Is an accountant liable for not incorporating my business?

Is an accountant liable for not incorporating...

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Hi, I asked my previous accountant 3 times whether i should be a sole trader or a limited company. The first time when i set up my business in July (by this time my PAYE from my previous job for the tax year in question was already close to the 40% tax bracket). The 3rd/last time I asked (a few months later in the same tax year) was when my total earnings for the tax year had reached 6 figures. My business, costs and trading were fully known by my accountant and they had committed in writing to making my income tax as efficient as possible. I was finally incorporated in late January of the last tax year - 6 months after setting up my business and after generating a 6 figure total income for the tax year to that date.

This is not a 'kick the accountant' question. More a genuine desire to know whether the accountant (by not providing any information on the risks/benefits of sole trader versus limited company status when asked 3 times which was the most efficient status - and by stating in writing that they were on top of my accounts and would make my accounts tax-efficient) was potentially negligent in their advice and action? The accountant had committed in writing to taking care of all communication and interaction with HMRC and had stated in writing that they would minimise my income tax. I changed accountants last year as I felt I could not get proper answers.

My new accountant has just completed my sole trader accounts and self assessment and, as a consultant with relatively low costs, I now have notable excess profit liable to tax at 40%

My new accountant has stated that a limited company would have been far more beneficial to me tax-wise and that the decision not to incorporate will result in tens of thousands of pounds additional tax payment.

Am i being unreasonable in expecting to have a case to seek some form of financial redress? Or is it simply a case of you win some, you lose some when it comes to accounting advice? Note my accountant is ACCA accredited.

Replies (82)

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David Winch
By David Winch
25th Jan 2013 17:57

Negligent acts or omissions

Let's be clear here.

If X does a negligent act that causes damage to Y then X may be liable in damages if sued by Y.

If X negligently omits to do something and that omission causes damage to Y then X may be liable in damages if sued by Y.

What is different in these two scenarios is that in the case of the omission when Y claims damages he will have to show that X really ought to have done the thing which he omitted to do for Y (sometimes referred to as 'proximity') and he will also have to show that if X had done what he omitted to do then things would have been better for Y.

Now in this case the OP is saying his (former) accountant should have advised him about forming a company because (i) there was (in law) a contract between the OP and his (former) accountant (albeit there was apparently no letter of engagement) based on the (former) accountant's assertion that he would help the OP minimise his taxes and (ii) the OP repeatedly requested advice on this very point (and provided the accountant with relevant information to enable that advice to be produced).

The OP is also saying that if his (former) accountant had given him the advice (and assuming, as the OP asserts, incorporating would have saved tax overall) then the OP would have accepted that advice and acted upon it and saved the tax.  Presumably that is exactly what the OP has done recently having received advice on that point from his new accountant.

So, on the face of it, that ticks all the boxes (in my opinion at least) for a valid claim against the former accountant (both under contract law and under the tort of negligence).

I do not think there is any merit in law in saying, in effect, if the client knew so much (or could have learned stuff from a search on the internet) then the accountant is absolved from his duty to advise the client when asked.  Similarly there is no merit, in my view, in suggesting that the accountant's liability is diminished because the client could have sacked him sooner and got advice from a competent accountant.

But there is merit, I would suggest, in pointing out that there are pros and cons to incorporation and so the OP's actual loss may be less than he imagines.

I would suggest that the OP (if he is sufficiently bothered about this, which he appears to be) should make an appointment to discuss this with a suitably experienced solicitor.

David

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By Jason Dormer
25th Jan 2013 19:22

My thoughts

Client (Mojo) clearly intelligent and sensible person not looking to blame without reason, and taking account of feedback received.

Whilst always two sides to every story, previous accountant clearly negligent - there was a duty of care, which was breached, and client suffered financial loss as a result.  Three times (written) of asking?  What more can he do?

VAT Flat Rate Scheme - Would expect the benefits of this explained too.

Mojo - Is it worth suing?  Probably not, move on, select another accountant you are confident will work with you and give you the advice and service that as a client you deserve. 

Judging by the information provided f I were you I would ask for (and pay) new accountant for a thorough review to ensure you are operating as efficiently as possible.

 

 

 

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By User deleted
25th Jan 2013 19:49

This thread ...

... saddens me!

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By Mojo1999
25th Jan 2013 22:29

Going offline
Thank you all again. I'm going offline with this now as I don't wish to create any ill-feeling with the post. It has been very useful for me, though, and it has been more than generous of you all to spare the time and share your knowledge.

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By D J P
25th Jan 2013 22:54

I disagree with most of the comments

I’m sorry to disagree with many comments, but this sounds to me like someone who is just trying to push the blame for their own inaction on someone else. Another manifestation of the blame culture.

