Mehjoo v Harben Barker: Lessons for accountants

The media suggests that a recent professional negligence case imposes an obligation on accountants to advise on tax schemes. Mark Lee looks at the reality of the position.

No sooner had The Times reported on the High Court case of Mehjoo v Harben Barker than variations on their headline were being repeated as fact: “Judge says accountants must help clients avoid tax”. The truth, as ever, is somewhat more nuanced.

In fact the law has not changed. 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 article for AccountingWEB last month Tax schemes: What do you tell clients?

So why is so much of the press saying otherwise...

Continued...

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johnjenkins's picture

One of the    1 thanks

johnjenkins | | Permalink

worrying features of this case is quite simply a lack of common sense on behalf of the Accountants.

I have a multi-national client who has now (after M&S won a high court ruling regarding CT) asked if they could do the same. Should I have already advised them? On the surface not a difficult thing to do but common sense tells you to "hang on a mo" is this as straight forward as it seems and do I need specialist help.

Because of the complications of UK tax avoidance schemes you can get bogged down in something that is quite simple.

The most important lesson

Justin Bryant | | Permalink

I think is this bit in para 174 of the judgment:

“In any event, even if there had not been such a retainer at an earlier time, the Defendants' duty on 2 October 2004 was to use all proper skill and care to give tax-planning advice on that occasion for the reasons set out above (including what Mr. Purnell said in evidence as quoted at the end of paragraph 152 and in paragraph 153 and the amount of CGT potentially payable) so as to reduce or eliminate his liability to pay CGT on the sale of his BFL shares even though not requested to do so.”

Thus, based on this case, engagement letters should exclude liability for any tax mitigation avoidance/planning advice (via meetings, letters, emails or phone calls) unless specifically requested by the client and where the scope and fees etc. re such advice is agreed in advance in writing (e.g. under a separate engagement letter). 

 

bookmarklee's picture

Not sure I agree this is a fair conclusion Justin

bookmarklee | | Permalink

It is clearly however the single para on which other commentators have focused.

Over and above the quotes I shared in the article, in his final summing up the Judge makes clear:  

"I know that this judgment will be a great disappointment for [the general practice partner], who obviously was an accomplished accountant and who was determined to help his clients to the best of his ability. Sadly, he erred by failing to advise the Claimant to take the advice of a non-dom specialist after many years of successfully helping the Claimant and I hope that he understands why I have reached my decision"

On the engagement letter point I think your suggestion would be an unwelcome move. How many clients would want to engage an accountant who promises NOT to offer pro-active tax planning advice?

In any event, as this judgment makes clear, even if your engagement letter ('retainer') makes clear that you will not give advice unless specifically requested to do so, this can be superceded by events. In effect, your contrary actions could create a new implied term on which you conduct business and thus create a duty of care to continue to offer pro-active tax planning advice.

Mark

johnjenkins's picture

@Mark    1 thanks

johnjenkins | | Permalink

Very similar to IR35. If the contract for services is not adhered to in practice it could cause problems.

Ultimately it is the clients decision based on options we give them (regardless of engagement letter) that is the deciding factor. In this case the Accountant didn't give the options the client felt should have been given.

To me that is what an Accountant is all about. Putting figures together then discussing options, but above all, knowing your client.

Managing risks in engagement letters

Justin Bryant | | Permalink

Mark, although this case is not binding, that paragraph from the case seems to establish the principle that regardless of the terms of the existing retainer and prior dealing there is a potential liability (under contract and/or tort as the case may be), as the tax planning meeting had been at the behest of the advisor (and not that of the client). That is the key point.

Thus, all “pro-active” tax advisors are potentially underwriting their client’s tax advice (assuming they contact them, unsolicited, to suggest any kind of tax planning etc.), which is completely ridiculous as that is a potentially unlimited liability (outside the existing retainer liability limitations) and hopefully the accountant will win on appeal.

As you say, the actual tax risk (non-dom issues in this case) could cover anything and everything, so clearly you need to cut-off that unknown risk by cutting off the cause of the underlying liability (probably the worst way to do that is to tell all your staff to refer all complicated tax cases to a specialist, as almost by definition  there is always a risk that the complicated issue will not be identified).

Any accountant knows that they ought not to underwrite such risks and that pretty much most risks, including this one, can and should be managed in an engagement letter.

Clients will equally understand that their “pro-active” accountants are acting reasonably to limit their potential unlimited liability resulting from ridiculous decisions such as this one if they amend their engagement letters accordingly.

