Mehjoo v Harben Barker [2014] EWCA Civ 358 – accountant negligence – tax advice – sale of shares in business – capital gains tax liability – need for specialist tax planning – generalist accountants – whether providing tax advice on routine matters creates a duty to give specialist tax planning advice
The Court of Appeal decision of Mehjoo v Harben Barker [2014] EWCA Civ 358, which was concerned with allegations of accountant negligence in relation to the giving of tax advice, provides helpful clarification of the circumstances in which accountants are obliged to provide tax advice to their clients.
The brief facts were as follows. Harben Barker Limited (“HB”) is a small firm of generalist chartered accountants with two offices in the West Midlands. One of its partners, Mr Alan Purnell, acted as Mr Mehjoo’s accountant from about 1980 providing accountancy services and general tax advice.
Mr Mehjoo was born in Iran in 1959 of Iranian parents, where he lived until 1971 when he was sent to school in England. He has been resident in the UK since that time and since 1996 has been a British citizen, retaining his Iranian domicile.
Sale of business
After playing squash competitively until 1989, Mr Mehjoo built up an extremely successful retail fashion business in the UK. His first shop was established in 1983 and in 1998 the business moved to larger retail premises in Birmingham. In 2003 Mr Mehjoo merged his business with that of Mr Andrew Scott and they became shareholders in a new company called Bank Fashion Limited (“BFL”). In April 2005 BFL was sold for £22m of which Mr Mehjoo’s share was £8,508,586.50.
Capital Gains Tax (CGT) liability
For tax purposes, the shares in BFL (an English registered company) were UK assets in respect of which Mr Mehjoo was liable to pay CGT on any disposal. The shares qualified for business taper relief, which reduced the chargeable gain by 75% resulting in an effective tax rate of 10%, rather than 40%, and a CGT bill of £850,000 rather than £3,400,000.
Pre- sale tax advice
HB were never asked to give Mr Mehjoo tax planning advice on possible ways of minimising or eliminating the already low rate of CGT.
Mr Mehjoo’s solicitors in the sale were Wragges and he had discussions prior to the completion of the sale with Mr Purnell of HB and at least two firms of tax advisers, Ford Campbell and MTM (Midlands) Ltd, neither of which suggested using a Bearer Warrant Scheme (“BWS”), which Mr Mehjoo later claimed would have allowed him, because of his non-UK domiciliary status, to avoid CGT entirely.
In the event, Mr Mehjoo did not enter any tax saving scheme prior to the sale of the shares.
Post-sale tax advice
The sale completed on 19 April 2004, by which time the BWS was no longer an option after legislation had been introduced to prevent its use. Relying on tax advice from MTM (for which he paid a fee of £200,000!) Mr Mehjoo entered into a Capital Redemption Plan (“CRP”) which was an artificial tax scheme designed to avoid having to pay CGT. HMRC challenged the scheme and in 2012 Mr Mehjoo agreed to pay the CGT liability and interest which, together with most of MTM’s fee, he sought to recover from HB.
Allegations of negligence
Mr Mehjoo contended that HB:
- had a duty to advise him that he had or very probably might have non-dom status which carried with it significant tax advantages and that he should therefore seek and obtain specialist tax advice. HB denied that it had a duty to provide tax planning advice unless requested to do so.
- was negligent for failing to give such advice, which HB also denied.
In support of the duty of care allegation he relied on, amongst other things, the following two aspects of HB’s conduct:
- on many occasions prior to the sale Mr Purnell went out of his way to offer unsolicited advice (including some tax advice) on aspects of Mr Mehjoo’s business and personal financial affairs. This included some advice about the implications of his merger with Mr Scott and about VAT in connection with his purchase of a boat in 2004.
- during the sale process he had a meeting with HB in October 2004 to discuss the tax implications of the sale.
High Court decision
The case was heard by Mr Justice Silber who considered that HB, by its conduct (described in the paragraph above), assumed a responsibility to advise and assist Mr Mehjoo generally in relation to his tax affairs, including in relation to CGT planning on the sale of the BFL shares, even though it had not been requested to do so. He found HB negligent for not advising Mr Mehjoo that he should obtain tax advice from a non-dom specialist.
Court of Appeal reversal
In the leading judgment, Lord Justice Patten explained why he disagreed with the lower court’s decision. He thought the following was significant:
- CGT avoidance using the BWS required specialist tax planning advice;
- HB were not and had never held themselves out to be specialist tax planners;
- the unsolicited tax advice given by HB was not specialist – it was relatively routine;
- the High Court had not distinguished between routine tax advice and more sophisticated tax planning;
- HB were not aware of the existence of the BWS or any other means of avoiding CGT;
- the reasonably competent generalist accountant would also not have been aware of this;
- none of the other firms of specialist tax advisers whom Mr Mehjoo subsequently consulted suggested he should consult a non-dom specialist or raised the possibility of using a scheme like the BWS. None of them had been sued in negligence;
- at the October 2004 meeting HB did alert Mr Mehjoo to the possibility that there might be available a more radical tax saving scheme, but he took the matter no further.
Patten LJ concluded that HB had assumed a duty to give tax advice, but not one that extended to giving specialist tax planning advice; as HB had acted as a reasonably competent accountant would have done, there was no negligence.
Comment
The High Court decision created some uncertainty as to the extent of tax advice to be provided by a generalist accountant. The Court of Appeal ruling provides welcome clarification that the position remains that clients who consider they have been given bad tax advice need to consider what their accountants were instructed and agreed to do, and what the reasonably competent accountant practising in the same field of work would have done.
Although what can be expected of the reasonably competent accountant is primarily a matter of expert opinion, the case does offer guidance helpful to understanding the parameters of the duty of care:
- an accountant in the position of HB is not under a general roving duty to have regard to and to advise on all aspects of a client’s affairs absent a request to do so;
- an accountant who is retained by a client to deal with his personal financial affairs will inevitably have to point out what might be the hidden tax consequences of any particular proposal.
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