Mr Rooney’s investment was well before the General Anti-Avoidance Rule came into effect, so it follows that HMRC could only challenge his investment if there was some aspect of it that contravened tax law. It also seems inherently unlikely that anyone would invest significant sums in a ‘tax scheme’ without believing that it operated within the applicable tax laws.
As lawyers specialising in professional negligence claims, we have been involved in many cases resulting from tax planning gone wrong. However, typical claimants are not high-profile celebrities (though we have had a few of those), but are typically high net worth individuals such as doctors and dentists, who have always used the services of a financial adviser.
Apparent risks
In our experience, pushing the limits of tax law create two particular risks for investors. First, there might be uncertainties about the exact extent of what was legal. For example, in a film sale-and-leaseback scheme such as Invicta 43, tax relief might be sought against the expense of producing a film. But while payments to actors and film crew might seem obvious expenses of producing a film, it might be more ambiguous as to whether promotional costs would be allowable for tax purposes in the same way.
A typical investor is unlikely to spot or appreciate this type of risk. It is therefore important they are either made aware by their professional advisers of the relevant risks, or made aware that they are not being advised.
Second, when tax law is being pushed to its limits – and this may vary from one tax year to the next – it can be important for the success of these schemes that they are implemented correctly and on time. For example, if an investor decides to proceed, but his investment is not implemented before a change in tax law occurs, then the investor might incur expense without securing the expected advantages.
It is therefore important for professional advisers to ensure arrangements are in place at the correct time to ensure schemes are implemented correctly.
Due to the sometimes highly leveraged nature of some of these investments, the losses – if they go wrong – can considerably exceed the sums originally invested. If HMRC is seeking significant back tax or even penalties, it would be natural for the investor to wonder whether they had a professional negligence case against their adviser.
Key points
• It was recently reported that Wayne Rooney was at risk of being hit with a £5m tax bill.
• There is a difference between advising on a course of action and providing information.
• Advisers could be subject to complaints if they do not take enough precautions.
As lawyers, we support financial advisers and, while we cannot dictate the nature of clients’ cases, we can offer advice on how not to become the subject of litigation.
Subtle differences
Legally, it is long established, and has been recently re-emphasised in the Supreme Court in BPE v Hughes-Holland (2017), that there is a difference between advising on a course of action, and merely providing information. This difference has a significant effect on the adviser’s potential liability, in terms of whether in principle they are liable for the particular type of losses complained of.
Just how far should advisers have to go in providing options? The extent of this uncertainty was illustrated in the case of Mehjoo v Harben Barker (2014), which concerned tax advice given by accountants Harben Barker to Mr Mehjoo.
In its initial decision, the court found for the claimant, commenting that: “In any event ... the defendant’s duty ... was to use all proper skill and care to give tax-planning advice ... so as to reduce or eliminate [the claimant’s] liability to pay capital gains tax on the sale of his shares even though not requested to do so.”
The decision was successfully appealed, and when giving its reasons for overturning the original decision, the appeal court acknowledged that the tax issue arising was highly specialist and outside of routine tax advice; commenting: “[We are] not therefore persuaded that [the defendants] were under any duty to advise the claimant of significant tax advantages which, to their reasonable knowledge, did not exist.”
Clearly, the scope of the advisers’ duty is to advise, and what matters is what the advice covers, this being highly fact-sensitive.
Practical steps
Given that the adviser’s duty can be so fact-sensitive, there are a number of practical steps both advisers and their clients can take to help ensure things go to plan – so far as can reasonably be predicted.
Conversely, failure to follow these steps may provide grounds for a successful claim or Financial Ombudsman Service complaint by an investor, whether in negligence of, or breach of, the conduct of business sourcebook rules in the FCA handbook. These steps include:
• Ensuring that terms of engagement correctly reflect your role;
• If you will not be giving advice, or if advice you give is not intended to be relied upon by your client, then make this clear and ensure your client understands what this means;
• If you are perceived to have exercised a value judgment on behalf of the client (for example, by selecting only some investment options from the wider market), then you risk being found to have advised;
• If discussing tax schemes that might be at a higher risk of being challenged by HMRC, then ensure the extent of the risk of a challenge is explained. If the advice falls outside of your competency, make this clear to the client so that they can obtain advice elsewhere;
• Should any commissions be involved, then ensure the proper formalities, including disclosure, are dealt with;
• Be clear on any relevant time frames. It is easier for things to go wrong when there is a rush;
• Finally, ensure that appropriate due diligence has been carried out before recommending a product.
It is also important to be aware of the Criminal Finances Act 2017, which, as of 30 September 2017, has made it an offence to fail to prevent facilitation of tax evasion, though any issue of criminal liability falls outside the scope of this article and the precise limits of that new offence are yet to be tested.
Andrew Reid is an associate solicitor, professional negligence, at Moore Blatch and James Hall is a barrister at Hardwicke
