The Court of Appeal has overruled the first instance judgment in Mehjoo v Harben Barker that was, rather exaggeratedly, reported as deciding that accountants were under a duty to help their clients access tax avoidance schemes.
Assumption of duty beyond retainer letter
The accountant’s retainer letter listed conventional forms of tax advice, in addition to other accounting duties, but indicated that more extensive tax planning was available only on request. The accountant was not a specialist tax planner. He did, however, from time to time on his own initiative provide basic tax planning suggestions and on one occasion held a meeting with his client at which the possibility of mitigating capital gains tax through unspecified mitigation schemes was discussed. This was held at first instance to entail an assumption of a duty on the part of the accountant to provide tax planning advice to the client, including on tax mitigation schemes that could be available to him on account of his potential non-domiciled status, even though the client had not specifically asked for such advice.
The Court of Appeal has distinguished between the basic tax advice that formed part and parcel of the accounting services of the typical high street practitioner and specialist tax planning expertise relating to non-domiciled status. A wider duty to ensure that his client was given advice on any specialist tax mitigation schemes that might potentially be on offer in the market place could not, the Court of Appeal held, be inferred from the fact that the accountant provided standard tax advice and historically had raised the possibility that further mitigation possibilities could exist.
Duty to seek specialist advice
The judge at first instance ruled that the fact that the accountant was not a tax planning specialist did not absolve him from the duty to ensure that his client received advice in accordance with the duty that the accountant was said to have assumed. Where his own experience or skills were insufficient for him to provide such tax planning himself, he should have ensured that the client obtained further advice from a specialist.
The Court of Appeal rejected this argument also. The accountant had mentioned to his client that there might be opportunities to save tax but had also warned of the danger of HMRC challenge. He had not known about the bearer warrant scheme under which non-domiciled persons could, under certain circumstances, mitigate their tax liability, which the claimant later asserted should have been brought to his attention. The Court of Appeal found that knowledge about the existence or operation of these schemes would not have been possessed by a reasonably competent generalist accountant at the time. Since he did not know about them, the accountant could not be under any duty to advise his client to seek specialist advice relating to them.
This ruling marks a welcome recognition that a generalist accounting practice providing standard tax advice is not automatically assuming a duty to that client to be an expert on potential specialist tax mitigation schemes that could apply to the client. It must also be right that an advisor who is unaware that tax savings might be available to his client through such specialist schemes is not under any duty to obtain further advice on them.
This judgment does not, however, absolve accountants or other professionals from the obligation to refer clients to specialists when they are or should reasonably be aware that the client would benefit from such specialist advice. In such cases it will be important to form a view at an early stage if litigation is threatened on (a) what knowledge did the accountant actually have of such specialist schemes; (b) did the retainer agreement limit the scope of advice the adviser agreed to provide; (c) did the adviser actually go beyond the terms of the retainer and volunteer additional advice on potential tax saving schemes; and (d) if there was no actual knowledge ought a reasonably competent general practitioner to be aware of such specialist schemes.
The last question will be a very hard hurdle for potential claimants to overcome if seeking to pursue smaller general practitioners. The Court of Appeal's test does, though, leave open an argument that the mid to larger firms of accountants, with different specialist departments, may owe a slightly different duty to their clients. Accountants should remind themselves of the precise terms of their engagements and do their best not to stray outside; where this is necessary they should properly document why the scope of their instruction has expanded and consider the wider ramifications including whether they should involve (or suggest involving to the client) their other specialist departments.