When tax advice is misleading or fails to identify an alternative which would involve a lower payment, how much is a taxpayer entitled to be compensated? What if the alternative is an untested tax-efficient structure and there are doubts about whether HMRC might permit it?
A number of arguments are raised in such cases.
- Is the obligation to pay tax a loss at all? Tax is a social necessity so can it be considered a loss as a point of public principle. Although this argument regularly makes an appearance and can be relevant in some circumstances, the normal position for professional advice is that failure to identify a more tax efficient option for a client will, in principle, normally result in a claimable loss for that client.
- If HMRC would not accept the alternative option the taxpayer probably cannot have suffered a loss by failing to using it. So, should the Court determine whether the scheme was valid? This is the subject of the recent case Altus v Baker Tilly.
The established position on assessing loss for poor advice is to consider what the parties and others would have done if the correct advice had been given. This often requires two stages:
- What would the client have done - ie would it actually have taken the alternative action. This is decided on a balance of probabilities. The court decides whether it is more likely than not that the alternative would have been taken;
- What would the saving have been. If the saving is clear then the loss is that saving. If however there is any doubt about whether there would be a saving the Court must assess the 'lost chance' of obtaining that saving.
Loss of a chance is regularly considered in professional negligence cases wherever the actions of a third party or the outcome of a separate issue would determine whether a loss was actually suffered. In October 2014 we commented on Chweidan v Mischon de Reya, where the Courts re-asserted how the principles of loss of chance apply to claims for a lost opportunity to pursue litigation. Loss of chance raised its head in the context of tax planning in Altus v Baker Tilly.
Altus sued Baker Tilly for failing to advise it of a change in corporation tax law which Altus claimed (if they had been made aware of the change) would have led it to restructure its business so as to mitigate its tax liabilities. The Court accepted that Altus would have undertaken the restructuring if the advice had been given. Baker Tilly, however, argued that HMRC would have investigated the structure and would not have accepted it. Consequently they asked the Court to determine one way or another whether, as a matter of law, the restructuring would have had the intended effects.
The Court was not prepared to do this. The claim was one for loss of chance as the question of whether the restructure would have in fact mitigated Altus' tax liability (and to what extent) depended upon HMRC's actions and (potentially) the outcome of a challenge to the structure. The Court would consequently assess the probability that HMRC would have challenged the re-structure and (if so) the probability that the challenge would have succeeded. Those percentages are applied to the maximum tax saving to give the recovered loss.
The outcome was that the Court will not delve into the details to determine whether a tax structure would actually work to decide on whether negligent advice caused a loss. Instead it will make a broad assessment of the chances of the structure working.
The author Matthew Walker assists professional clients with professional negligence issues.