How tax advisers can be negligent
Andy Keates reviews cases where clients have sued their tax advisers for providing negligent tax advice, in the light of a new dispute involving PwC and a former client.
Cases of professional negligence frequently turn as much on what was not said as on what was said.
The leading case is Hurlingham Estates, where a firm of general lawyers (Wilde & Partners) was held to have been negligent because its advice on a lease acquisition failed to mention that a tax liability would arise (which could easily have been eliminated by adopting an alternative structure).
The fact that the firm’s conveyancing partner was not himself capable of giving taxation advice did not absolve him of a responsibility to urge his client to seek such advice.
The legacy of this 1996 case is the doctrine that, in order not to be negligent, an adviser should ensure that any foreseeable issues arising from the advice given are identified; the client should be encouraged to seek more specialist advice if the adviser himself is unable to offer this. The bare minimum is a “health warning”.
The 2014 case of Hossein Mehjoo explored in greater detail the extent of the adviser’s duty to “look around the corner” on a client’s behalf.
Mehjoo sued Harben Barker (HB), a generalist firm of chartered accountants, for negligence in advising on his sale of shares in a UK trading company. The advice letter from HB did in fact include a “health warning”:
“Various tax saving schemes may be available subject to upfront fees and uncertainty regarding Government action.”
Despite this general advice (which Mehjoo failed to pursue), Mehjoo argued that HB should have specifically raised the issue of his non-UK domicile, and encouraged him to seek the advice of a “non-dom specialist” who could have given him access to “significant tax advantages”.
He managed to persuade the judge at first instance (Justice Silber) that the firm’s failure to do this constituted negligence. However, the Court of Appeal was less persuaded.
With regard to gains on the disposal of a UK-situs asset (such as the shares in question), the vendor’s domicile status would have no bearing on the liability to tax. Lord Justice Patten considered that HB was not “under any duty to advise [him] of significant tax advantages which, to their reasonable knowledge, did not exist”.
He drew a clear and meaningful distinction between the circumstances in Hurlingham and those in Mehjoo. In the earlier case, tax was a very real issue which a competent adviser should have ensured was addressed. In the present case, the “significant tax advantages” from a non-domiciled status were illusory: “the competent accountant would not have believed that they existed”.
John Hargreaves, the founder of Matalan, is suing advisers PwC for “negligence” in the tax planning advice he received from the firm.
His claim arises from advice that he should “go non-resident” in 2000 in order to sell a substantial shareholding free of CGT. As matters transpired, he did not manage to satisfy the tests for non-residence, but his tax return failed to report any liability to tax.
Last year the FTT dismissed HMRC’s assessment charging £84 million of tax on the sole ground that it was “stale” – absent that factor, the FTT would have whole-heartedly upheld the assessment. HMRC is appealing the judgment, and if it is successful, Hargreaves will owe tax and interest estimated at £135 million.
Some complex questions are raised by this case.
In his FTT judgment, Judge John Brooks was persuaded that there had been negligence in the fact that Hargreaves’ tax return had omitted any mention of the share disposal – which, given the shaky nature of his claim to be non-resident, was material.
However, he carefully declined to attribute the negligence specifically to either Hargreaves or PwC (he made extensive use of the “and/or” formula).
From what we have seen so far, this is by no means clear-cut. PwC had specifically advised Hargreaves that a “clean break” with the UK was necessary, and had expressed concerns over elements of his ongoing contractual arrangements with Matalan. In the event, Hargreaves clung too closely to the UK and failed to sever his residence status.
In the event that HMRC wins its appeal, the High Court may need to consider the extent of PwC’s duty to Hargreaves. To what extent (if any) should PwC have monitored his patterns of behaviour more closely? Should the firm have advised him to file his returns differently when (or if) it became clear to them that his intent to become a Monaco resident was failing?
Was this a Hurlingham event (there is something the adviser really should have told the client) or a Mehjoo event (the adviser has already told him everything they needed to tell him)? Only time will tell.