I disagree with all your other comments, but that's the main one.

 

bookmarklee's picture

All?

bookmarklee | | Permalink

Justin Bryant wrote:

I disagree with all your other comments, but that's the main one.

 

ALL? That is of course something you have a perfect right to do.

Mind you I would not expect the principal of a 'tax solutions' firm to agree with me on such matters. And I imagine the same would be true even if they have as much experience of professional negligence issues as I have accumulated over the years.

Mark

davidwinch's picture

The actual relationship with the client    3 thanks

davidwinch | | Permalink

I would not agree that this is a "ridiculous decision" of the court.

What I think the judge was trying to do was to understand the real relationship between the client and the accountant at the relevant time (in 2004).  There was a letter of engagement which had been written by the firm and signed by the client in 1999.  The judge accepted evidence that this was not issued as a result of discussions and negotiations between the firm and its client but was simply issued, unprompted, by the firm.  The judge accepted that Mr Purnell (the engagement partner in the firm) explained to the client that the letter was a formality and the client then signed it (see paras 124 - 5 of the judgment).

By 2004 (if not before) the reality of the relationship with the client was that the firm supplied unsolicited tax advice when the firm considered that to be appropriate in a situation (and billed for it).  Such a situation arose in 2004 (and had previously occurred on other occasions).

The evidence of the engagement partner (referring to a period from 2002 to 2004, which includes the period on which the claim is based) was that, "I was always required to consider [the client's] best tax position" (see para 152).

In the face of that it would have been surprising if the judge had found that the firm was actually NOT required to consider the client's tax position.

The engagement partner held meetings with the client and wrote to the client suggesting various ways in which tax might be saved in relation to the impending sale of a business.

So it seems pretty straightforward to conclude from that that the firm had a duty to ensure that the advice which they provided on that occasion was reasonably competent.

Unfortunately the advice on this occasion (the court concluded) was negligent and in consequence the client received a tax bill that could have legitimately been avoided.

So the accountants (or their insurers) have to pay that tax.

I don't find that surprising - do you?

David

bookmarklee's picture

To follow on from David's explanation

bookmarklee | | Permalink

The key issue is that in 2004/05 any reasonably competent accountant would have given a non-dom client the same advice.  The accountants in question failed to do this and, crucially, they failed to refer their client to someone who had the necessary expertise to provide, what was, 'standard' advice at that time.

For most conventional clients the position would have been far less clear cut. The question would always have been - what would a reasonably competent accountant have advised? And was there a generally agreed 'solution' that anyone who really understood the situation would have advised be undertaken?  Very few tax avoidance schemes would satisfy these tests.

In recent years very few reasonably competent accountants would give clients positive advice to get involved in fancy tax avoidance schemes. Thus, as I have long argued, there is no serious prospect of anyone being successfully sued for failing to do this.

And there is definitely no new obligation to do this either.

Mark

davidwinch's picture

The danger    8 thanks

davidwinch | | Permalink

It seems to me that the danger is not that a typical reasonably competent High Street general practice accountant will not be familiar with available legitimate tax avoidance schemes relevant to a non-dom selling a business.

The danger is that the accountant might not recognise when he is out of his depth.

There is nothing wrong with being out of your depth - nobody can be au fait with every aspect of tax / accounts / audit / investment business / etc.

But there is something very wrong with failing to recognise when one is out of one's depth and cheerfully providing advice that is inadequate (and billing for it) - particularly when the consequence is that the client suffers as a result.

Had I been advising this client I think my advice would have been along the lines of, "There is a lot of money involved in this transaction - I think we should arrange for some specialist tax advice in case there are any savings that might be made".

That's all it would need to keep me out of trouble!

David

bookmarklee's picture

Guide to Professional Conduct for those working in tax

bookmarklee | | Permalink

davidwinch wrote:

It seems to me that the danger is not that a typical reasonably competent High Street general practice accountant will not be familiar with available legitimate tax avoidance schemes relevant to a non-dom selling a business.

The danger is that the accountant might not recognise when he is out of his depth.

Had I been advising this client I think my advice would have been along the lines of, "There is a lot of money involved in this transaction - I think we should arrange for some specialist tax advice in case there are any savings that might be made".

Well said David. Indeed paras 2.5 and 2.6 of the Guide to Professional Conduct for those working in tax say much the same thing:

2.5 - "a member must not undertake professional work which he is not competent to perform unless he obtains help from an appropriate specialist."

2.6 - "A member who is giving what he believes to be a significant opinion to a client should consider obtaining a second opinion to support the advice."

