I'm interested in…

  • Strategy & Procedure
  • Catastrophic Injury
  • Professional Indemnity
  • Motor
  • Fraud
  • Disease
  • Liability
  • Commercial Insurance
  • Costs
  • Local Authority
  • Scotland

Limited duties: what tax advice does an accountant need to give?

Readers may recall the article in our last update on Mehjoo v Harben Barker [2013] EWHC 1500 (QB), which was reported in some quarters as placing an onus on accountants to advise clients to enter into tax avoidance schemes if such schemes would be beneficial to them.  That case has now been overturned by the Court of Appeal ([2014] EWCA Civ 358), whose decision and its effect we consider below.

Background facts

Mehjoo v Harben Barker was a professional negligence claim against a firm of accountants.  The Claimant was an Iranian non-domicile who had built up a successful clothing business in England that he sold in April 2005.  As a result, he was liable for capital gains tax (“CGT”) of around £850,000 on his share of the business.  For a number of years the Claimant had retained the Defendants to provide him with general tax advice and so he sought advice from them on minimising his CGT liability.

On the Defendants’ advice the Claimant invested in a Capital Redemption Plan (“CRP”) scheme which failed and so 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 on the basis that, had he been properly advised by the Defendants, then the Claimant would have sought expert advice from an adviser who specialised in non-domiciles, who would have advised him to avoid tax differently using Bearer Warrant Planning (“BWP”) which was available to non-domiciles, which he alleged he would have done and which would have succeeded.

At first instance, Mr Justice Silber had upheld almost every element of the claim.  In particular, he 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.  Moreover, the Judge found that if the Defendants had not been negligent then the Claimant would have taken such specialist advice, which would have been to use the BWP, which the Claimant would have done immediately, and which would have been successful.

Decision

The Court of Appeal allowed the Defendants’ appeal and reversed the previous decision.  In doing so it found that the Defendants had never offered, much less agreed, to provide the Claimant with specialist and complex tax planning advice.  The Defendants’ letter of engagement with the Claimant covered only conventional forms of tax advice and the Claimant never sought more specialist advice from them.  As the Defendants did not provide, and had not provided, specialist tax planning advice to the Claimant it could not be inferred that there was a positive duty on the Defendants to give such advice.

The Court of Appeal held that the reasonably competent accountant advising the Claimant on the CGT implications of selling his business would not have known of the specific tax planning opportunities available to the Claimant, about which he claimed, without more specialist tax knowledge.  The Defendants had fulfilled their duty by advising the Claimant that various tax saving schemes might be available to him, but he chose not to follow them up.  The Defendants’ advice could not be negligent when they did not know that the type of tax saving scheme, about which the Claimant had claimed, existed.

Comment

It remains arguable that the original decision in this case did not create new law or extend the duties of accountants to advise their clients to invest in tax avoidance schemes.  The central issue for liability was therefore an old one – that the professional must take account of all relevant facts in advising their client, and recommend that they take further specialist advice if appropriate.

The Court of Appeal’s decision reinforces this principle, but is interesting in the amount of specialist expertise that the Court was willing to impute to the accountants.  As they were general tax advisers the Court was unwilling to expect extremely technical and specialist tax advice from them.  For these accountants it was enough to advise the Claimant that certain opportunities might exist, which he then needed to pursue.

Whilst this decision is encouraging to accountants and their insurers because it limits the level of specialism that can be expected from a general tax adviser, it does turn on very specific facts.  A different decision could well be reached if the accountants had, or held themselves out as having, particular specialist tax expertise, or if their letter of engagement had been less clear about the limits on their advice (or there had been no letter at all).  The outcome could also have been different had the Claimant been a less wealthy and more vulnerable individual.

Overall, the case reminds insurers of the importance of considering carefully the information given by insured accountants about their practice, and the specialisms that they have, as well as 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 carefully setting out in letters of engagement the limits on the retainer between the client and the accountant as to the level and scope of advice that will be provided.  Further, it highlights the importance of considering what the Claimant might have done had he been advised differently.

Accountants themselves are reminded of the importance of putting a clear engagement letter in place as soon as possible that carefully delimits the extent of their advice.  They should also fully investigate a client’s background and consider all material facts carefully in advising them.  This case cautions accountants against overstepping one’s knowledge and expertise.

Contact

For further details please contact Jonathan Hyde, Senior Associate on +44 (0)20 7280 8927.

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.

Top