Appeal court overturns £1m Mehjoo claim

West Midlands accountancy firm Harben Barker succeeded in convincing the Court of Appeal to overturn the £1m negligence claim brought by a client who alleged they had not advised him properly about his tax avoidance options as a non-domicile.

Mehjoo was an entrepreneur who was granted asylum in the UK in the 1980s and became a UK citizen in 1996. During the 1990s he built up the company Bank Fashion, which he sold for £8m in 2004. He paid £800,000 in tax under the CGT taper relief that applied at the time, but then attempted to shelter his money in a capital exemption scheme arranged by Montpelier. When the scheme failed and Montpelier went bust, Mehjoo was advised to sue his accountants.

At the initial trial, KPMG’s David Kilshaw testified that as because of his background, Mehjoo could be considered as a non-domiciled taxpayer, so he shouldn’t have entered a capital redemption scheme - a bearer warrant scheme would have been more appropriate.

Bearer warrant schemes are not the domain of most High Street accountants. But the implication of the original High Court verdict from Mr Justice Silber was that even if an accountancy firm didn’t know of such esoteric arrangements, it should refer clients to specialists in that area.

The decision put the six-partner firm through a nightmare that could have closed down their firm.

However, the appeal court judges...

Continued...

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Comments
bookmarklee's picture

Further proof it were needed....    1 thanks

bookmarklee | | Permalink

... that there has never been an automatic obligation on accountants to advise clients on tax avoidance schemes. And, as I have long maintained, there is no risk of a successful negligence claim against accountants for failing to give such advice.

I explained what I considered to be the lessons from this case for accountants by reference to the High Court judgement. And the successful appeal reinforces my conclusions:

"There is no new obligation on accountants to advise on fancy tax schemes. Nor is there any requirement for them to understand complex tax schemes. Thus there is no need to protect accountants from such a dubious obligation (as one commentator has demanded).

I believe that the position remains exactly as I set out in my [previous] article for AccountingWEB.... Tax schemes: What do you tell clients?"

David Winch has summed up the position nicely in his comment in the Any Answers thread above:

"Accountants finding themselves out of their depth should admit that & suggest obtaining specialist advice.  In effect the Court of Appeal has concluded that HB did enough to alert their client to further possibilities (which would most likely incur fees) & the client chose not to follow that up."

Mark

ShirleyM's picture

I agree with your comments, Mark    3 thanks

ShirleyM | | Permalink

.... but then attempted to shelter his money in a capital exemption scheme arranged by Montpelier. When the scheme failed and Montpelier went bust, Mehjoo was advised to sue his accountants.

I also think the above extract is significant. I wonder who advised him to sue his accountant? 

It would have been 'open season' on general practitioners if they could be successfully sued for the failure of schemes that they had neither promoted or acted as introducer.

Wragge & Co.    2 thanks

Justin Bryant | | Permalink

were Mehjoo's legal advisers and presumably they (along with counsel) would have advised Mehjoo on the merits of his claim. Unless there was a CFA and/or ATE fee insurance then Mehjoo has basically ended up transferring a significant amount of his wealth from his share sale (I estimate around £2m) into the pockets of lawyers and HMRC (as VAT on lawyers fees if he lives in the UK) as well as having "lost" a few years of his life on the stress and inconvenience of this litigation over a few £100ks in CGT (that was already at the low 10% taper relief rate)..

.

two lessons that I feel needs to be learned    2 thanks

Jekyll and Hyde | | Permalink

1) accountants need to be more aware of their limitations in the future and possibly accept that they will have to refer clients upwards from time to time.

2) individuals have to start to take responsibility more and look at who they are engaging and whether that engagement suits their purpose. If you make a wrong decision and engage in the wronwrong type of accountant then you are largely at fault.

johnjenkins's picture

I'm flumoxed    2 thanks

johnjenkins | | Permalink

that this should even be allowed to have gone to court. As Mark quite rightly says it is not part of an Accountants job to be obligated to reduce clients tax bills by avoidance schemes, let alone be cross examined for eight days.

Red Leader's picture

not even silent    4 thanks

Red Leader | | Permalink

The accountants had even said to the client in writing that, in effect, tax saving opportunities may exist that they were not able to advise on. The client was then at that stage alerted to the option of pursuing this but he chose not to at that time.

I'm astonished that this wasn't sufficient to quash the claim right from the beginning.

