Time limit for negligence claims

An occupational hazard for tax advisers is the constant risk of negligence claims for giving incorrect tax advice, where that negligence results in economic loss such as additional tax liabilities and professional costs being incurred by their clients (and/or third parties).

Whilst professional indemnity insurance might help advisers to sleep better at night, the stressful and time-consuming nature of professional negligence claims are best avoided, not to mention the perceived stigma of adverse publicity from being on the receiving end of such claims.

Negligent tax advice?

Special time limit

An action founded on ‘tort’ (i.e., broadly a wrong in civil (rather than criminal) law that usually requires a payment of money to make up for the damage caused) cannot normally be made more than six years from the date on which the cause of action arose (Limitation Act 1980 (‘LA 1980’), s 2; NB this Act does not extend to Scotland).

However, there is an important exception to this ordinary six-year time limit where the facts relevant to a negligence action are not known when the cause of action arose. A longer limitation period applies in those circumstances. This limitation period is the later of the following (LA 1980, s 14A(4)):

(a) six years from the cause of the negligence action; or

(b) three years from the earliest date on which the person with the cause of action first had both ‘the knowledge required for bringing an action for damages in respect of the relevant damage (i.e., knowledge of the ‘material facts’ and ‘other facts’ (as defined) relevant to bringing the damages action), and a right to bring the action. 

‘Material facts’ in (b) are broadly such facts as would lead a reasonable person who had suffered such damage to consider it sufficiently serious to justify instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment. Furthermore, for the purposes of the limitation clock starting, knowledge that any acts (or omissions) did or did not as a matter of law involve negligence (i.e., such that no reasonably competent adviser of appropriate expertise would have given it) is irrelevant (LA 1980, s 14(9)).  

Thankfully, there is a ‘long-stop’ overriding limitation for the issue of proceedings in respect of negligent tax advice, which is 15 years from the date (or if more than one, the last date) of the alleged act or omission (e.g., negligent tax advice) to which the damages action relates. This overriding limit applies notwithstanding that the cause of the negligence action has not yet accrued or the starting date for the purposes of the special time limit in (b) above has not yet occurred before the end of the 15-year limitation period (LA 1980, s 14B).

When does the clock start ticking?

For the purpose of establishing as a fact when the three-year time limit in LA 1980, s 14(4)(b)) commences, supporting evidence is essential. It is important to note that the time elapsed since the cause of action commenced might be significantly longer than six years. 

For example, in Etroy & Anor v Speechly Bircham LLP [2023] EWHC 386 (Ch), the claimants (‘SE’, an individual, and ‘RBC’, a Jersey-based trust services provider) sought damages for negligent tax advice given by the defendant, (‘SB’, a solicitors’ firm specialising in private client matters) to SE in 2009. Pursuant to that advice, RBC had established a trust and was appointed as the professional trustee. The claimants claimed that they incurred tax liabilities of over £1 million because of the negligent advice. However, a preliminary issue for the High Court was whether the claimants’ claims in May 2021 for negligent tax advice were time-barred.

SB maintained that the claims were statute-barred because the alleged tort arose more than six years earlier. However, the claimants maintained that the action was not time-barred because (pursuant to the Limitation Act 1980, s 14A) the earliest time they acquired the knowledge required for bringing an action was September 2018, i.e., less than three years prior to issuing their claim.

SE (who was then not domiciled or deemed domiciled in the UK) had set up a trust (‘HAT’) in 2002 to hold interests from his work. As matters then stood, the trust held excluded property for inheritance tax (IHT) purposes. Following advice from SB in 2009 he transferred assets in HAT to the new trust (HMT) in 2010. However, SB negligently failed to appreciate that HAT held UK situs assets (and failed to give advice to mitigate the tax consequences), such that the creation of HMT caused significant inheritance tax (IHT) charges and costs. In 2017, SE sought tax advice from different advisers (PwC) in relation to the trust, and PwC raised IHT issues, particularly a potential entry charge and principal charge. The High Court noted that by May 2017 both SE and RBC knew it was necessary for PwC to carry out an investigation into the undisclosed IHT charges. RBC also knew it would have to carry out its own work.

However, the High Court concluded that in May 2017 SE did not have knowledge for the purpose of section 14A of the damage in respect of the damages claimed, or knowledge that it was attributable to the acts or omissions alleged to constitute negligence. SE first had such knowledge in September 2018, which was the first time PWC firmly indicated there was likely to be a significant IHT entry charge attributable to SB’s advice. In September 2018, RBC were notified of PwC’s concern that the transfer advised by SB had generated a very substantial entry charge, which was the first stage of RBC having the required knowledge for the purpose of section 14A. The claimants could not reasonably be expected to have acquired the knowledge required for bringing an action for damages alleged prior to September 2018. Consequently, the claimants’ claims were commenced within the time permitted by section 14A and were not time-barred.

Conclusion

For tax advisers unfortunate enough to be on the receiving end of a damages claim for incorrect advice, the availability of evidence will be important in establishing whether the negligence claim is time-barred. In Etroy & Anor a great deal of correspondence (including notes of meetings) was presented in evidence. Both sides focused on those communications. The High Court commented that this was the best evidence of what the parties knew or should reasonably have known at the time, albeit that the court’s conclusion based on that evidence was unfavourable to the defendants.

For further commentary on negligence and the tax professional, see Law and Regulation of Tax Professionals at Chapter 6.

Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is General Editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).