting. She then sued her solicitor. Having set out the facts, Mr Justice Megarry dismissed the claim holding: 'hindsight is no touchstone of negligence. The standard of care to be expected … must be based on events as they occur, in prospect and not in retrospect'.

Generally, following standard industry guidelines will protect tax advisers from claims of negligence against them. However, the courts will not be so sympathetic if they feel that the person has been negligent, even if following a standard practice (see G & K Ladenbau (UK) Limited v Crawley & de Reya [1978] 1 WLR 266). Further, even if a practice is universally adopted by the profession, the courts will not be precluded from finding negligence. In the words of Mr Justice Walsh in the case of O'Donovan v Cork County Council [1967] IR 173:

'If there is a common practice which has inherent defects which ought to be obvious to any person giving the matter due consideration, the fact that it is shown to be widely and generally adopted over a period of time does not make the practice any less negligent. Neglect of duty does not cease by repetition to be neglect of duty.'

Different views of the law

The above section dealt with situations where a perfectly valid approach taken by a tax adviser has, nevertheless, had unfortunate consequences for the taxpayer. In such cases, the outcome could only have been known with the benefit of hindsight. However, these cases can be distinguished from situations where different members of the profession have contradicting opinions about the interpretation of a particular statute. If the matter ever goes to court, the judges will provide an answer which is deemed to have always been correct. But does that mean that all advisers who, prior to the judgment being delivered, advised otherwise have been negligent? For example, will they be liable for the tax that could have been saved had the adviser not dismissed a particular scheme? Alternatively, would the tax adviser be correct to make a disclosure of a particular 'avoidance arrangement' in a particular set of circumstances?

Elkington v Holland (1842) 9 M&W 659 held that a lawyer was not guilty of negligence when 'the utmost that can be said is, that he has misconstrued a doubtful act of Parliament'. So, provided that the adviser reaches a tenable view of the law, his advice is not negligent even if the view turns out to be wrong ( Bell v Strathairn & Blair (1954) 104 LJ 618).

The British Columbia Supreme Court went further in Ormindale Holdings Limited v Ray, Wolfe, Connel, Lightbody & Reynolds (1981) 116 DLR (3d) 346. There, Mr Justice Taylor considered the question as to when a legal adviser should tell his client that the opinion on the law may nevertheless be wrong. This, as is often the case, depends on the particular facts. If the client is unaware of the inherent risk that the advice may be wrong, then a warning should be given. On the other hand, if a client wants 'straight answers, no waffling, no "in my opinion" answers', the learned judge held that such caveats were unnecessary. In Ormindale , the scheme being sold to the plaintiffs was marketed as a loophole which would yield them a profit of $5.5 million. While not decisive, the judge found the expectation of risk in speculative deals and the relative newness of the scheme being marketed as indicators that the plaintiffs should have been aware of the risk of failings in the advice. Consequently, he dismissed the claim for negligence.

However, the absence of a 'health warning' was a negligent omission in the case of Port of Sheerness Limited v Brachers (1997) IRLR 214 where the disputed point was known to be moot. Mr Justice Buckley held that 'the unfortunate state of the law might lend support to the argument [underlying the solicitor's advice, but] it equally illustrates that no competent solicitor could reasonably have advised in the terms [the solicitor] did'.

In either case, if the advice concerns a relatively straightforward point of law, an adviser would be negligent if the advice thereon were incorrect ( Otter v Church Adams Tatham & Co [1953] Ch 280).

So when a tax adviser is truly unsure about the effect of a particular legislative provision, but wants to give a definitive answer to the client, the adviser should consider seeking a second opinion.

Palmer v Moloney

In Palmer v Moloney and another [1999] STC 890, these points were not expressly addressed by the courts. That case concerned the former retirement relief provisions in the Taxation of Chargeable Gains Act 1992. It turned on whether the claimant, who spent on average forty-two and a half hours a week working for his company, was a full-time working officer or employee of a company. To satisfy this requirement, the claimant had to show that he was required to devote substantially the whole of his time to the service of that company. The problem was that Mr Palmer also spent seven and a half hours working for another company. In order to mitigate the tax due on the disposal, Mr Palmer's accountants recommended the payment of stock dividend (on which higher rate tax would be paid at the effective rate of 25 per cent) in order to eliminate a 40 per cent capital gains tax liability.

In the High Court (reported at [1998] STC 425), Mr Justice Laddie held that Mr Palmer did not qualify as a full-time working officer or employee of the company. Consequently, Mr Palmer had not paid tax unnecessarily. In the Court of Appeal, two judges (Lord Justices Aldous and Clarke) held that the purpose of the legislation was to benefit people in Mr Palmer's position and that, therefore, retirement relief would have been available. The third, Lord Justice Nourse, disagreed.

This meant that, during the course of the litigation, two learned judges agreed with the interpretation of the legislation put forward by the first defendant and his firm (the second defendant), whereas two judges favoured the claimant's view. Further, Lord Justice Clarke confessed to finding the legislation 'difficult to construe'.

While the defendants, in the view of the majority of the Court of Appeal, got the law wrong, it would appear that theirs was at least a tenable view and that, arguably, they should not have been found to have been negligent. However, what is not clear from the reports of the case, was the extent to which the defendants had ever considered the alternative view. It is possible that this omission was the most serious failing and the indicator of negligence (see Port of Sheerness Limited above).

When the law changes

From a practical point of view, how soon, after a judgment is given, is a reasonable tax adviser expected to make himself aware of the court's ruling? Alternatively, is a tax adviser always expected to be immediately aware of a proposed change in the law, which is heralded by press release, to take immediate effect? I am not aware of any authority on these points and would, in its absence, suggest that the timescale would depend on the facts.

For example, reasonably competent tax advisers ought to be aware of the likelihood of proposals being made on Budget day. However, it is at least arguable that ad hoc announcements are not necessarily within the reasonable contemplation of the reasonable competent tax adviser. On the other hand, a different conclusion might be reached if the adviser is a Queen's Counsel specialising in tax (and senior counsel's opinion is specifically being sought). In such a case, one might expect 'the rather small and select group of silks specialising in tax matters' to check daily for any changes in the law (the description being taken from Mr Justice Lloyd's judgment in Matrix Securities ).

The final article in this series will consider the third and fourth requirements for a negligence claim: that the client has suffered a loss and that it was caused by the defendant's negligence.

Issue: 3968 / Categories: Comment & Analysis