Mark

TaxTeddy's picture

An excellent debate    1 thanks

TaxTeddy | | Permalink

A short thanks to the participants above in a well reasoned debate.

To those of us in small practices who feel vunerable to the whole issue of negligence claims, this is a valuable discussion.

Many thanks

 

Tax schemes: Lessons for accountants    1 thanks

adambl | | Permalink

 

I haven't read through the case in great detail but the thing that surprises me a little is why did the firm's insurers not put a stop to the case sooner? Surely they must have thought the accountants' reasons for not advising on non-dom issues were a bit weak.

In my (limited) experience of insurers they will always want to do a deal and avoid legal costs where they can.

 

Jon Stow's picture

Reasonably competent    1 thanks

Jon Stow | | Permalink

This is an area of tax in which I would consider myself "reasonably competent" but when dealing with a complex issue involving large amounts of money, our first thought should be about the risk, however small, of getting it wrong. Even if we had got it right, how we might deal with a litigious client disappointed with an unexpected outcome or one which was not quite as good as another plan about which he had learned later on?

We all have to know our limitations, one of which is risk in our own home territory. If the risk is great even where we know the answer, we should pass on the work to a larger entity with an appropriately sized and experienced team of advisers and a large PI policy.

Common Failing    1 thanks

Ian McTernan CTA | | Permalink

I have seen this a few times before- the 'general accountant' who will try and do everything inhouse for the client even when they don't have the expertise.

I think this case is really about knowing your strengths and weaknesses and knowing your client.  Clearly the vast majority of us would know that there may have been an issue with non-dom status as we would have it marked up on our files!

For the amount involved, I'd have been reaching for my contacts lists to run it past one of them and get them to take a look at it.  I find clients are more than happy to pay for such advice- all it takes is a quick phone call to the client along the lines of 'I'd like to get a specialist to review this as it's not really my area of expertise, he's quoting £xxxx for the review' and after I outline why I think we should get the advice no client has ever minded, nor have I ever lost a client from doing this- in fact I have gained several, as those clients tend to be very happy that I know my limits and know I always have their best interests at heart, and talk to their friends about it!

 

Morals to be learnt here: get to know your clients, and know enough to know when you should be seeking advice. (a special mention here for 'theVATpeople' - many thanks!).  There is no shame in not knowing it all.

Old Greying Accountant's picture

I don't want to side-track this debate, but ...    2 thanks

Old Greying Acc... | | Permalink

davidwinch wrote:

But there is something very wrong with failing to recognise when one is out of one's depth and cheerfully providing advice that is inadequate (and billing for it) - particularly when the consequence is that the client suffers as a result.

David

... this is the key element to me of the qualified/non-qualified debate!

Non-Dom Specialist's Controversial view    4 thanks

JackHarper | | Permalink

I have been advising clients about tax avoidance since 1969 including on "schemes" when they were in rampant vogue before Ramsay and to a degree after like the expert witnesses in the case. I have been advising non-doms since then too. Before 2008 it was routine to offer to clients some fairly bizarre though totally routine remittance planning advice. E.G in the year before becoming resident sell your 5 offshore trading companies to a sixth to create a debt repayable out of company cash flow as tax free future remittances.

I have heard of clients who were not satisfied with a 10% tax rate like Mehjoo. If this was his sole idiosyncracy so be it but in my experience such a lack of a sense of perspective is likely to be pervasive.Ideally I would not want to take on such a client at all. For over 20 years such a decision has been fortunately my sole prerogative.

Before 2008 a non-dom could have held his shares in a non-resident company owned by a non-resident settlor-interested trust. The company would have sold the UK shares and the cash could have been distributed up ultimately to the settlor, tax-free  because of his non-domicile despite his UK residence. I accept of course that the shares have to go into the structure before they acquire significant value. But surely such a client who could access a 10% tax rate (as still possible up to £10M) should be wary of the hassle and loss of control involved in this structure though I acknowledge it may have an IHT advantage also.This type of balancing judgment has always been a part of tax planning ("schemes" included).

Mehjoo was prepared to pay £200,000 to save tax of about £850,000 on sale proceeds of £8.5m with no guarantee of success.Of course he was entitled to do so, whatever Mrs Hodge may say, but I wish his advisers could have foreseen that he would later sue them, despite huge costs, on the grounds they should have kept him tax-free altogether. I doubt they could have made enough in total fees to have made that worthwhile. The trick is not to take such a client on or ditch him as soon as his psychopathology manifests itself. While not easy an amateur pilot client says of an iffy weather forecast: it's always better to be down here looking up than up there looking down.

