12 February 2015
Practice Group(s):
Commercial Disputes
‘Horizon‒scanning’: is a ‘Top-Level’ Firm Required
to See Further?
By Sarah Turpin and Sean Kelsey
Altus Group (UK) Ltd v (1) Baker Tilly Tax and Advisory Services LLP (2)
Baker Tilly Tax and Accounting Limited [2015] EWHC 12 (Ch)
This case involved allegations of professional negligence in the context of tax planning
advice, and saw the application of reasonably familiar principles. Whilst these cases
always depend on their facts, the decision may lend weight to any argument in future that
firms providing “a top-level specialist service” should, in some respects, be held to a
higher standard of care.
The claimant, Altus Group (UK) Ltd (“Altus”), is the English subsidiary of Canadian
company Altus Group Limited (“AGL”). AGL and Altus are both part of the Altus
corporate group, a real estate consultancy with its headquarters in Canada. The case
concerned tax arrangements involving a corporate structure (the “LLP”) set up by AGL to
acquire the property consultancy of a firm called Edwin Hill. Altus, a member of the LLP,
engaged the Baker Tilly defendants (“Baker Tilly”) to prepare its corporation tax returns
for corporation tax periods the first of which ended on 31 December 2008.
Altus alleged that Baker Tilly were in breach of duty in January 2009 for failing to give
advice regarding the consequences of the coming into force on 1 January 2009 of the
Corporation Tax Act 2009 (“CTA 2009”). A provision of CTA 2009 which took effect in
April 2009 (referred to as “Change 86”) had a significant bearing on tax treatment of
amortisation of goodwill in the Edwin Hill business. Broadly, the effect of Change 86 was
to bolster any argument HMRC might make, for corporation tax periods from the period
ending on 31 December 2009, that it was impermissible to allocate to Altus, for its own
corporation tax purposes, a share of any loss arising on amortisation of goodwill by the
LLP.
Baker Tilly did not bring Change 86 or its effect to the attention of Altus until 25 October
2011. Thereupon, Altus took specialist tax advice from Ernst & Young (“EY”), who had
advised on the original structure for the acquisition of the Edwin Hill business, and which
now proposed a new structure (the “Proposal”). The Proposal was ultimately not
adopted, in part due to the complexity of issues it raised. Also, an assessment was made
in March 2012, that with only around six months remaining in the programme of
amortisation of the Edwin Hill goodwill, implementation of the Proposal would by then
result in only minimal financial benefit in the final relevant accounting period. Altus
alleged that but for Baker Tilly’s breach, it would have been able to implement the
Proposal three years earlier, with a view to mitigating its tax liabilities. Altus sought
damages for the loss of that chance.
Baker Tilly admitted breach of duty in failing to advise on the impact of CTA 2009, but
only from around July 2009, when it prepared a corporation tax computation for Altus for
the half-year to 30 June 2009. Baker Tilly denied that, were it not for its breach, Altus
would have implemented the restructuring proposal. Baker Tilly further argued, in the
alternative, that even if Altus had implemented the restructuring proposal, it would have
‘Horizon‒scanning’: is a ‘Top-Level’ Firm Required to
See Further?
been ineffective as a matter of law for tax mitigation purposes, and would have been
successfully challenged by HMRC.
The court concluded there had been a breach of duty in January 2009 – Baker Tilly
should have been aware of the change effected by CTA 2009. HH Keyser QC, sitting as
a judge of the High Court, held that “It is not necessary to suppose the defendants to be
under some strict or onerous duty to engage in what has been called horizon-scanning
for future legislation. It suffices that, in considering the filing position for 2008, they
ought…to have considered the relevance of the Corporation Tax Bill and brought Change
86 to the attention of their client.”
The court had no hesitation in finding that, had EY been asked in 2009, it would have
given the advice it gave in 2011. But the court went on to find that Altus, even if made
aware of Change 86, would not have sought the advice of EY. The lack of evidence of
fact on these matters was determinative. First, no evidence was submitted as to the likely
actions of the relevant decision maker at Altus in January 2009. The court held in the
absence of that evidence that Altus would most likely have sought the advice of PwC, not
EY, but there was no evidence before it as to what PwC would have advised. (Very late
on, after judgment had been handed down in draft for correction of typographic errors
and omissions, Altus attempted to introduce fresh evidence to the effect that PwC were
not instructed in relation to tax advice until the end of May 2009. The judge held that it
had been for Altus to prove its case on causation at trial, and that neither the evidence
adduced at trial, nor the evidence sought to be adduced at the eleventh hour was
sufficient for that purpose.)
The court went on to consider whether, had it found wrongly as to whether Altus would
have asked EY for advice, Altus had indeed lost an opportunity to mitigate tax. The court
resisted Baker Tilly’s submissions that it should rule on the legal effect of the Proposal.
Although in a suitable case where “loss of a chance” turns on a point of law, it can be
appropriate for the court dealing with the negligence claim to determine that point of law,
it would not be appropriate to hold a ‘trial within a trial’ on matters of tax law – effectively,
a hypothetical litigation of an HMRC challenge that was never brought. Instead, the court
applied the principles set down in Allied Maples: where a claimant’s loss depends on the
hypothetical action of a third party (here, HMRC), it does not have to prove on the
balance of probabilities that the third party would have acted so as to confer the benefit
said to have been lost, but can succeed provided it shows that it had a substantial
chance rather than a speculative one. On the facts, this involved a complex assessment
of the likelihood that HMRC would have raised challenges to the Proposal on a variety of
possible bases. The court offered a practical assessment of the prospects of HMRC
bringing a challenge in the first place, and then the prospects of any such challenge
being successful. It made clear, however, that its assessment was irrelevant to its final
order, and the claim was dismissed.
While the case is an interesting example of the application of reasonably well-know
principles in the context of tax planning advice, it may have potentially wider implications
due to the court’s assessment of obligations on accountants with regard to “future
legislation”. For immediate purposes, it may be as well to note that CTA 2009 was part of
the Taxation Law Rewrite Programme. In relevant respects it did not so much introduce
changes to the tax regime as place on a statutory basis certain matters which had been
the subject of HMRC guidance previously. The court confirmed that it was “not necessary
to suppose the defendants to be under some strict or onerous duty to engage in what has
been called horizon-scanning for future legislation.” Baker Tilly ought however to have
considered the Bill which was in due course passed as CTA 2009, and brought Change
86 to their client’s attention.
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‘Horizon‒scanning’: is a ‘Top-Level’ Firm Required to
See Further?
It is notable that, in reaching this conclusion, Mr Keyser QC held that it was “not, I think,
necessary to rely on the distinction between what may be termed an ordinary accountant
and a large firm of tax and accountancy specialists such as the defendants. However…I
consider that there is a distinction and that the case is a fortiori for firms that put
themselves forward as providing a top-level specialist service.” This finding, whilst not
binding, is consistent with some existing commentary, and may add weight to future
attempts to hold some firms to a higher standard of care in an assessment of breach of
duty.
Authors:
Sarah Turpin
Sarah.Turpin@klgates.com
+44.(0).20.7360.8285
Sean Kelsey
Sean.Kelsey@klgates.com
+44.(0).20.7360.8180
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