Will other limited companies sue accountants for inadequate advice?
A recent Court of Appeal judgment that speaks of an accountant’s “contractual duty” appears to have been overlooked by the contracting industry, despite relating to a scheme provided by tax consultants Montpelier, who are well-known among contractors, writes Sumit Agarwal, founder of accountancy firm DNS Associates.
Perhaps the sheer length of the Mehjoo Vs Barker judgment – about 65,000 words – explains why it has gone under the radar of many a contractor, but it has been noticed by legal and accounting professionals, for whom it has caused quite a stir. It has also been reported by some of the mainstream press with, as expected, varying degrees of accuracy.
What is undisputable is that the case concerns Iranian-born Hossein Mehjoo, a ‘non dom’ that built up a multi-million-pound fashion business in the UK, who successfully sued his accountancy firm, Harben Barker, for professional negligence. Although the firm is appealing, Mehjoo won £1.4million in compensation which, oversimplified; was due because the accountant should have told Mehjoo about an offshore, then-legal, tax avoidance scheme, as opposed to the one they recommended (and he used) that was provided by Montpelier, and which was struck down by HM Revenue & Customs.
So, as a result of the scheme failing, Mehjoo had to pay nearly £800,000 in Capital Gains Tax which he sought to avoid when selling his jointly-owned fashion business, Bank Fashion Ltd. Having paid £200,000 to enter the scheme, he was perhaps understandably dissatisfied with the service he received from Barker (which advised him to use the Montpelier scheme) and so sued Barker for its failure to provide him adequate tax-planning advice.
Ruling in Mehjoo’s favour, Mr Justice Silber found that any “reasonably competent” accountant would have recognised that, as a non-domiciled citizen, Mehjoo was eligible for tax schemes not available to domiciled UK citizens. The businessman, the judge said, should have been told about a scheme called the Bearer Warrant Scheme (BWS) which, until 2005 when it was quashed by HMRC, allowed non-domiciles to transfer ownership of a company to an offshore trust. Describing BWS as a scheme offering “not tax avoidance but tax mitigation,” the judge stated that “the main reason for creating the trust would be to enable the client to receive the capital…tax free” - that is, without paying any CGT.
The judge added that the accountancy firm “had a contractual duty to advise the claimant that non-dom status carried with it potentially significant tax advantages.” He then likened the duty of the accountancy firm - which he called “decent,” “competent” yet a “generalist” - to refer a client to a tax specialist to that of a GP, whom he said would refer a patient to a specialist if the medical condition warranted it.
With this in mind, and from reading the judgment, it appears that the accountancy firm erred by firstly missing the fact that their client was a non-dom and then, because of that oversight, failed to recognise that the advice the client required went beyond their expertise and, thirdly, the firm didn’t seek the appropriate, specialist tax advice for their client, or refer him to such a source or specialist.
Unsurprisingly in my view, the accountancy firm is appealing against the judgment. Generally-speaking, I would advocate that accountants should always advise their clients of all legal ways to minimise their tax liability and, if they are in doubt, remember – and act on - the judge’s ‘GP’ analogy. The judgement enforces this recommendation by saying that the generalist accountancy firm “had a contractual duty or concurrent tortious duty to advise the Claimant [Mehjoo]….that he should take tax advice from [specialist tax advisers].”
Even though our firm specialises in the tax affairs of freelancers, contractors and the self-employed, I believe this judgment is an unwelcome ruling for the accountancy industry. By this I mean that, unfairly, it could give rise to many situations where clients attempt to sue their accountant for not pointing out every single loophole in the highly complex, ever-changing UK tax system.