It is not the accountant’s job to make commercial decisions for the client. How the client runs his business, and indeed how he structures it, is his responsibility. The accountant has not given incorrect or negligent advice because, by the OP’s own admission, he gave no advice at all.

The OP may have asked for advice, but the accountant is under no obligation to give it.

Unless the OP can produce some evidence that the accountant actually agreed to give advice and then failed to do so, I don’t see that the OP has a leg to stand on.

 

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Replying to shaun king:
David Winch
By David Winch
26th Jan 2013 10:33

The agreement

D J P wrote:

Unless the OP can produce some evidence that the accountant actually agreed to give advice and then failed to do so, I don’t see that the OP has a leg to stand on.

If the OP had asked the accountant for advice on, say, how to build a space rocket and the accountant had not replied then I agree the OP would have had no claim against the accountant for that failure to advise.

But here the accountant had sold his service to the OP on the basis that he would minimise the OP's tax and clearly the issue of incorporation was raised by the OP with the accountant in that context.  There was apparently no letter of engagement (which might have more closely defined the accountant's responsibilities).  So I think we must regard the (unwritten) contractual agreement between the OP and the accountant as covering the giving of tax advice by the accountant in response to a query from the OP.

Indeed more generally I think a court would read into any contract between a self-employed person and an accountant dealing with his tax affairs an obligation for the accountant to respond to the client's reasonable requests for tax advice (albeit allowing for the possibilities of an additional fee or referring the client on to a specialist).

(I have covered the "giving no advice at all" point already in an earlier response on this thread.)

David

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By User deleted
26th Jan 2013 10:23

Case to be made?

As I stated above, not one person on this thread - even David W - is in a position to categorically say whether or not the OP has a case. Because we simply do not know all the facts. We can offer advice based on what we think those facts may be, or offer advice on what the position might be in the case of other, theoretical, facts. but that is all it is - theoretical. Having said that, I value, and tend to agree with, David's comments. He has shown over and over that he is more expert than most on such matters.

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By User deleted
26th Jan 2013 10:53

Even sadder now ...

... who in their right mind, knowing they have a decision to make that may need expert advice, would let things get to a point they make that decision without that advice, from either the original source or an alternative?

DW may be correct legally, but that doesn't make him "right"!

I vote we start a war for independance from the US, we could start by chucking all the Macdonalds burgers in Poole harbour and have a Poole Patty Party!

 

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David Winch
By David Winch
26th Jan 2013 11:48

@OGA

It may be that by incorporating when (and how) he did the OP has not optimised his tax position.  We don't know.

It may also be that the accountant regarded the OP as a PITA client.  Again we don't know.

It may be that, because of IR35, the OP has walked himself into trouble by incorporating.  We don't know (although the OP believes he is in the clear as far as IR35 is concerned).

I do think that if the accountant had replied along the lines of, "Let's see how things go for 6 months and then review the position" that that could have been a perfectly sensible response.  Unfortunately it appears that (even if the accountant thought that) he didn't respond in those terms.

Or if the accountant had replied along the lines of, "I am not in a position to advise you on that, you need to consult a tax specialist - my mate Fred Bloggs is very good" that would have been OK too.

Equally, if the OP had not specifically asked the accountant for advice on incorporation I don't think the accountant would have been obliged to provide that advice at that stage (and, in my view, would not have been negligent if he had not).

But based on the 'history' provided to us by the OP in this case I think the accountant has left himself open to legal action.

But each case has to be looked at on its individual facts.

So don't get sad unnecessarily!

David

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By thomas34
26th Jan 2013 12:54

What an appalling thread

And I agree sad.

"The decision not to incorporate will result in tens of thousands of pounds additional tax payment".

I presume that the incoming accountant has set out his calculations to prove his assertion. If not, I believe that it is he/she that needs to look at themselves.

In order to arrive at anything like this hypothetical saving, the profits would have had to be left in the company - would the OP have been happy with this? Upon the extraction (presumably by means of dividends) he'd have incurred a 22.5% charge for higher rate tax (25% of net dividends).

This would be after profits had been depleted by 20% corporation tax.

It appears that the outgoing accountant should have communicated better with the OP but this is a million miles from causing financial loss on the grounds of negligence.

There are many factors to be considered when contemplating incorporation including what level of salary to take in order to accrue an S2P pension and what additional accountancy fees would accrue (in my case we'd be talking about £800 p.a. versus £300 p.a.)

I've seen many cases of incorporation where the only beneficiary is the accountant.

Sorry, but from the information to hand, I believe there's not a snowball's chance in hell of a successful action.

 

 

 

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Replying to biff1001:
David Winch
By David Winch
26th Jan 2013 13:46

Objectivity

thomas34 wrote:

Sorry, but from the information to hand, I believe there's not a snowball's chance in hell of a successful action.

It appears that you have concluded that overall the OP would have made no saving from incorporation - despite all "the information to hand" pointing the other way.

