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Accountancy firm not negligent for failing to recommend a non-domiciled taxpayer take specialist advice, says Court of Appeal

Out-Law News | 27 Mar 2014 | 4:33 pm | 3 min. read

A small accountancy firm was not negligent when it failed to recommend that a client domiciled outside of the UK take specialist tax advice on a sophisticated tax planning scheme, the Court of Appeal has ruled.

The decision overturns that of the High Court, which had previously found Harben Barker negligent in relation to its client, Hossein Mehjoo. However, in his leading judgment, Lord Justice Patten said that there was a distinction between the routine tax advice that the firm provided to its client and the more specialised advice Mehjoo argued that he should have received.

Although Harben Barker was ultimately successful in this case, tax expert Catherine Robins [link] of Pinsent Masons, the law firm behind Out-Law.com said that the dispute showed the dangers of 'mission creep'; which could occur when advisers routinely provided advice beyond the scope of that set out in the letter of engagement.

"In the High Court, Mr Justice Silber was prepared to read into the arrangements an understanding that tax advice would be provided because of the previous conduct of the parties, and did not differentiate between routine general tax advice and the very specialist advice involved here," she said.

"Professional advisers will be relieved that the Court of Appeal has overturned the previous ruling, which appeared to put an onerous obligation on any non-specialist professional adviser. However, although the firm was ultimately successful the case does illustrate the importance of setting out clearly in the engagement letter the nature of the tax advice to be provided - and then avoiding 'mission creep' by not advising on further areas," she said.

Mehjoo had engaged Harben Barker to provide accountancy services and general tax advice. Although he was made a UK citizen in 1996, he retained non-domicile status for UK tax purposes. In 2005 he made a large capital gain on the sale of shares in his company. He had argued that, as a reasonably competent accountant, the firm was under a duty to advise him that he may have non-domicile status which carried with it significant tax advantages, and that he should therefore seek specialised tax advice.

Both parties were in agreement that Mehjoo had not specifically requested specialist advice, and that the terms of the letter of engagement between himself and the firm only included "general tax planning advice on the best use of reliefs". However, Mehjoo said that because there had been occasions in the past when his adviser had pointed out the tax consequences of proposed actions without his asking for it, this indicated that there was an understanding that he would be provided with tax advice even when not requested.

However, Lord Justice Patten disagreed. Even when Mehjoo's adviser had been pro-active, the advice he provided had been "relatively routine" and very different from the much more sophisticated form of tax planning Mehjoo referred to in his arguments. The taxpayer had claimed that a specialist tax adviser would have informed him of the existence of a tax planning scheme called the Bearer Warrant Scheme, which would have involved a restructuring of the transaction so that Mehjoo would have been selling bearer warrants rather than UK situs assets.

"The reasonably competent accountant setting out to advise Mr Mehjoo of the tax consequences of the sale would not, in my view, have been under any obligation to raise for discussion the claimant's domicile unless it was relevant to the CGT liability on the disposal," the judge said. "The accountant would have known that it gave Mr Mehjoo no tax advantages in relation to the sale of [the shares] unless the situs of the shares could be changed. As this was something which HB neither knew nor could have been expected to know was achievable, there was no reason to mention the matter, still less a liability in negligence for not having done so."

"The obligation to advise the claimant of his status as a non-dom seems to be based on the fact that ... HB were aware that the sale of [the shares] would generate a large cash sum possibly for future investment. But accountants are not paid to give unnecessary advice and I can see no reason, still less any obligation, on HB to have raised the claimant's non-dom status ... when the only issue for discussion was the CGT payable on the disposal ... I take the same view in respect of the claim that [Mehjoo's accountant] should have told Mr Mehjoo that his probably non-dom status carried with it significant tax advantages," he said.