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 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.

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.