An interesting approach to the need for objectivity which underpins forensic accountancy.

David

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By User deleted
26th Jan 2013 13:05

Time for a song ...

... have to do with this one, closest I could think of, just replace "cars" with "ambulances" in your head when you listen!

http://www.youtube.com/watch?v=GrpSjXo6ah0

 

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By kenny achampong
26th Jan 2013 14:21

make a loss

It saddens me too...because I don't know what "stay as sole trader, make a loss, goodwill transfer" means and now I'm worried that I might be missing something big. How can a "high income" be a loss ?

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Replying to Euan MacLennan:
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By User deleted
26th Jan 2013 14:40

The answer is ...

kenny achampong wrote:

It saddens me too...because I don't know what "stay as sole trader, make a loss, goodwill transfer" means and now I'm worried that I might be missing something big. How can a "high income" be a loss ?

... go and see a competent professional, ideally on recommendation, and pay for proper advice. Every case is unique, as spelt out clearly by many posters above, and the only way to get the right advice for you is to get specific advice for you. And, be proactive, if the chosen professional won't give you clear and easy to understand advice in a timely manner do something about it and find one that will, before you make any decisions, not after, so you don't have to go whinging about it on accounting forums.

Starbucks have high income, but they make a loss ...

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Replying to User deleted:
By kenny achampong
11th Feb 2013 14:24

a profitable loss

Old Greying Accountant wrote:

kenny achampong wrote:

It saddens me too...because I don't know what "stay as sole trader, make a loss, goodwill transfer" means and now I'm worried that I might be missing something big. How can a "high income" be a loss ?

... go and see a competent professional, ideally on recommendation, and pay for proper advice. Every case is unique, as spelt out clearly by many posters above, and the only way to get the right advice for you is to get specific advice for you. And, be proactive, if the chosen professional won't give you clear and easy to understand advice in a timely manner do something about it and find one that will, before you make any decisions, not after, so you don't have to go whinging about it on accounting forums.

Starbucks have high income, but they make a loss ...

Starbucks presumably just charge more from their suppliers in Holland or charge commission or whatever, but can't see how that option is avaliable to just a normal "self employed" person. And what goodwill can be there be attached to one "self employed" person ?

I have asked a couple of accountants and they can't really shed any light on it...so just a hint to point me in the right direction would be good. Thanks. 

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By Steve-EBL
27th Jan 2013 14:03

Eat my hat if any foothold here
Trying to sue an advisor for not answering a question over the positives and negatives of incorporating I would wager has never been brought before a court before, as its so obviously not a winner.

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David Winch
By David Winch
27th Jan 2013 15:34

Let me hazard a guess how this will end.

I cannot see it going to court.

Either the OP will decide not to bother spending time and money (initially) on pursuing his former accountant or he will contact a solicitor who will write a 'letter before action' to the accountant.

The accountant will pass the solicitor's letter to his insurers.  The insurers will fairly swiftly make an offer to settle (with the objective of avoiding liability for the OP's legal costs from that point on).  A settlement will then be agreed.

David

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By L Hunter
28th Jan 2013 15:47

Is accountant liable?

This thread, and the amount of comment it has generated, only goes to illustrate the very great difficulties involved in trying to work in this field.

There are no clear parameters unless you give every client a twenty page letter of engagement which is what I believe the Big Four routinely do.

I did not read all the answers in detail but the general impression I get is that accountants are far too keen to work for free!

 

 

 

 

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By jndavs
28th Jan 2013 21:26

IR35 Again!

Why does the OP think that this does not apply?

On the advice of the original accountant who provided such a sterling srevice?

Or are the new accountants about to get sued for incorporating when perhaps they should not have ;-) - are they liable?

"Damned if I do. damned if I don't" - Bart Simpson

Still our underpaid cousins could make a few bob out of this.

 

BTW IMO no.

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By mwngiol
28th Jan 2013 22:59

Not a legal eagle but...

 

"The accountant had committed in writing to taking care of all communication and interaction with HMRC and had stated in writing that they would minimise my income tax."

If it can be proved that the OP's income tax could have been reduced by incorporation, and that the former accountant was in possession of all the relevant facts and information within the relevant timeframes, and that the question was asked of them 3 times within that timeframe, and that no great feat of clairvoyance was required, then I don't see how anyone can say that there is not at least the possibility of a claim.

Without both sides of the story we can't say categorically one way or the other but surely, based on what we do know, it is possible?

I'm no fan of the litigation culture, but that's the society we find ourselves in :(

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By DMGbus
29th Jan 2013 08:42

Were instructions given to incorpirate?

