HMRC currently published a list of approximately 80 tax avoidance schemes, promoters, enablers and suppliers, recognising that this list is not exhaustive and that there are others that it cannot publish currently information about others. There have of course been other historical schemes and HMRC have previously reported on marketed tax avoidance and how the market has changed (the latest such report being in November 2022).
For a number of years, the professional indemnity insurance (PII) market has been wary of risks faced by accountants whose clients have been involved with tax avoidance schemes. Where accountancy firms’ clients have been involved with tax schemes, those firms should liaise with their PII brokers to consider their potential exposure to claims since (for reasons including those referred to below) in some cases exposures may not be significant and it could be helpful to relay that information to prospective PII insurers.
In the first place, much will depend on what the accountant did do or should have done in their work. It should be recognised that accountants’ roles can range from assisting clients with tax returns, through to effecting introductions to promoters of tax avoidance schemes, and accountants themselves designing and promoting such schemes.
Much will also depend on when the accountant conducted the work. Principles and standards have developed over time, as is recognised by the various, changing editions of Professional Conduct in Relation to Taxation (these being effective at various dates from November 1995 to 1 January 2023) and generally one should be judged against what the reasonably competent accountant should have done at the time.
It is also important to recognise that accountants who have clearly delineated in engagement letters correspondence with clients what they will and will not be doing, and accountants who have not strayed beyond that scoped work, may reduce the risk of meritorious criticisms being made against them.
Even if accountants have failed to act as they should have done, claims for compensation against them face a number of hurdles, including (i) whether any breach of duty to a client has caused any recoverable loss and (ii) whether claimants are in time to bring court proceedings. Two recent judicial decisions assist here.
As for (i): although in an action against a tax QC as opposed to an accountant (and where that tax QC was found not to have owed a duty of care to users of the scheme), in McLean v Thornhill QC (2022 and 2023) some claimants did not establish that, had they been given particular risk warnings, they would not have participated in the scheme. One factor in that finding was that the claimants had already been informed that there were other substantial risks (so essentially further warnings would have been unlikely to have had any effect). In Upham v HSBC UK Bank plc (April 2024), tax payers had invested in the ‘Eclipse’ film finance scheme with the aim of deferring liabilities for several years. HMRC successfully challenged the scheme and the investors sued HSBC for alleged false representations as to the structure of the scheme. The Court decided that, whilst some claimants had lost significant sums in invested monies, advisers’ fees and HMRC late payment interest, they failed to give proper credit for profits earned on monies whilst tax liabilities were deferred. The claimants, save for one who was made bankrupt by the failure of the scheme, failed to prove that they had suffered a net overall loss after giving credit for profits made.
As for (ii): where a lot of tax avoidance schemes were entered into many years ago and where HMRC challenged them many years ago, it is also relevant to consider whether claimants are time barred by not having issued court proceedings before expiry of the relevant limitation periods. In McLean v Thornhill QC it was determined that the six year limitation period in tort ran from when the claimants made their investments, not from when HMRC refused their claims for tax relief. However, the alternative three year limitation period ran from when the claimants had sufficient actual or constructive knowledge of key matters and, on the detailed specific facts, including HMRC correspondence and reassurances from the scheme’s sponsors and promoters, only one of the sample claimants’ claims was issued after that three year period.