Sympathies to those involved    4 thanks

mabzden | | Permalink

I feel sorry for all the accountants caught up in this and in the Hillgrove case. A lot of mud tends to fly around in Court, with highly paid lawyers making scandalous accusations about everyone's integrity (except their own of course). And typically the people involved get very little protection from the Judge or in the media reports that follow.

I speak from experience here - I recently had to appear as a witness (of fact rather than as an expert witness) in a fraud trial. I wouldn't wish the experience on my worst enemy.

So I'm glad in this case the accountants were vindicated. I'm also glad the Court of Appeal took a swipe at the original Judge given his public criticism of Mike Warburton.

carnmores's picture

50% of judgements

carnmores | | Permalink

Are over turned on appeal or so it seems why are judges so bloody useless and badly trained

davidwinch's picture

Appeals    4 thanks

davidwinch | | Permalink

carnmores wrote:
50% of judgements are over turned on appeal or so it seems why are judges so bloody useless and badly trained

Don't forget that the vast majority of judgments are not appealed!

Generally there is also an initial 'filter' mechanism whereby the aggrieved party requests permission to appeal.  That request may be turned down & cases which do not get to a full appeal hearing are generally not reported.  So, broadly speaking, the appeals which get to a full hearing are those in which the appellant has decent grounds on which to base an appeal.

By the way an appeal is not a re-trial - an opportunity for the parties to 'do it all again'.  In appeal hearings ordinarily there is no evidence from witnesses and the original judge & jury's finding of fact are not up for re-examination.  (As with all sweeping statements, there are exceptions but they are rather few & far between - except where a Magistrates' Court decision is being appealed to the Crown Court, where different rules apply.) 

On appeal the appellant will normally argue that the law was misunderstood or misapplied to the facts or that there was some irregularity in the trial process which renders the outcome invalid.  In criminal appeals the appellant will ask the Court of Appeal to conclude that the conviction was "unsafe" or the sentence "manifestly excessive".

In my experience of criminal cases defendants are too quick to think, "If I am convicted I will appeal".  In practice there will often be no valid grounds on which an appeal can be mounted and defendants should IMHO always approach a trial as their one and only chance to get their explanation / defence accepted.  In the course of a trial there may be many tactical decisions taken by the defendant (with the advice of his legal team) on, for example, which defence witnesses to call / what lines of questioning to put to the witnesses / etc.  Unfortunately if things end badly for the defendant he will not get the chance to run the trial again adopting different tactics!

David

daveforbes's picture

@David

daveforbes | | Permalink

David, perhaps you could enlighten me. So much seems of our law is based on case law and precedent. What happens if this changes between original case and appeal ?

davidwinch's picture

Change of law    2 thanks

davidwinch | | Permalink

daveforbes wrote:

David, perhaps you could enlighten me. So much seems of our law is based on case law and precedent. What happens if this changes between original case and appeal ?

If a court has decided a case, and then it is validly appealed, and then there is a change in the understanding / interpretation of the law due to new case law, and then the appeal comes to be heard - then the appeal court will rely on the latest understanding / interpretation of the law.

On the other hand, if a court has decided a case & the time limit for appeal (which is quite short - I think normally 28 or 56 days) has passed, and then there is a change in the understanding / interpretation of the law due to new case law, and the defendant wishes to appeal because the law has changed - then normally permission to appeal will be refused.

The logic is that it is important that court decisions are generally final.  It is commonplace for the understanding / interpretation of the law to be developed by new case law.  If when that happened all previous cases based on the old understanding / interpretation were able to be re-opened then the courts would continually be flooded with appeals all the time.

Again there are exceptions, but that is the general rule.

So the 'trick' with an 'out of time' appeal is to find some reason (other than a change in the law) to make a valid appeal then (if that reason is accepted) when the appeal is heard the appeal court will apply the 'new law' to the case as part of the process of considering the appeal.

David

carnmores's picture

i absolutely stick to my guns

carnmores | | Permalink

especially re civil / commercial trials i leave the criminal side to you . basic errors are stll made by many judges some who do have a record of nearly 50% overturned, and as David Forbes possibly implies they are simply not upto the mark being too lazy to properly check precedent , read the skeleton arguements etc ; we are helping on a pro bono case at Brighton that is being held in small claims court and the costs are upto £15,000 becuase the judges dont know the law and its simple and they refuse to listen, now they have closed the court office and you cannot book to go and see them for 8 weeks and the case is supposedly being reheard in April , total shambles - i hope you have got the point thta costs are also a critical factor in why some people cannot or wont appeal, it doesnt mean the original judgement is correct.

where can we , if at all , find idividual judges strike rate ?

