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Do accountants owe a duty to advise on tax avoidance schemes?

Whilst HMRC is busy clamping down on tax avoidance schemes, the High Court was reported in some circles recently as apparently placing the onus on accountants to advise clients to enter into tax avoidance schemes if such schemes would be beneficial.

Background facts

In Mehjoo v Harben Barker [2013] EWHC 1500 (QB) Mr Justice Silber heard a long and complex professional negligence claim against the defendant accountants. The Claimant (and the Defendants’ ex-client), Mr Mehjoo, was an Iranian non-domicile. He built up an enormous clothing business in England that he sold in April 2005, as a result of which he was liable for capital gains tax (“CGT”) of around £850,000 on his share of the business. The Claimant accordingly sought the Defendants’ advice on minimising his CGT liability.

On the Defendants’ advice the Claimant invested in a Capital Redemption Plan (“CRP”) operated by a company called Montpellier, which was intended to create a capital loss so as to avoid the CGT for which the Claimant was otherwise liable. However, the CRP scheme failed and the Claimant had to pay tax, interest and a penalty to HMRC. He sought to recover this from the Defendants, together with the costs of investing in the CRP scheme.

The Claimant alleged that, had he been properly advised by the Defendants then he would have sought expert advice from an adviser who specialised in non-domiciles, who would have advised him to enter into a different tax avoidance scheme available only to non-domiciles using Bearer Warrant Planning (“BWP”), which he would have done and which would have succeeded.

Decision

Mr Justice Silber upheld almost every element of the claim. In particular, the Judge held that it was negligent of the Defendants, who were generalist accountants, not to note the Claimant’s non-domicile status and advise him to take specialist advice on the impact of that status in seeking to avoid CGT. The Judge then found, as a matter of fact, that if the Defendants had not been negligent then the Claimant would have taken such specialist advice, which would have been to invest in the BWP, which the Claimant would have done immediately, and which would have been successful.

The Claimant was therefore entitled to recover the CGT that he had paid but would have avoided through the BWP. The Judge also awarded the costs of entering the CRP scheme on the basis that they were a foreseeable loss caused by the Defendants’ negligent advice to enter into that scheme. The Claimant was entitled to interest in addition, albeit that was reduced because he had not mitigated his loss by purchasing appropriate certificates of tax deposit from HMRC that would have stopped interest running.

Comment

Upon close analysis, this decision probably does not create new law or extend the duties of accountants to advise their clients to invest in tax avoidance schemes. Instead, the Court found that the Defendants had been negligent in failing to take proper account of the Claimant’s status as a non-domicile in advising him how best to mitigate his CGT liability and advising him to take specialist advice on that point. The central issue for liability was therefore an old one – that the professional must carefully take account of all relevant facts in advising their client, and recommend that they take further specialist advice if appropriate.

What was perhaps unusual in this case was the Judge’s confidence in accepting the Claimant’s hypothetical account of what would have happened had he been properly advised. This part of the judgement turns on the particular facts, but it is nevertheless worth bearing in mind the importance in this sort of claim of how a Claimant says that they would have acted had they not been advised negligently.

This decision reminds Insurers of the importance of considering carefully the information given by Insured accountants about their practice and checking that the advisers are suitably qualified for the work that they undertake (and do not advise beyond their expertise). It also reinforces the importance of fully investigating what the Claimant might have done had he been advised properly, and doing everything possible to challenge that account.

Accountants themselves are reminded of the importance of fully investigating a client’s background and considering all material facts carefully in advising them. This case is a salutary reminder of the warnings of overstepping one’s knowledge and expertise.

We understand that the accountants are appealing the decision

Contact

For more information please contact Jonathan Hyde, Senior Associate on +44 (0) 20 7280 8927 or email jonathan.hyde@dwffishburns.co.uk

By Jonathan Hyde

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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