 

An excellent quote!

arnold28 | | Permalink

 it's always better to be down here looking up than up there looking down

Perhaps worth a few specifics...

James26 | | Permalink

...without being too specific so as to be advice :).

So if somebody does have a compliance only engagement letter and does not give pro-active advice would that put them in the clear? 

If no, would it put them in the clear if after sending each computations they reminded the client that their scope of works does not include advice on potential claims such as; M&S, Flemming etc.

I'm thinking more of johnjenkins comment at the top.  I'd have thought that there could very well point the finger if M&S claims wasn't mentioned over the last 6/7 years and you knew there were substancial profits in the UK and losses available in Europe that might (subject to M&S being successful) be available. 

I'm only speculating not having read the 66,000 words or knowing your specifics.  However, this is why there is a long list of caveats that goes out with the letter to the client when a Big 4 send a completed tax computation to a corporate client, it isn't just about getting the fees in (e.g. CFC we have not reviewed please let us know if you'd like to pay us more for this, ACT claims we have not reviewed please let us know if you would like to pay us more for this, M&S not considered would you like to pay us more for this, TP you've said you have the documentation would you like to pay us more to review this, Thin Cap/Allowable purpose/Arbitrage/Debt cap and the list goes on).

 

 

finding facts and avoiding faults    2 thanks

moneymanager | | Permalink

Many accountants would think they have little to learn from the way that finanical advisers work. In the area of 'know your client' I have generally found the standards and methods used by both accountants and solcitors to be woefully inadequate.

A financial adviser will use a standard form designed or chosen by their business and be trained in its deployment. I have recently seen such documents ranging from about 8 to 40 pagesBy this I mean that questions of discovery are not random but structured so as to be both comprehensive and unambiguous covering both facts and clinets intentions and preferences i.e. 'hard and soft facts'.

A cynic may say they are just sales tools designed to discover business opportunities. Well, perhaps, but if the potential client didn't intend to do something to his benefit he wouldn't be there in the frst place.

Too many 'professionals' still employ an A4 blank pad for teh purpose which can easily lead to ommissions of both fact and client intetnion and lead to cases such as this.

 

 

 

Litigation is not a search for Truth    2 thanks

JackHarper | | Permalink

It is a game with highly specific rules run by lawyers. Although those giving evidence must not perjure themselves the object is to win. A judge is prepared to rule out as inadmissible a good point, even a killer blow, if it could have been raised a lot earlier. So only a certain kind of justice receives but a passing nod.

This type of litigation, and its settlement, is often conducted by the PI insurers to the defendants and their fabulously expensive lawyers. They only instruct those who "wecognise our handwiting". Given the evidence of the defendants,  commendably honest but close to an admission of liability, it is surprising there was not a settlement without proceedings. An obdurate and greedy plaintiff can leave a defendant with nothing to lose but to fight. The best hope for a successful plaintiff of this kind is that the defendant goes bankrupt and has a very wealthy wife.

I once had a property developer as an occasional tax client. He deliberately engaged a  cheap incompetent accountant and solicitor conveyancer and made regular claims met by their PI insurers.Apparently everyone in this menage a quatre was happy with the economics of it.

The plaintiff in this case succeeded in getting his sale proceeds tax-free, courtesy of the defendants' insurers presumably. He lost the scheme fee as presumably it did not work and there is no positive evidence that another scheme would have. The defendant, his longtime adviser and friend, must pay whatever his insurers will not. Multiple professionals have fed off the carcase. A nearly victimless outcome. Except that like car insurance the premiums of all of us will go up, underwriting capacity will shrink further, some will be refused cover and others priced out of business altogether.

Dontcher just luv market forces and the joys of professional (sic) practice!

Waste of Time    1 thanks

North East Acco... | | Permalink

What is the point of an engagement letter if its ignored?

We spent ages redoing our engagement letters a few years ago and they need updating again. Might just do a one pager saying we liable for everything and put all assets in wifes name!

Mind you, regardless of whats in the engagement letter these guys seem to have got this badly wrong.

Know what you know, but more importantly, know what you don't know but know someone who does!

bookmarklee's picture

It was ignored by the accountants

bookmarklee | | Permalink

North East Accountant wrote:

What is the point of an engagement letter if its ignored?

My reading of all this is that the accountants went beyond what their engagement letter said they would do. As such THEY created a new implied term that obliged them to give tax advice even if not specifically requested to do so by their client.