In the simplist possible terms here's the process that should have taken place:

1.  Pro-active accountant points out that incorporation has both advantages and disadvantages plus extra compliance costs and risks

2.  If accountant wasn't pro-active then client asks about incorporation and receives appropriate advice from the accountant

3.  Accountant then awaits instructions from client as to going ahead with the incorporation process

Step 3 appears to be lacking in the OP's case, or maybe the OP assumed that no formal instructions were required.

It is my guess that in some cases a client assumes that the accountant, having pointed out the adavantages/disadvantages, then proceeds to incorporate the business on the assumption that the client wishes to go ahead.  This assumption is wrong, however some clients do get the incorrect impression that their accountant virtually has a power of attorney and should just do things without proper instructions ("paid to organise and minimise my tax liability").

In summary maybe the OP's issue arises from a misunderstanding and lack of communication.

 

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David Winch
By David Winch
29th Jan 2013 14:28

Step 2

I think the OP is saying that only the first part of step 2 was completed.  He requested appropriate advice but did not receive it.

David

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By User deleted
29th Jan 2013 14:51

Yes ...

... so he should have sacked said accountant and found a different one.

If you don't have the sense to do that you shouldn't be in business in any form!

I still think it is pertinent to know if he didn't get proper answers, or did get answers but didn't like them!

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By User deleted
29th Jan 2013 15:16

I agree OGA

If a client asks for advice (repeatedly) and his adviser fails to respond, the client should indeed consider taking his business elsewhere.

But inaction by the client in that regard does not, IMO, relieve the accountant from his duties as a professional adviser and does not avoid a potential charge of negligent behaviour.

If I were to retain my GP, in spite of concerns about his competence, that would - as far as I know - be no defence against a possible charge of negligence were he to prescribe wrong medication, mis-diagnose etc.

In other words, when considering negligence you need only consider the actions of the person concerned, compared to that of a competent person in the same field. The client's decision to remain with the adviser in this case may have been foolish, but is of no relevance as far as the adviser's conduct is concerned

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By User deleted
31st Jan 2013 10:21

Don't apologise ...

... women have a great propensity for making mountains out of molehills - that is why men have sheds!

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Replying to Red Leader:
By ShirleyM
31st Jan 2013 10:37

Why not?

Old Greying Accountant wrote:

... women have a great propensity for making mountains out of molehills - that is why men have sheds!

... and that is the best place for some men!

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By justsotax
31st Jan 2013 10:57

...with OGA and

others this is a very sad thread....DW I normally have the utmost respect for you and your advice but on this by giving the answers you have you open the doors to all of those parents who send their kids off to school, find that they break their leg on the way in by slipping on an icy path and then proceed to sue the school for making them go, the council for not gritting the pavement and the house owner form only partly clearing the path in front of his house.  (whilst not mentioned that little Billy didn't wear shoes appropriate for the weather conditions and was actually playing 'tick' at the time, so was running).

 

As for a shed...at this time of year that is definitely the best place for me....(and i am damn sure my wife would agree....)

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By User deleted
31st Jan 2013 14:38

Unfair on David W

David has not opened any doors - the blame culture is already alive and flourishing. I see his comments as nothing more than a reflection on the sad state that this country finds itself in. If anyone is to blame it is those behind the adverts that one sees throughout the day on daytime TV and in the gutter press.

EDIT - and in clearing my spam folder just now, 5 out of the 12 emails deleted were inviting me to take an 'injury compensation test'. Enough said.

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By ShirleyM
31st Jan 2013 14:46

BKD ... we are still getting cold calls

.. offering to get us injury claim compensation for a road accident my husband was involved in 14 months ago!

The only person involved was my husband, and nobody got hurt!

... and we are on the TPS, for what use it is  :(

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By User deleted
01st Feb 2013 10:39

Talking of sheds ...

... this is a great twisted lyric ...

... in a perfect shed is a lonely view ...

 

 

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By User deleted
11th Feb 2013 17:14

There is ...

kenny achampong wrote:

Starbucks presumably just charge more from their suppliers in Holland or charge commission or whatever, but can't see how that option is avaliable to just a normal "self employed" person. And what goodwill can be there be attached to one "self employed" person ?

I have asked a couple of accountants and they can't really shed any light on it...so just a hint to point me in the right direction would be good. Thanks. 

 

... always goodwill, just depends on the type!

But why are you asking me, and what are you asking me?

I have no idea how Starbucks make a loss, as far as I know they just charge a franchise fee, what they get charged by overseas companies to offset that I know or care not.

Ask a clear concise question and I might give an answer, but I really struggle to understand what you are talking about and that is probably why the "couple of accountants" couldn't answer you either!

 

 

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By mikewhit
12th Feb 2013 06:28

Beware of the MSC

Don't forget that if there is too close a relationship between the accountant's services and setting up of a limited company, then the company might be deemed a 'managed service company' and subject to extra tax.

So in principle the accountant is best to have an arms-length relationship in that respect.

Talk about 'chilling effect of regulations' !

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