The Court of Appeal has revisited and reversed the 2013 decision of the High Court in Mehjoo -v- Harben Barkerconsidering an accountant’s duty to advise on complex tax planning schemes relevant to non-domiciled individuals.
Having provided ‘general’ accountancy services to the claimant over a number of years, the claimant alleged that the defendant firm should have advised him of the potential to reduce a considerable capital gains charge by using his non-domicile status and pursuing a complex scheme of tax planning. The Court of Appeal has reversed the High Court’s decision that this was the case, exploring the terms of the retainer and highlighting an important distinction between an accountant’s duties arising in relation to routine tax advice and much more sophisticated tax planning services.
Mr Mehjoo was born in Iran with Iranian citizenship, but went to school in the UK in 1971 and stayed in the country after that, obtaining British citizenship in 1996. He built up a successful business in the UK, which he sold in 2005, making a personal profit of more than £8.5 million.
The defendant accountancy firm, Harben Barker, employed a Mr Purnell who had acted as the claimant’s accountant since 1980, practicing initially on his own account before being taken over by Harben Barker. The firm is described in the Court of Appeal judgment as ‘generalist accountants’ dealing with annual tax returns and reliefs, as opposed to more specialist accountants with expertise in advising on the types of non-domicile scheme that Mr Mehjoo was arguing he should have been made aware of.
The case considered the scope of Harben Barker’s duties in light of the type of service they provided to Mr Mehjoo, the express terms of their retainer (based on a single letter signed in 1999) and any implied terms based on past custom and practice.
High Court decision
The High Court held that Harben Barker was under a duty to advise Mr Mehjoo that he may have been a non-domiciled individual for tax purposes. This would have enabled him to consult an appropriate tax specialist to consider what capital gains tax (CGT) avoidance opportunities might legitimately be available to him following the sale of his business.
The High Court found that Harben Barker had unwittingly assumed the duty to provide advice through its actions, rather than what had been expressly set out in the 1999 retainer letter. It had assumed responsibility for doing so by arranging meetings to discuss CGT planning and had previously set out the tax implications of proposed transactions. This is despite the fact that the retainer letter signed by Mr Mehjoo stated only that he would be provided with ‘quotations for general tax/planning advice on the best use of reliefs’ and only provide a more extensive tax and personal financial planning service if specifically requested to do so. No specific request was made by Mr Mehjoo.
As a result of the High Court decision, Harben Barker and/or its insurers faced a bill of £1 million for failing to advise their client. Unsurprisingly, they appealed.
Court of Appeal decision
The Court of Appeal decision has provided clarity on what may and may not be implied in this situation. The judgment confirms that there was no duty to advise on sophisticated tax planning matters and emphasises that there needs to be clear evidence before a course of conduct can be said to have significantly varied the terms of a professional’s written retainer.
In particular, the Court of Appeal accepted that whilst Harben Barker knew of Mr Mehjoo’s potential non-domicile status - and that this may have certain tax benefits - they were, quite reasonably, unaware that such status may enable him to reduce or eliminate payment of CGT on a share sale. No reasonably competent accountant acting in the role that Harben Barker did (as general accountants) would have necessarily been aware. The judgment makes an important distinction between the kind of routine tax advice being provided by Harben Barker as part of an accountant’s ordinary duties and what the case is about, being sophisticated tax planning.
In terms of whether Harben Barker’s actions left them open to a claim that they had accepted duties going beyond those set out in the retainer letter, Lord Justice Lewison - providing a supporting judgment - commented that, in his judgment, ‘… it was impermissible for the judge to infer from the limited occasions upon which Mr Purnell pursued a line of inquiry beyond the strict limits of his retainer that there had been a far reaching (but silent) variation of the retainer, which had the effect of imposing an open-ended and apparently limitless duty upon Harben Barker’. In fact, Mr Purnell had alerted the claimant to the possibility that there might be some kind of more ‘radical’ scheme available to escape the tax liability, but he did not follow this up.
Implications – for accountants, other professionals and their insurers
Whilst there was a happy ending in the Court of Appeal for Harben Barker and their insurers, the outcome of this case did turn on its facts to an extent. Nonetheless, it serves as a useful reminder that great care should still be taken by professionals to accurately scope an engagement letter and to ensure that it is reviewed regularly, especially in cases where the professional has gone beyond the strict terms of their retainer. It also reminds those tempted to bring similar claims that they cannot assume that advice will be provided outside of the terms of the retainer that they have explicitly agreed. They also must take responsibility for instructing the right professional for the right job and requesting explicit advice should that be required.
It is important for the professional and the lay client to be in total agreement as to what advice will and won’t be given in any given circumstance. Care should be taken to ensure, especially in longstanding professional relationships, that neither the professional nor their client becomes complacent.
Likewise, professionals should remember that their insurers are unlikely to be sympathetic to claims arising out of situations in which they have purported to advise on matters outside of their expertise, which could take them outside of the terms of their cover.