Nick

davidwinch's picture

Strike rate    1 thanks

davidwinch | | Permalink

carnmores wrote:

where can we , if at all , find individual judges strike rate ?

I don't know anywhere that that information would be available.  (By the way I am not suggesting judges are always right!)

David

"When the scheme failed and Montpelier went bust"

TMR | | Permalink

Why is it so many promoters of these schemes go bust?

They've given the advice, taken the money often based on false promise, paid it out to themselves then walked away.

It's natural anyone wants to minimise their tax bill, some of these schemes are complicated and some not, some work and some don't. The highest authority in the land is the Court, but the Government and HMRC often remain silent for far too long allowing taxpayers to walk in to a trap, thus they all collude with these promoters in allowing the unsuspecting tax payer to make a judgement call based on what the Court or ultimately some higher Court may or may not decide some long time in the future often as a result of some skilled barrister with the gift for the gab.    

Would Mehoo have gone in to this scheme if he had been aware? and what warnings were given?

If you're presented with paying yourself a salary or a dividend, the decision is clear and even the very basic accountants can give that advice knowing its correct. If its not correct and its cost the client, then the accountant is responsible and hopefully (through PI insurance) the client is justifiably compensated.

For a client to differentiate between what is for most accountants a simple piece of advice as opposed to a complicated piece of advice isn't easy and most clients simply rely on the "professional community" to hopefully guide them away from the traps however complicated. I do not know to what extent the accountants were involved (verbally or in writing) if at all in this case, and certainly they too often have to rely on what is latest thinking/court judgement at their peril.  Mehoo has presumably lost a lot of money, and the real culprits have gotten off scot free. They are the ones who should be sued not the accountants albeit there must be some responsibility if the accountants engaged even in verbal discussion without making clear warning but not to the extent of full recovery.

When will these schemes come with the same Government health warnings as a packet of cigarettes and when will legislation be adopted that forces promoters to obtain Government/HMRC backed certification that cannot be undone. Probably when hell freezes over! because HMRC/Government have received a wadge of cash, the promoter' got his share and the legal profession also has had a nice earner!

 

carnmores's picture

@David

carnmores | | Permalink

God forbid !

Sometimes not as easy

ThornyIssues | | Permalink

Jekyll and Hyde wrote:
1) accountants need to be more aware of their limitations in the future and possibly accept that they will have to refer clients upwards from time to time. 2) individuals have to start to take responsibility more and look at who they are engaging and whether that engagement suits their purpose. If you make a wrong decision and engage in the wronwrong type of accountant then you are largely at fault.

While I agree with point two, it is not as easy for someone to gauge an accountancy as it would be to choose a garage to service one's Aston Martin.

I am delighted for Harben

Hayter | | Permalink

I am delighted for Harben Barker. That justice took so long to be given is unfortunate to say the least and it must have been a very difficult period to endure before the outcome was determined.

The common thread in these cases are that the taxpayer parts company with significant cash sums in an attempt to avoid a much larger liability. When the scheme fails, as most seem to do, the promoter is nowhere to be found and it is the accountant who is left to try and pick up the pieces. An almost impossible task given that the accountant will not have sufficient information to rebut HMRC's assault on the case.

Like most accountants, I occasionally dip into a tax mitigation scheme for clients. It always comes with the caveats of not risking my qualifications or the clients peace of mind. The few who have taken up the more aggressive schemes have invariably received a chastening lesson, even with third party ATE insurance.

Any further appeal?

mabzden | | Permalink

Is there any news on whether this case is likely to be referred to the Supreme Court? Is this publicly available information?

Supreme Court

Justin Bryant | | Permalink

Mehjoo has 28 days (from the CA desision) to appeal, but the CA can refuse permission to appeal and so can the SC and even if it went to the SC it is inconceivable that Mehjoo would win as the High Court was clearly wrong and the CA was clearly right. What I find surprisng is that except for one or 2 barristers I know, commentators on this website and elsewhere agreed with the High Court decision last year (or at least did not disagree with it).

Tax schemes

N.Krishnaswamy | | Permalink

 

When avariciousness grows wild  and morality goes down, what the Hell we talk about?