Ruling in negligence case

Posted on 05 Sep 2018
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Midlands accountancy firm Harben Barker has won an appeal against a ruling that the firm was acting negligently when it failed to recommend a non-dom client, Hossein Mehjoo, should seek specialist advice on a complex tax planning product that would have helped the businessman avoid a £850,000 capital gains tax (CGT) liability for the sale of shares in his fashion company report Harris & Co accountants Northampton

The judgment in the Court of Appeal in Mehjoo v Harben Barker (a firm) & Anor [2014] EWCA Civ 358 overturned previous court rulings in the long-running case, made it clear that accountancy firms do not have a general duty to recommend sophisticated tax planning schemes to their clients. 

The case concerned an Iranian businessman, Hossein Mehjoo, who retained his Iranian domicile of origin for UK tax purposes. He had previously successfully sued Harben Barker for £1.4m after the firm failed to recommend he use an offshore tax avoidance scheme – known as the Bearer Warrant Scheme (BWS) – in order to reduce his CGT bill.

Mejhoo had argued, and other court judgments had accepted, that the accountant who dealt with him at Harben Barker should have been aware both of his non-dom status and of options such as the BWS.

However, the judges at the Court of Appeal said such a decision was not ‘sustainable’ since Harben Barker ‘were not and had never held themselves out to be specialist tax planners’.

Lord Justice Patten said: ‘I am not therefore persuaded that HB were under any duty to advise the claimant of significant tax advantages which, to their reasonable knowledge, did not exist.’

Rob Morris, partner at City law firm RPC, said: ‘This ruling offers a lot of protection from negligence claims for generalist accountancy firms who don’t offer specialist tax planning advice. It means that accountancy firms will not be liable for failing to recommend a complex tax planning product unless they specifically offer this service to clients.’

Morris said the Court of Appeal decision was also significant for professional firms that build a close relationship with a client over a number of years without updating their engagement terms, as court was reluctant to find that the accountancy practice assumed a duty to volunteer advice on issues it had not expressly agreed to in its written retainer.

The Court of Appeal referred to the information provided by the firm to Mejhoo regarding the terms of engagement, which included ‘general tax-planning advice on the best use of reliefs.’ The judges said: ‘Any more specialised services than that would have to be specifically requested by the claimant and it would then be a matter for Harben Barker to decide whether and, if so, how such a request would be accommodated.’

As a result, the judges concluded that in the earlier High Court verdict in the case, ‘the judge was wrong to find that Harben Barker were in breach of duty and it is therefore unnecessary to consider the various issues raised about causation and remoteness of damage’.

The claim against the firm was dismissed. 

"This decision is good news for accountants, many of whom had been concerned that the High Court ruling meant that they had a duty to advise clients about tax avoidance schemes," said Meg Wilson, tax specialist writer at CCH.

"I never inferred this from the earlier ruling, as it seemed to be more about accountants ensuring they seek specialist advice when dealing with areas of tax legislation not sufficiently equipped to deal with.

"However given the ruling that the tax advantages of the possible non-dom status of the client in this case were only relevant if the shares were located outside the UK and that this is not something the accountant could have been expected to know was achievable, the accountant did not even need to mention that the client’s domicile status could even be an issue." 

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