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? Mostly for the normal reason that controversial headlines attract more attention. Also because many commentators have an agenda or simply follow the herd. In other cases it is, as it is so often, due to the journalists being unaware of enough of the surrounding issues to write an accurate report. And many of those experts who have commented evidently did so before reading the case report.
I have no intention of attempting to summarise a judgement that runs to more than 66,000 words. You can read the whole thing by following this link if you are so inclined. It does contain many fascinating revelations and conclusions. I also understand that it is subject to appeal. It is hard to see how the key points that I have addressed below will be affected regardless of the outcome of an appeal.
In this article I intend to focus only on the key issues that are relevant to the question at issue.
Hossein Mehjoo was claiming damages against his former long-standing accountants, Harben Barker, for alleged negligence in 2004/5. In effect, the way these cases work, the allegation was that they had failed to provide the advice that could be expected of a “reasonably competent” accountant.
Mehjoo was born in Iraq in 1959 to parents of Iranian origin. He lived there for 12 years before coming to the UK. His background was well known to his accountants who had acted for him since first completing his tax returns in the 1980s.
As any reasonably competent accountant would have known, it was important to consider Mehjoo’s domicile status in the context of his tax affairs. It seems that his accountants did not do so. In such a case any accountant would be found negligent if they also then failed to consider the application of what might be considered ‘standard’ advice to non-doms.
In October 2004 the accountants considered the potential CGT position in the event that Mehjoo was to sell shares in his company. The general practice partner liaised with the firm’s tax partner although neither seems to have considered even the possibility that their client might have been a non-dom or the advice that would then have been appropriate. The CGT at stake was around £800,000.
The accountants’ defence
It is a good few years since I last acted as an expert witness in a professional negligence case. However I have long believed that the following arguments, put forward by the defendants, are doomed to fail in most such cases. The accountants claimed that:
- They were not obliged to give their client tax-planning advice unless expressly asked to do so
- They were not required to advise their client to obtain tax planning advice from a non-dom specialist
Other arguments more specific to the facts of the case were also put forward as part of the defence. But these are not relevant to this article so I have not covered them.
The judgement includes reference to various procedural issues that denied the defendants the facility to amend their defence and to introduce further arguments. Like the judge I doubt these would have impacted the issue of whether the defendants did all that could be expected of “reasonably competent” accountants.
What did the accountants do wrong?
The judgement notes that “No criticism is made of the fact that the defendants, as generalist accountants, were not aware of [a common form of tax planning for non-dom taxpayers]”
The accountants’ mistake was that:
- they missed the fact that their client was a non-dom
- this required the provision of advice that went beyond their expertise
- they failed to seek specialist tax support advice on behalf of their client or to introduce him to a suitable tax specialist
As a side issue I would also note that the accountants attempted to rely on a literal reading of their letter of engagement. Arguably therefore they had no obligation to provide any tax planning or tax mitigation advice unless this was specifically requested. And, in the case in question, they claim that no such request was made although this was disputed by Mehjoo.
The problem for the accountants was that they routinely offered their client unsolicited tax advice and had taken the initiative as regards the transaction in question. Perhaps this too was a mistake. But they would have given much the same advice even if the client had asked for it so not much turns on this point.
Lessons for accountants generally
I would summarise the most obvious lessons as follows:
- Ensure you have considered the domicile status of any clients born overseas or who might otherwise, due to their parentage, have the facility to claim they are not domiciled in the UK. You should also do this as regards clients’ spouses/partners
- If you have such clients and there is any prospect of tax advice being required or relevant you should ensure that you are able to advise them on the non-dom related issues and consequences
- If you are not able to do this yourself then you are at risk of a professional negligence claim if you do not make this clear. You can of course mitigate the prospect of such a claim by engaging or introducing a suitable specialist to provide non-dom related advice
The lessons from this case though are not restricted to clients who may be entitled to claim non-dom status. The same principles apply to all clients and all areas of specialist advice that they might require.
Are you ‘reasonably competent’?
Accountants have long been at risk of professional negligence claims if they fail to provide the level of advice and service that would be provided by a “reasonably competent” accountant.
Anyone who has attended my talks on the question of professional negligence or who has read my ebook containing tips and advice on risk management for accountants, will recognise this phrase.
The guide to professional conduct for those working in tax contains a standard obligation regarding professional competence and due care that is relevant here: “A member must not undertake professional work which he is not competent to perform unless he obtains help from an appropriate specialist.”
The question will often be what advice would a reasonably competent accountant have given? It is no defence to claim that only a specialist would have given the advice that the accountant failed to provide. This is because a “reasonably competent” accountant who did not have the specialist expertise, would have complied with the guide to professional conduct and introduced or sought advice from a suitable specialist.
The judge did not criticise the accountants for failing to advise on a complex tax scheme.
They were also not held liable for failing to advise on such scheme.
There was no suggestion that all accountants need to be tax experts.
And there was no suggestion that the accountants should have been aware of fancy tax planning schemes. On the contrary.
The judge explicitly confirmed the advice in the guide to professional conduct to which I referred earlier.
He stated that the defendants were “reasonably competent generalist accountants” and that they therefore “had a contractual duty or concurrent tortious duty to advise the Claimant….that he should take tax advice from [specialist tax advisers].”
This is a long established and uncontroversial conclusion.
This case is however a topical reminder of the dangers of trying to go it alone.
Even if the accountants had won the case they would still have had to commit the same amount of time and effort to defend their position. The worry and distress that this can cause is enormous. On this occasion one of the key partners in the firm had since retired. He would never have expected to spend so much of his retirement preparing for such a case that related to matters that took place many years previously.
Mark Lee is consultant practice editor of AccountingWEB and writes the BookMarkLee blog. This and his ebooks are for accountants who want to stand out and be more successful in practice, online and in life. He is also chairman of the Tax Advice Network of independent tax experts providing tax support to accountants in general practice.
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