Some years back I was the 'expert' in a professional negligence claim that went to court. In that case the accountant sought to evade responsibility by pointing out that their simple engagement letter only referenced the completion of accounts and tax returns. As such they sought to defend their complete failure to give the most basic of tax advice to a client. The accountant's headed paper noted they were a member of the ICAEW Tax Faculty and it was clear they knew their client had no other advisers.  I agreed with the claimant that any 'reasonably competent' accountant would have given the most basic of tax advice that the accountant in question had failed to do. After all that was why the client had engaged a qualified accountant to help with their accounts and tax. As is invariably the case!

If that engagement letter had specifically excluded the provision of any tax advice, the outcome might have been different. But frankly, as I indicated above, which clients would want an accountant who refuses to give any tax advice?

I have long believed, and this case confirms, that every general practice accountant needs to have access to specialist tax support. This may only be needed on those occasions when clients' tax problems, issues and questions require tax expertise that goes beyond the accountant's day to day experience. And, as this case shows, it is probably worth speaking with an appropriately experienced specialist whenever the amounts of tax are more significant than usual.

Mark

ps: One reason why my Tax Advice Network produces a weekly newsletter containing topical, commercial and practical tax tips is so that general practice accountants have a regular reminder that they have immediate access to independent tax specialists across the UK.

Red Leader's picture

@Mark

Red Leader | | Permalink

What would a "reasonably competent general practitioner" do in these circumstances:

I prepare tax returns for the client and provide tax advice from time to time. A third party with the client's permission wants confirmation that the client has net worth excluding private residences of at least £500k. I am confident that their net worth is several times this. However, I have not done any work to support this view. The client is non-business and so a balance sheet is not part of the work done each year. What is my liability position if in those circumstances I just go ahead and sign the confirmation letter?

Say a black swan event occurs and net worth plummets, is there comeback on me, assuming the third party suffers a loss?

johnjenkins's picture

So our strive

johnjenkins | | Permalink

for perfection goes on and those that make mistakes will be penalised one way or another.We have a complicated and antiquated tax system that is not fit for purpose and is causing our profession many problems. More smaller business are trading overseas, the world is a much smaller place now yet we rely on tax avoidance schemes to highlight the problems. The days of the small general practitioner are numbered.

bookmarklee's picture

@RedLeader

bookmarklee | | Permalink

Sorry - but this thread is not the place for such a specific discussion. Do post it in the Any Answers section of the site and I'll share a quick view there.

But the simple answer is that no reasonably competent accountant would simply sign the letter!

Mark

The trouble with "reasonable competence"

hiu612 | | Permalink

is that one cannot know they are incompetent. Put another way, if they knew they were out of their depth and had referred the client for specialist knowledge, there wouldn't have been a problem. The fact that they didn't know they were out of their depth makes all the advice to advisor's about what to do when you are in it over your head redundant. It is the first step of realising you need help which is the stumbling block.

The trouble with "reasonable competence"

hiu612 | | Permalink

is that one cannot know they are incompetent. Put another way, if they knew they were out of their depth and had referred the client for specialist knowledge, there wouldn't have been a problem. The fact that they didn't know they were out of their depth makes all the advice to advisor's about what to do when you are in it over your head redundant. It is the first step of realising you need help which is the stumbling block.

Know your client

James26 | | Permalink

I think moneymanager makes a good point.  Hands up anyone who has worked in an accountants with more than one office where they would trust what is recorded in their customer information management / permanent file?

Quite likely that though they knew he was non dom 20 years+ ago that this might have been lost by the time you get to early 2000s

Ermintrude's picture

NOT KNOWING what you don't know....    2 thanks

Ermintrude | | Permalink

....that's the danger.  I agree with David Winch.

With this in mind, I'll get a second opinion from my consultant on anything out of the (/my own personal sole practitioner's everyday work) ordinary; and also anything involving larger (or significant to the client where less well off) sums of money.

I suppose if there were to be a poor result even after using a specialist, at least one could demonstrate they'd taken reasonable steps and therefore not been negligent.

