Professional negligence: a warning for advisers
There has been a great deal in the media over the past months and indeed years about the efficacy of entering into anything other than ‘vanilla’ tax planning. There has also been such a significant body of legislation and tax case law, that many advisers are reticent to suggest anything that HM Revenue and Customs might consider ‘aggressive’, however that might be defined.
Given this background, and in the post-GAAR era, the recent coverage afforded the High Court decision in Mehjoo v Harben Barker (2013) makes interesting and on the face of it slightly, perplexing reading.
This is not a tax case but a professional indemnity case in which the actions of a ‘competent accountant’ were examined in the context of a common transaction and available high level tax planning.
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The essential facts are as follows. As long ago as 2004/05, Mr Mehjoo (M) disposed of company shares for a significant profit. Back in those days, two levels of capital gains tax (CGT) taper relief were available to reduce the amount of gain chargeable to CGT. The more favourable rate of relief gave the taxpayer an effective CGT rate of just 10%, compared with a maximum of 40%. In this case, CGT of some £850,000 was payable at the lowest rate.
For many UK resident taxpayers, maximising business asset taper relief represented a good tax outcome, but although M was a tax resident, he was also non-domiciled. His advisers had completed tax returns on this basis for many years.
Subsequent to the sale, M learned of a tax scheme available to non-domiciles, involving the issue of bearer warrant shares, which are deemed to be situated where the bearer is situated. Had he been advised on this, M could have entered into a share reorganisation and received bearer warrant shares, which he could have sold as a non-UK situs asset. Under the remittance basis rules, the CGT charge would have been avoided completely whilst the sale proceeds remained outside the UK.
The accountants acting for M failed to bring this planning opportunity to his attention. They therefore prevented him from being able to take advantage of the scheme and so save, indeed avoid tax.
In the High Court, it was held that the accountants had a contractual duty to help their client to avoid tax on the disposal and so had been negligent in failing to do so.
In their defence, the accountants sought to rely upon a literal reading of their terms of engagement and as a result contended that they had no duty to provide advice on avoiding tax unless requested. There was dispute over whether or not such advice had been requested, but in a sense this was irrelevant because, advice had been provided in the past without such a request, and in addition the accountants had been proactive in advising in relation to this disposal.
This said, the key point was that they overlooked the fact that their client was non-domiciled and so required specialist advice which was beyond their expertise. Although the court did not go as far as to say that, as ‘competent accountants’, they should have been able to provide specialist tax advice and complex tax planning arrangements, they did nonetheless have a duty to advise the Claimant….that he should take tax advice from [specialist tax advisers].” In truth this is an uncontroversial conclusion.
In this post-GAAR era, this case is a timely reminder to all those advising providing taxation services neither to go it alone nor assume that their clients will not be prepared to enter what they as professionals consider controversial tax planning.
It is understood that the case has been appealed and the outcome is awaited with interest.