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.
In Mehjoo v Harben Barker  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.
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.
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