The recent decision of Mr Justice Silber in Hossein Mehjoo v Harben Barker (A Firm) and Harben Barker Limited1 has attracted a great deal of publicity in both professional journals and the general press as it considers the important issue of an accountant's duty to his client in the context of tax mitigation opportunities.
Mr Mehjoo ('the Claimant') claimed damages against his former accountants, Harben Barker ('the Defendants'). The Claimant, who was born in Iran, had built up a clothing business, Bank Fashion Limited ('BFL'). The Claimant's shareholding in BFL was sold in April 2005 for some £8.5 million and his liability for capital gains tax ('CGT') was £847,458. The case was concerned with the steps which the Claimant argued his accountants should have advised him to take in order to eliminate or reduce his liability to CGT on the disposal of his shareholding in BFL.
Essentially, the Claimant contended that as a consequence of the longstanding engagement of his accountants (over 25 years), the Defendants were obliged to advise and assist him in relation to his personal, financial, and tax affairs, including identifying and advising him of possible methods by which he could minimise his tax liability, including giving him appropriate advice on the proposed sale of his shares in BFL, without being expressly requested to do so. He argued that any reasonably competent chartered accountant should have advised him of the significant tax benefits of his non-domiciled ('non-dom') status and in consequence he should have been advised to obtain tax advice from a firm of accountants or tax advisers who specialised in advising individuals who had or might have non-dom status. The Claimant's accountant was not a specialist in this area.
Put shortly, the Defendants argued that they were not required to give their client tax-planning advice unless expressly requested to do so and they were not obliged to advise their client that he should obtain tax planning advice from a non-dom specialist to consider the various tax avoidance opportunities that might legitimately be available to him.
The Claimant gave evidence and he also called three witnesses of fact to give evidence on his behalf. Expert evidence was also relied upon by both parties.
Mr Justice Silber was satisfied that the Claimant was a "careful and reliable witness who was telling the truth and whose evidence I should accept". The judge also accepted that the other witnesses of fact were doing their best to recollect matters of importance and were honest witnesses.
Mr Justice Silber concluded that the Claimant was "very probably or possibly might have been a non-dom in October 2004" and that the Defendants had a contractual or tortious duty to advise the Claimant about his non-dom status. In the judge's view, the Defendants should have advised the Claimant to take the advice of a specialist when he was contemplating the disposable of his shareholding in BFL.
The Bearer Warrant Scheme
The Claimant argued that, had he sought advice from a specialist non-dom accountant or tax adviser, he would have been advised to enter into a Bearer Warrant Scheme ('BWS'). Such a scheme allowed UK shares owned by non-doms to be 'swapped' for bearer warrants which would be taken off-shore and placed in trust before sale. As non-UK situs assets at the time of disposal there would be no charge to CGT.2
In this respect, Mr Justice Silber considered whether such a specialist would have advised the Claimant that there was a substantial risk of a successful challenge by HMRC to his non-dom status and/or a substantial risk that a BWS entered into by the Claimant would be successfully challenged by HMRC. The judge also considered the possibility of advice that there might be a change in law before the Claimant was able to enter into a BWS.
Given that HMRC had accepted, in January 2006, that the Claimant was a non-dom and nothing had been put forward which demonstrated that the HMRC ruling was based on incorrect or incomplete information, the judge concluded that there was not a substantial risk of a challenge by HMRC to his domiciled status as a non-dom.
The judge then commented on what advice a specialist non-dom adviser would have given as to whether there was a substantial risk that the scheme would be successfully challenged by HMRC on the grounds of Young v Phillips,3 a decision that held that for an instrument to be treated as situated in the jurisdiction in which it was physically located, the instrument must also be marketable in that jurisdiction. In this respect, the judge accepted the evidence of Mr Killshaw, the expert called on behalf of the Claimant. Mr Killshaw's evidence was that his firm did not regard Young v Phillips as a material risk because the then Inland Revenue had not taken the point in the context of bearer shares and in any event it could easily be addressed by holding the bearer shares off-shore for a short period before placing them in a trust. The judge accepted this evidence and said:
"280 I conclude that the specialist non-dom adviser would not have given any advice that there was a substantial risk that if the claimant had engaged in BWS, it could be successfully challenged by HMRC on Young v Phillips' grounds. For what it is worth, this advice has been borne out by subsequent experience."
The Claimant sought recovery of damages for the CGT he had to pay together with interest. He also claimed the cost of entering into an abortive tax arrangement provided by Montpelier which had not been successful, and in relation to which he had incurred fees of £200,000.
The judge was of the view that such damages should be recovered and said:
"526 … I do not consider that a reasonably competent non-dom specialist would have advised the claimant, who clearly was a non-dom, to enter into a CRP scheme in the light of its obviously artificial nature and the fact that it was based on a second hand insurance policy scheme which was blocked by the 2003 budget … he would not have used the Montpelier scheme."
Much is made by HMRC of the necessity for taxpayers, both corporate and individual, to pay their 'fair share' of tax, whatever this phrase might mean. However, accountants and other professional advisers, such as solicitors, must remain alive to the professional duties that they owe to their clients to ensure that they receive proper advice, or are referred to other professional advisers who have the necessary expertise to enable advice in a particular specialist area to be given. This case confirms that such advice may, in certain circumstances, extend to providing specialist advice on tax mitigation arrangements.