Her Honour Judge Moulder said that time limits for bringing a claim ran from before a tribunal decision against a similar scheme. She said the usual six year time limit ran from the date the schemes were entered into and the alternative three year time limit for bringing negligence claims ran from when the claimants "first knew enough to justify setting about investigating the possibility" that the advice they had been given was defective.
"This case is a useful reminder that possible negligence claims against advisers need to be considered at an early stage. Tax enquiries can often drag on for a long time and cases can take years to get to tribunal. It will often be too late if you wait until it is clear that a tax scheme has definitely failed before protecting your position regarding claims against advisers," said Ian Hyde, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com
The claim against Champion Consulting Limited and various associated businesses was brought by several individuals who had entered into various 'charity shell' schemes and a film scheme. The 'charity shell' scheme relied upon the individuals obtaining tax relief through the mechanism of gift aid. The investors initially subscribed for shares in a 'shell company' which then acquired a target company and was then listed on AIM or the Channel Islands Stock Exchange. The investors then gave some shares to a charity and claimed tax relief on the value of the shares gifted. Tax relief was claimed on the value of the shares at the time of gift which it was claimed was the value of the shares on listing.
The individuals claimed their tax advisers had assured them that the schemes would work effectively and said that one adviser had described the charity shell scheme as a "no-brainer" and "government sanctioned". They alleged that an adviser had agreed to indemnify them against any failure of the planning. In relation to the film scheme, an adviser had claimed the schemes had a 75% chance of being successful.
Both schemes were challenged by HMRC and it seemed that a much lower amount of tax relief would be available than had been claimed.
The judge was satisfied that the advisers had been negligent in the advice given in relation to both the charity shell scheme and the film scheme, but the claimants had failed to show that they had brought their claims within the requisite time limits.
Claims in tort, including negligence claims, must be brought be before the end of six years from "the date on which the cause of action accrued". For negligence claims there is an alternative limitation period of three years running from the 'starting date'. The starting date is defined as the earliest date on which the claimant "first had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action."
In relation to the charity scheme, the claimants claimed that they did not suffer damage or did not have the requisite knowledge until a decision of the First-tier Tribunal in 2014 in relation to a similar charity tax relief scheme, where the tribunal decided that the market value of the gifted schemes was much less then the taxpayers had claimed.
HMRC had begun enquiring into the claimants' use of the scheme in 2009 and in 2011 wrote to say that they were investigating a number of these schemes, challenging the valuation of the shares and were planning to take a lead case to tribunal.
The judge said the six year limitation period ran from the date the shares were issued rather than the date of the tribunal's decision.
"It seems to me that it was the point at which the claimants entered into the planning that they suffered damage. When they contracted to purchase the shares, they suffered damage, not because the shares were then worth less than the claimants paid for them, but because the purchase of the shares would not give the claimants the result that the defendants had assured the claimants would result i.e. the tax relief," she said.
She decided that the starting point for the three year time limit was earlier than the date of the tribunal decision.
"The question is whether there was something which would reasonably cause the claimants to start asking questions about the advice they had been given, not when they first knew they might have a claim for damages but when each of them first knew enough to justify setting about investigating the possibility that [the adviser's] advice was defective," she said.
The judge said that by the HMRC letter in 2011, if not before, one of the claimants "had knowledge of the material facts, that is such facts about the damage as would lead a reasonable person to consider it sufficiently serious to justify instituting proceedings. It was not knowledge in the sense of knowing for certain but he knew enough for it to be reasonable to begin to investigate further."
She decided that none of the negligence claims had been made within either the six year or the three year limitation period and therefore they all failed.