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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.

28th May 2020
Tax writer
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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.

Establishing negligence

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?

Learning points

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.

Replies (11)

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By Justin Bryant
28th May 2020 17:10

The real learning point in all these cases is that such risk can be easily managed via an engagement letter. If Wilde & Partners had expressly excluded tax advice from their LoE all would have been well. I would expect PwC's standard LoE to have lots of limitation/exclusion clauses. In Mehjoo the advisor's problem was scope creep i.e. there was no proper LoE for the specific advice.

So it is not the law of tort, but the law of contract that is important in these advisor/client negligence cases (unlike where, say, a lender sues an auditor re the borrower's accounts, where it's tort).

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Replying to Justin Bryant:
By Calculatorboy
28th May 2020 21:20

Absolutely spot on reply..., my standard letter of engagement states accounts plus tax returns , and any further work is by written agreement and will be itemized on the fee note

Ps i dont use icaew template , its a yawn, they are living on a different planet , i feel sure any judge would say the terms are totally incomprehensible to any ordinary small businessman ..just my view

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Replying to Calculatorboy:
By martinhayward
29th May 2020 10:29

Agree with you regarding complicated letters of engagement and the possible views of a judge if tested in court. I want my clients to read them and agree them so I make sure they are clear, short and in simple language. Trying to cover every conceivable angle undermines the content.

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Replying to Calculatorboy:
By MC1
29th May 2020 10:31

I agree that the templates provided by the governing bodies aren't suitable. Do you mind me asking, how do you go about ensuring your engagement letter covers everything and keeps up to date? Do you use a third party or grow your own?

We grow our own - 2 page LOE plus 2 page TOBS but I often find myself worrying that I have missed something!

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Replying to Justin Bryant:
By Mike Warburton
29th May 2020 12:36

The extent of scope creep in Mehjoo was essentially a half hour meeting between Mehjoo and the tax partner at Harben Barker where the suggestions made were mainly for CGT roll over such as EIS. As expert witness for Harben Barker I attempted to explain to the judge that this was rather different from a high risk artificial offshore tax avoidance scheme involving bearer warrants but my evidence was largely dismissed. It is often overlooked that this case was first heard in Queens Bench rather than Chancery. Without intending any disrespect to the judge, by his own admission he found some of the tax concepts difficult to follow. Fortunately at Appeal we had a judge who was particularly well equipped both to appreciate the intricacies of the tax system and the way accountants operate in practice.

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By The Dullard
29th May 2020 10:55

Why's there a picture of a jury for an article concerning civil litigation? You might just as well have got the stock gavel photo out!

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By North East Accountant
29th May 2020 11:28

Our LofE are adapted ICAEW ones.

Our STOB are very adapted ICAEW ones, which we have added to over the years including some terms from a USA lawyers ones... they run to 14 pages, so we can read them.

If ever you need them they are your first line of defence only and are there to slow down whoever is attacking you.

A decent solicitor will break through these but have taken some wounds on the way and you can spend months/years arguing about these which will wear out your opponent.

The most important thing is what you have done (or not done) and what you can prove you have done and not done.

Verbal evidence.....what you say you have done is not worth a candle.

Written evidence... this is what it's all about.

Time recording - a log of everything that you have done will help.

Comprehensive real-time notes of every single telephone conversation and all meetings with clients can save your professional life.

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Replying to North East Accountant:
By Brend201
01st Jun 2020 22:41

This sounds like great advice. Reminds me of a semi-retired older partner in a firm I worked in. He had a A4 page-per-day diary into which he wrote everything - by which I mean everything. He showed me a page once that included "had a sandwich at my desk for lunch". He told me that he had been involved in a significant issue once that went to the High Court and which hinged on conflicting statements. He told the judge that he had it all written down in his diary. Judge read the contemporaneous notes and held for the partner's side.

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By tim hervey
29th May 2020 18:58

Let's hope that members of the legal profession and other legally-recognised conveyancers advise those of their clients who are selling UK property to seek advice from members of the tax profession so as to ensure those clients, where appropriate, file the relevant return and pay any related tax liability, both due within 30 days of the completion date relating to the property sale.

Even if the lawyer's LoE excludes tax advice, surely it is incumbent on the lawyer, and morally the right thing to do, to 'flag up' that a return may be due within 30 days of the completion date together with any resulting tax liability .

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Mark Lee 2017
By Mark Lee
03rd Jun 2020 18:03

Hmmm. Not sure i agree with Justin Bryant that "Such risk can be easily managed via an engagement letter". It's a tad more complicated than this in my experience.

Although it's many years since I acted as an expert witness the basic principles are unchanged. I once acted as an expert in a case where a dual qualified ACA CTA had failed to give pretty obvious tax planing advice to a sub-contractor client. He sued and the defence argued there was no obligation to provide any advice as the engagement letter was clearly only for tax compliance work.

The judgment confirmed that there was a reasonable expectation that such a service should include basic tax planning advice = especially given the CTA qualification on the headed notepaper.

In fact even if the LoE had explicitly stated that no tax advice would be given this might have been struck out as an unfair contract term.

And in the Mehjoo case, where the LoE said no advice would be given, the accountants were found to have gone beyond the terms of the LoE. They had provided advice on occasions and therefore it was reasonable for the client to expected them to give advice in the matter under dispute.

One fundamental issue to keep in mind is what would a reasonable competent accountant or tax adviser have done. If you have done that then you will rarely be deemed negligent.

I wrote at length for AccountingWeb about the Mehjoo case at the time: and later in subsequent comments on a later piece here:

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Replying to bookmarklee:
By Mike Warburton
03rd Jun 2020 20:28

I naturally read your commentary on Mehjoo at the time and appreciated your comment that my reputation was redeemed somewhat by the Appeal court judgement. My eight days in the witness box was certainly longer than usual.
It was indeed a very unusual case. It was heard in Queens Bench before a judge who was usually involved in criminal cases. Hossein Mehjoo was taking the action against Alan Purnell who had been a very good friend of his for many years. They played squash together and dined at each others homes. While Alan was giving his evidence I was sitting in court with his wife. She simply could not comprehend that Alan's friend could be behaving in this was towards her husband. She was clutching a picture of their granddaughter just to help keep a sense of reality. I was so pleased for her and Alan that justice was finally done.


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