Yes hiu612, you are basically correct

Justin Bryant | | Permalink

hiu612  - yes that's the problem and is why this is a ridiculous decision and is why, in the meantime pending the outcome of any appeal (or a similar case being decided the other way), proactive tax accountants/lawyers need to limit their (new and very surprising) potential unlimited liability in writing (via their LoE) and clients will obviously not mind that. Even if Mark Lee is right and I am wrong on that point, would you rather risk having an unhappy client who objects to you limiting your potentially unlimited liability re underwriting his tax risk in full (and is not the sort of client I would want), or risk losing your home with unlimited liability for the sake of keeping such a client happy for a meeting/phone call/email fee of probably less than £500 plus VAT? It’s a no-brainer. 

pembo's picture

dangerous    2 thanks

pembo | | Permalink

when either ego gets in the way or the inexperience to know that you're out of your comfort (and PI) zone. Often both get in the way.The trouble with tax is not so much what you know but what you do not know often in terms of   interactions. This is potentially very dangerous. Many GP accountants can go from A to B to C but do not realise that they should be considering D/E/F merely because they are blissfully unaware D/E/F exist. As the judge said this is in itself not a criticism. Not recognising that there may be D/E/F is however.

I had a recent case with a NHS consultant.I was 99% sure of his position but advised a written second opinion from a specialist that he fully appreciated. This was not perceived as either a sign of weakness or incompetance but sound professional judgement. Would you really expect your GP to pronounce on your heart problem or would he refer you to that consultant ? The key as with most of these issues is experience and the trust your client has in you.

Yes pembo, you are basically correct    1 thanks

Justin Bryant | | Permalink

Pembo, an even better and more accurate analogy would be if your GP phoned you up unsolicited and invited you to a health check-up for, say, £200 (plus VAT). How nice of him you might think.

Well, the corollary of this ludicrous case is that if the GP did not spot a potential cure for an ailment you had that could have been spotted and successfully dealt with by a consultant (substitute tax specialist) and you subsequently dropped dead from that, then he has unlimited liability for whatever ailment you died from and that could have been prevented had he referred you to the life saving (substitute tax saving) consultant. 

 

 

Irrespective of the law....

Trevor Scott | | Permalink

... it is my view that it is common sense, for any practitioner, to advise on avoiding unnecessary taxes or advise where to go for such advice; because if you don't then you are likely to lose at least that client (on bad terms). Advising of such, in my view, is also part of offering a decent service to clients.

carnmores's picture

Re not taking on a job without requisite knowledge    1 thanks

carnmores | | Permalink

this is something from time to time that many are tempted by ; lawyers are particularly bad at this in my experience and charge vast fees to find out something they possibly should already know but dont admit too

Tax    2 thanks

linda1jean | | Permalink

David Winch is correct in that as soon as an accountant see a huge money transaction this should be the red flag!  Anyone would have to wonder how it will be taxed and must inquire.

Old Greying Accountant's picture

If you have fee protection ...    1 thanks

Old Greying Acc... | | Permalink

... they usually provide Tax and VAT specialists you can use for free.

I generally run thing spast ACCA technical and the TaxWise helpline, i can then guage if I am happy with my position ofr if I need a second opinion, at which point I will generally point the client at a specialist and have them contract direct - although I insist I attend the meeting (for free, mainly so I understand what is suggested and don't compromise the advice through ignorance).

finding facts and avoiding faults

ver1tate | | Permalink

Too many 'professionals' still employ an A4 blank pad for teh purpose which can easily lead to ommissions of both fact and client intetnion and lead to cases such as this.

How true!!

 

plummy1's picture

What about this scenario?    1 thanks

plummy1 | | Permalink

As a company that gives advice on capital allowances claims we often talk to the owners of commercial property. Invariably they seek guidance from their accountant on the possibility of claiming capital allowances and in many cases the potential claim does not proceed because the accountant tells the client they have claimed for all available allowances.

However we are certain in many instances that this not the case and the accountant is unaware of the full extent to which CAs can be claimed, or they  believe, as many do, that making such a claim will result in a higher CGT liability on disposal of the property. My question is in these circumstances could the accountant be seen to be negligent in not advising that a claim is possible and recommend the engagement of a specialist firm to undertake the work. I am biased but it would seems to me that where a firm is prepared to accept clients who incur commercial property expenditure that they should be conversant enough with the law to recognise capital allowances claims potential and advise their client accordingly. What are people's opinions on this point?

 

.

The judge himself in the

Justin Bryant | | Permalink

The judge himself in the subsequent costs hearing at para 48 agrees on the key point as follows:

http://www.bailii.org/ew/cases/EWHC/QB/2013/1669.html

“What is important is that the Claimant's case was that the Defendants had an obligation to give tax planning advice to the Claimant even when not requested to do so. As I have explained, his case was based first on a continuing duty as evidenced by Mr Purnell's conduct from the time when he was a partner in the First Defendants, while the second and alternative aspect of the case was that even if such a duty had not previously existed, it arose during the course of the meeting on 2 October 2004. On both of these matters the Claimant has succeeded.”

