The High Court decision has recently been published in the professional negligence case of Hossein Mehjoo v Harben Barker [2013] EWHC 1500 (QB). It makes sobering reading for all professionals: but particularly for accountants in general practice.
The case is long (almost 600 paragraphs), complex and full of blind alleys and red herrings: what follows is a simplification.
An individual who was (probably) domiciled outside the UK was contemplating the sale of shares in his UK company. He was a client of an accountant in general practice. There was no specific reference in the letter of engagement to an obligation to give tax planning advice but such advice had in fact been given over the years. The client made his disposal and (with the benefit of taper relief) paid tax of some £850,000 on a gain of some £8.5m. After the event he was introduced to the purveyors of a “Capital Redemption Plan” scheme, designed to create a loss out of thin air to shelter the gain: but it turned out that the scheme didn’t work.
So, were the accountants sued for having negligently introduced their client to the defective CRP? No. It’s worse than that. Much worse.
At the time of the disposal, tax planning using “Bearer Shares” was available to non-domiciled individuals (the route has long since been closed by legislation); and the evidence was that if the client had used such a scheme it would have been effective in saving him the tax. The court held that the accountants, as non-tax-specialists in general practice, had a duty to seek advice from tax specialists, in much the same way as a GP has a duty to refer a client to a consultant if he encounters symptoms beyond his expertise. Thus, although it was going too far to say that the accountants should themselves have implemented “Bearer Share” planning, they should at least have (1) Recognised that the client was or might have been domiciled outside the UK (2) Known that that status afforded some tax advantages and (3) Referred the client to (or themselves sought advice from) someone with “non-dom” expertise. So the accountants were liable to pay the tax that the client had suffered, minus the costs which would have been incurred on implementing a “Bearer Share” scheme.
So far so bad. But, as we have seen, the client, having made the gain, spent £180,000 on an alternative tax scheme (which turned out not to work). The judge held (rather controversially, we think) that this action was a foreseeable consequence of the accountants’ negligence: if the accountants had done their job properly, the client wouldn’t have incurred the cost of the CRP: so the accountants were liable for that £180,000 too. Ouch.
So: the doctrine of St Margaret Hodge et al numbers tax avoidance with the worst evils of our time: and a High Court judge penalises an accountant for failing in his duty to choose the right way to help a client avoid tax. What’s a girl to think?
Which all goes to show that the safest way for an accountant in general practice to sleep easy in his bed is to take advice from a firm of tax specialists. So… You know the rest.
