08 August 2013

The recent judgment in Mehjoo v Harben Barker [2013 EWHC 1500] runs to some 80 pages, and includes an extremely detailed analysis of the competing rights and obligations of accountants and their clients in respect of tax advice. 

Tax partner Nigel Popplewell believes that the case is to be appealed, but there has been a certain amount of press comment about the decision, along the lines that it is a judicial endorsement of aggressive tax planning.  In Nigel's view it doesn’t go that far, and must be considered in light of the particular facts of the case.  But it could be read as suggesting that where there is a reasonably well known (albeit aggressive) tax planning strategy available to a particular taxpayer, which his professional advisers do not apprise him of, and it can be established that had they done so he would have adopted the strategy, then an adviser may well be negligent in failing to bring the scheme to the client’s attention.

In fact the case went further than that, and the judge found that even though the accountants in question did not have the necessary tax expertise to advise on the strategy, they should have recognised this and suggested to the client that he should seek specific advice from someone better qualified than they.  The judge found, as a fact, that had they made this suggestion to the taxpayer, he would have taken up the opportunity, with the consequence that he would have been offered the relevant tax planning strategy which he would have entered into.

The issues that the court had to consider are set out below:

  1. Did the accountant’s retainer extend to advising and assisting the taxpayer generally in relation to his personal financial and tax affairs; and did it include advising him of possible methods by which he could minimise his tax liability (in respect of a sale of shares in a private company which realised approximately £8.5m for the taxpayer).
  2. Should the accountants have advised the taxpayer that given he very likely had non-dom status, he should go to a non-dom tax specialist.
  3. Whether the non-dom tax specialist would have suggested a particular tax planning arrangement, and what risks would that non-dom adviser have given as regards that tax planning.
  4. Would the non-dom tax adviser have recommend entry to the tax planning, and if so, would the taxpayer have taken that advice.
  5. Even if he had adopted the strategy, would the taxpayer have been better or worse off by so doing.
  6. What damages could the taxpayer recover, and was the taxpayer’s claim time barred.

The judge found for the taxpayer on all these issues, and awarded him damages for his losses which comprised:

  1. The capital gains tax (CGT) he had to pay HMRC, of approximately £850,000.00.
  2. The cost of entering into a tax planning scheme promoted by Montpelier, which cost £200,000.00, and which was ineffective.
  3. Interest of approximately £150,000.00 he had to pay to HMRC for late payment of CGT.
  4. Interest on everything.

So in effect, by awarding damages in this amount, the taxpayer has received his £8.5m, tax free (on the basis that this would have been the case if the taxpayer entered into the non-dom tax planning).

One interesting extract from the case in connection with the general retainer obligations of a professional adviser:

A solicitor is not a general insurer against his client’s legal problems.  His duties are defined by the terms of the agreed retainer”.

And again:

There is no such thing as a general retainer in that sense. The expression “my solicitor” is as meaningless as the expressions “my tailor” or “my bookmaker” in establishing any general duty apart from that arising out of a particular matter in which his services are retained. The extent of his duties depend upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do”.

If you have any questions about this case or would like advice on any other tax issues, please call or email the key contact identified at the top of this page. 

Key contact

Suzanna Harvey Partner

  • Head of Private Wealth
  • Private Client Services
  • International Tax

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