The Court of Appeal recently handed down its judgment in the case of Hossein Mehjoo v Harben Barker (A Firm) and Harben Barker Limited [2014] EWCA Civ 358 and clarified the scope of the duty of care owed by accountants to their clients.

The facts

Mr Mehjoo is a businessman who was born in Iran and later became a British citizen.  Harben Barker is a firm of chartered accountants.  Mr Mehjoo had a long standing relationship with an accountant, Alan Purnell, whose own accountancy firm merged with Harben Barker in 1991.  In 2004 Mr Mehjoo decided to sell his shares in Bank Fashion Limited, a company registered in the UK, and told Mr Purnell of the impending sale.  Mr Purnell met with Mr Mehjoo on 2 October 2004 to generally discuss capital gains tax saving measures in relation to the sale of the shares.  Mr Purnell asked to be kept updated about the sale so that he could properly advise Mr Mehjoo about tax saving measures.

The sale of Mr Mehjoo’s shares took place on 19 April 2005 for £8,508,586.50.  After the sale completed Mr Mehjoo was keen to pursue tax saving schemes.  Mr Mehjoo sought advice from another firm of tax advisers, MTM (Midlands) Ltd, and on their advice entered into a tax scheme called Capital Redemption Plan in August 2005.  Mr Mehjoo’s non-domiciled status was confirmed by HMRC in April 2006, as a result of Mr Mehjoo completing a form sent to him by Mr Purnell in January 2006.  HMRC later challenged the effectiveness of the Capital Redemption Plan and Mr Mehjoo had to pay penalties and interest to HMRC.

The Claimant’s case

In summary, Mr Mehjoo’s case, which was successful at first instance, was that Harben Barker was under an obligation to advise him that he probably had non-domiciled status, which would carry significant tax advantages, and that he should seek advice from accountants specialising in advising non-domiciled individuals about tax affairs in relation to his sale of his shares in Bank Fashion Ltd.

The Defendants’ case

Briefly, Harben Barker’s case was that they were not obliged to give tax planning advice unless they were specifically asked to do so and that consequently they were not obliged to advise Mr Mehjoo of his likely non-domiciled status and of any tax advantages that he might have as a result of that status.

Court of Appeal’s decision

Harben Barker appealed the High Court’s decision in respect of liability, causation and remoteness of damage.  As the Court of Appeal found in Harben Barker’s favour in respect of liability the appeal of the issues regarding causation and remoteness were not considered.

The Court of Appeal decided that a reasonably competent accountant advising Mr Mehjoo of the consequences of his sales of Bank Fashion Limited would not have been under any obligation to discuss Mr Mehjoo’s domicile with him unless it was relevant to the capital gains tax liability. As a reasonably competent accountant would have known that Bank Fashion Limited was a UK registered company it would have realised that there were no tax advantages unless the situs of the shares could be changed.  The situs of shares, i.e. where they are treated as being located for legal purposes (including tax), is where the shares register is held which for Bank Fashion Limited was the UK. The Court of Appeal held that the possibility of changing the situs of the shares was not something which Harben Barker, as reasonably competent accountants, could have been expected to know.  The Court of Appeal commented that whilst inconclusive, it was not insignificant that the other tax advisors consulted by Mr Mehjoo had also not suggested to him that he should consult a specialist in non-domiciled tax affairs.

The first instance decision that Harben Barker were under a duty to advise Mr Mehjoo that he was likely to be have non-domiciled status appeared to be based upon the fact that Harben Barker were aware that Mr Mehjoo would receive a considerable sum on the sale of his shares.  In considering this point the Court of Appeal held that “accountants are not paid to give unnecessary advice” and that as such there was no obligation on Harben Barker to raise Mr Mehjoo’s non-domiciled status with him at the meeting on 2 October 2004 as that meeting was purely to discuss the capital gains tax Mr Mehjoo would pay on the sale of his shares.  The Court of Appeal’s view was that the advantages of Mr Mehjoo’s non-domiciled status were not ones which were available to him on the sale of UK registered shares and as such a reasonably competent accountant would not have believed such tax advantages existed in relation to the sale of Mr Mehjoo’s shares.

The decision in Hurlingham Estates Ltd v Wilde & Partners [1997] STC 627 was considered by both the High Court and the Court of Appeal.  That case laid down a test regarding the extent of a solicitor’s duty.  That test was whether, taking into account the terms of the retainer and all of the circumstances which should have been reasonably known by the solicitor, that solicitor should have reasonably appreciated that the client needed advice and guidance regarding its tax liabilities.  The Court of Appeal held that Harben Barker passed the Hurlingham test as they had advised Mr Mehjoo that there might be schemes available to reduce his tax liability, albeit that they did not specifically advise him to seek advice from a specialist in non-domiciled tax affairs

In his judgment, Lewison LJ referred to the judgment of Oliver J in Midland Bank Trust Co Ltd v Hett Stubbs & Kent [1979] Ch 384 which dismissed the existence of the notion of there being a general retainer. Lewison LJ held that the first instance decision was wrong to infer that Harben Barker’s retainer had been extended significantly because of the few occasions when Mr Parnell had gone beyond the strict limits of his retainer.

Whilst this judgment will provide reassurance to generalist accountants that they are not expected to advise clients about specialist schemes of which they were entirely unaware, they would be wise to advise their client to seek specialist advice if they are aware or become aware of a specialist scheme which may potentially benefit their client.  It will be interesting to see what the Court’s approach will be in relation to the expected knowledge of a reasonably competent accountant of specialist tax saving schemes.  As ever, accountants (and indeed all professionals) will be well served by ensuring that they have a clear and detailed retainer setting out the scope of their instructions at the outset of their dealings with their clients.