The lawyer in the link below also agrees that that is the key point.

http://www.lexology.com/library/detail.aspx?g=646f260e-9b1a-453c-8bb5-10808aa2cae5

With respect to (non-lawyer) accountants commenting that in their view there are no surprising/new potential liabilities that arise from this case (when the case clearly decided that the defendant effectively agreed to underwrite a client’s tax planning risk with unlimited liability via a proactive meeting on it regardless of any prior dealing), and/or that this risk can be managed simply by referring such clients to tax specialists (what would be the point of the proactive meeting by the generalist advisor  if some other specialist advisor benefits with a much bigger fee than the generalist (without being exposed to the above risk) and it is inevitable that not all “specialist” situations would be identified in such a meeting anyway so why take that risk unnecessarily when you can carve it out in your LoE), they might want to check their engagement letters and PI policy and think again. 

 

 

 

davidwinch's picture

What is NOT surprising    2 thanks

davidwinch | | Permalink

Surely what is NOT surprising (or ridiculous) is that when the accountants offered tax advice on a specific transaction (and billed for that advice) they had a duty to the client that the advice which they provided was reasonably competent.  If and when they fail in that duty they have to indemnify the client for what he has lost due to their failure (i.e. the tax which he could have avoided).

That is hardly 'news'!  It is why accountants routinely carry professional indemnity insurance.

Had the accountants simply referred the client to a specialist for the relevant tax advice then they would not have been liable for the tax avoidably suffered by the client as a result of their inadequate advice (because the client would be relying on the advice of the specialist - not them).

The letter of engagement which these accountants had with this client did not reflect the reality of the service which they were providing. (They routinely provided, and billed for, advice that was not within the scope of their engagement letter, and THEY recognised that they accepted a duty to the client to provide that advice.)  So I think one would have to be cautious about assuming that a letter of engagement (which in this case had been issued unilaterally by the accountants without discussing its terms with the client) neutralises the danger of being sued.

The fact of the matter is that if you give your client bad advice and he loses money as a result he may sue you.  The best way to avoid that happening is to give competent advice (or wheel in a specialist if you are out of your depth).

David

bookmarklee's picture

Cheers David

bookmarklee | | Permalink

The other key issue to note is that what could be expected of a reasonably competent accountant in 2004/05 is not the same in all respects as what one could expect of a reasonably competent accountant these days.

In terms of lessons for today - what matters is what can be expected in 2013.

I disagree with Justin Bryant's assertion above as to what the case "clearly decided" and with his view as to the consequences of this. But hey, if the profesional bodies and insurers all that take that view then I will accept I am wrong. 

Mark

davidwinch's picture

Justin Bryant's point    1 thanks

davidwinch | | Permalink

I am not really sure what point Mr Bryant is making.

If he is saying that the accountants in this case ought not to be liable to be sued based on the advice they gave at a pro-active meeting to discuss tax aspects of a particular transaction (for which they billed the client) - presumably because the accountants were being pro-active - then I disagree with him.

If he was saying that the case decided that a pro-active accountant is liable for anything that happens to his client which could have been avoided by better advice from the accountant - then I disagree that the case decided that (because in this case the accountants arranged meetings with the client to advise him on the very issue on which they then failed to give competent advice).

If he is saying all professional liabilities can be side-stepped by a limitation clause in the letter of engagement issued unilaterally by the accountant, then I disagree with that.

If he is saying that accountants may be liable - to an unlimited amount - if they give incompetent advice, then I agree with that (but don't consider it to be new, or surprising, or ridiculous).

I regularly review my PI insurance.  I assume other accountants do the same.

David

johnjenkins's picture

I agree with    1 thanks

johnjenkins | | Permalink

Mark in respect that expectations today are perfection with no margin for error. So I do believe that a LOE can be worded so that liability stays with the client (look at what has been achieved with contracts for services - IR35). However the LOE would have to be strictly adhered to. My view has always been that if I'm not sure I tell the client and we discuss options. The problem occurs when you think you are sure and it turns out you're wrong. I'm sure a lot of us get asked "how can I reduce my tax bill? what do you suggest? what's your advice?" Once you start mentioning costs of specialist advice and how much tax it would save, the questions go away. This case was a specific and with that amount of money involved, even a courtesy call to a specialist would surely have been the route to go (common sense). There could possibly have been an argument over the billing was for time rather than advice.

