The English High Court has held in Knights v Townsend Harrison Ltd [2021] EWHC 2563 QB that no duty of care was owed by a firm of accountants in relation to failed tax schemes to which they introduced their clients.
In September 2011 Townsend Harrison (TH), a firm of chartered accountants, were engaged by Mr and Mrs Knights, the directors of Evergreen Trees and Shrubs Ltd. TH introduced the Knights to three tax schemes and an investment in a forex (foreign exchange) trading scheme. Two of those tax schemes failed to achieve the desired tax savings, with the third appearing likely to fail in the same way. The forex investment resulted in a total loss of funds.
The Knights alleged that they were owed a common law duty of care by TH in respect of these introductions; that TH had provided advice in respect of entry into the schemes; and that TH had breached their duty of care in causing the Knights to enter into the tax schemes. They claimed TH advised they had "nothing to lose" and encouraged them to enter into the schemes. The Knights alleged that TH agreed but failed to carry out extensive due diligence in respect of the forex investment scheme and/or that they had a duty of care to do so.
In response, TH argued that although it was engaged as the claimants' accountants, it merely introduced the schemes to them. It did not provide advice in respect of those schemes. The Knights had on 8 September 2011 signed TH's engagement letter incorporating TH's terms of business, which included a provision that TH might "advise you on your investments generally, but not recommend a particular investment or type of investment". It was denied that any duty of care arose from any of the introductions or that TH was under any obligation to carry out due diligence in respect of the investment scheme. It was denied that there was any causal link with the loss suffered by the Knights.
The court found that:
- The Knights' case regarding TH's introduction to the schemes failed. There was no support in expert evidence for the proposition that a general practitioner accountant acting reasonably would not, at that time, have introduced their client to those schemes.
- The case relating to the 'advice' by TH also failed. It was not accepted that TH went further than generally encouraging the Knights to give consideration to tax schemes, or that they had advised that the Knights had nothing to lose in entering into the tax schemes.
The court concluded that the Knights had failed to establish a duty of care in respect of the tax schemes. On the investment scheme, the court was unable to conclude any responsibility had been assumed or existed for TH to carry out the due diligence exercise described by the Knights. The court referred briefly to the Supreme Court's recent decision in Manchester Building Society v Grant Thornton UK LLP [2021] 3 WLR 81 and noted that "there was no “special relationship”, no assumption of responsibility, no reasonable foreseeability of reliance, and no reasonable reliance, so as to give rise to a relevant duty of care;" TH had sought to make clear in their terms of business that they accepted no responsibility for provision of advice and more generally in respect of the investment scheme.
The court observed the Knights had failed to establish that, in the context of engaging in fairly aggressive tax planning measures, they wouldn't have entered into such schemes even without the involvement of TH. Had they established a duty of care and a breach of that duty, the court noted that a question would arise "as to whether the losses in question would have fallen within the scope of the relevant duty of care."
Impact of case
Though considered only briefly by the court, this decision is one of the first widely reported since Manchester Building Society v Grant Thornton reconsidered the SAAMCo principle earlier this year. We blogged on the new six-part test earlier this year and Knights v Townsend Harrison demonstrates how important, and sometimes contentious, questions of scope of duty often are in professional negligence.
Knights v Townsend Harrison also demonstrates the importance of professionals clearly defining the scope of their appointment, in particular its limits or exclusions, from the outset in clear, unambiguous letters of engagement and terms of business.