We can agree to disagree (or

Justin Bryant | | Permalink

We can agree to disagree (or not understand each other) but I thought at least the article by the lawyers at CMS (Simon Garrett and John Enoch) was clear and presumably they are specialists and agree with my view that this case is of concern to all tax advisors re proactive advice (or volunteering assistance as they put it).

Ultimately, people who recommend using a specialist to minimise risk should heed their own words and respect the views of competent specialist  lawyers (i.e. a lawyer who specialises in PI claims) rather than their own non-specialist views. Indeed they risk being sued themselves for advising outside their own area of competence (if any). 

I see another law firm agrees

Justin Bryant | | Permalink

I see another law firm agrees with me:

http://www.bonddickinson.com/insight/publications/accountants-how-effective-your-engagement-letter-practice

They also say:

"...Furthermore, it is not for an accountant to advise outside of its expertise." 

Presumably therefore they would also agree with my comment above re non-lawyer accountants advising on PI issues.  etc. etc. etc.

 

Ermintrude's picture

Don't think defensively

Ermintrude | | Permalink

Imagine if you weren't in our profession, and if you were the client?  I would be absolutely bouncing!  I would most certainly sue my accountant!

Whether I'd expect to win or not - I suppose therein lies the issue.

johnjenkins's picture

There is another

johnjenkins | | Permalink

side to this. If the client had accepted the Accountants advice (and paid for it) (we also don't know how much tax was saved by that advice) in previous years then it should follow that client should have accepted the advice re CT (even though it wasn't the most tax efficient method). This begs the question are Accountants really responsible for getting their clients tax bill as low as possible? The answer to that is no. However we should always make our client aware of alternatives. I see no reason why that cannot be incorporated in a LOE.

bookmarklee's picture

Bond Dickenson

bookmarklee | | Permalink

Justin Bryant wrote:

http://www.bonddickinson.com/insight/publications/accountants-how-effective-your-engagement-letter-practice

They also say:

"...Furthermore, it is not for an accountant to advise outside of its expertise." 

We agree. Their analysis and conclusions are pretty much on all fours with mine above.

Mark

pembo's picture

notwithstanding

pembo | | Permalink

the facts of this case I find it somewhat ironic that in a climate where we as a profession are seen as the bad guys for costing the country £squillions in tax avoidance these guys get punished for doing the opposite. Can't win eh ?

davidwinch's picture

What the lawyers say    1 thanks

davidwinch | | Permalink

Justin Bryant wrote:

We can agree to disagree (or not understand each other) but I thought at least the article by the lawyers at CMS (Simon Garrett and John Enoch) was clear and presumably they are specialists and agree with my view that this case is of concern to all tax advisors re proactive advice (or volunteering assistance as they put it).

Ultimately, people who recommend using a specialist to minimise risk should heed their own words and respect the views of competent specialist  lawyers (i.e. a lawyer who specialises in PI claims) rather than their own non-specialist views. Indeed they risk being sued themselves for advising outside their own area of competence (if any). 

 

I also agree with the lawyers in the article to which you refer.  They say in that article:

 

"This is . . . a case which has not changed the law . . . The accountants were found liable to pay Mr Mehjoo’s entire CGT bill as well as penalties and interest imposed by HMRC in respect of the disallowed CRP scheme . . . The judge confirmed that there is no such thing as a general retainer to provide advice as and when needed (unless an engagement letter specifies this). The professional’s duty will be governed by the contract between the adviser and his client . . . The judge stressed, however, that even if there had been no prior assumption of responsibility to advise Mr Mehjoo on tax implications, such a responsibility was assumed for a particular key meeting, because that meeting was expressly convened to discuss CGT liability . . . The accountants were not negligent in failing to appreciate the advantages of a BWS scheme over a CRP scheme, but through their failure to realise that they should advise Mr Mehjoo to take specialist advice. If an accountant (or other professional) lacks the expertise required to meet his client’s needs he must refer that client to another professional adviser. Should he fail to do so, he may become liable for the foreseeable consequences of the client’s inability to benefit from specialist advice . . .

Accountants and other professionals need to be aware that volunteering assistance to clients can establish a course of conduct that negates any limits to the scope of a retainer stipulated in an engagement letter. This may apply particularly where accountants enjoy long-standing close relationships with their clients who then expect advice as a matter of course.  The second key message from this case is that each professional firm should understand the limits of its expertise and ensure that expert assistance is enlisted as needed."

 

All of this I agree with 100%.

David

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