Reports in national newspapers suggest that the ruling last week in the case of Mehjoo v Harben Barker imposes a duty on accountants to help clients use exotic and dubious tax avoidance schemes.
This is a misleading interpretation of a case which has not changed the law, certainly imposes no duty on accountants to recommend schemes that may ultimately prove ineffective but does provide valuable reminders of a number of issues concerning relationships between professional advisers and their clients.
The defendant accounting firm was appointed in 1999 by an Iranian national, Mr Mehjoo, to provide general tax and accounting advice. In 2004 Mr Mehjoo sold company shares and put proceeds of the sale into a Capital Redemption Plan (CRP) that was subsequently disallowed by HMRC, resulting in an £800,000 CGT liability.
Mr Mehjoo claimed that his accountant was negligent in not identifying that he could have avoided this liability if he had taken advantage of his non-domiciled status which the accountant failed to identify. Had the accountant introduced Mr Mehjoo to specialist non-dom tax advisors, they would, he contended, have advised him to place the proceeds in a Bearer Warrant Scheme (BRS) rather than the CRP.
The accountants were found liable to pay Mr Mehjoo’s entire CGT bill as well as penalties and interest imposed by HMRC in respect of the disallowed CRP scheme. The claimant was, however, found to have failed to mitigate the loss by not buying certificates of tax deposit to stop the interest running.
Contrary to press reports, the case was not primarily about whether the accountants should have told Mr Mehjoo to put his money offshore through the BRS, a tax loophole closed by Inland Revenue only a few months later. Rather, it rested on less sensational issues that are still of considerable importance to professional advisers.
- Scope of accountant’s duty
The judge confirmed that there is no such thing as a general retainer to provide advice as and when needed (unless an engagement letter specifies this). The professional’s duty will be governed by the contract between the adviser and his client. In this case, the engagement letter made no mention of providing tax advice under such circumstances as arose.
However, these points still did not help the accountants. The judge held that the accountant had accepted responsibility for providing such advice through a course of conduct. He had previously explained financial and tax implications of proposed transactions even without being requested to do so. Mr Mehjoo therefore had a right to assume that the accountant was also taking responsibility for providing tax advice when Mr Mehjoo sold his business. The irony was that the accountant unwittingly assumed this duty through providing a proactive service to Mr Mehjoo including suggesting tax planning measures. The judge stressed, however, that even if there had been no prior assumption of responsibility to advise Mr Mehjoo on tax implications, such a responsibility was assumed for a particular key meeting, because that meeting was expressly convened to discuss CGT liability.
This decision emphasises the importance for professionals to be aware that even if their engagement letter limits the scope of their work, they must take great care not to accept responsibility for additional advice through their conduct, either generally or on a particular occasion. Being helpful may prove very expensive.
- Duty to identify non-dom status and the possibility of related tax advantages.
The accountants were generalists. They were not experts in tax implications of non-dom status. However, the judge found that they should nonetheless have been sufficiently aware of the potential importance of residency for tax purposes to have considered whether Mr Mehjoo might be able to claim non-dom status and to know that it could be advantageous from a taxation standpoint for him to do so.
- Duty to seek specialist advice
This point is of wider significance. The accountants were not negligent in failing to appreciate the advantages of a BWS scheme over a CRP scheme, but through their failure to realise that they should advise Mr Mehjoo to take specialist advice. If an accountant (or other professional) lacks the expertise required to meet his client’s needs he must refer that client to another professional adviser. Should he fail to do so, he may become liable for the foreseeable consequences of the client’s inability to benefit from specialist advice.
The message is clear: advisers must be sensitive to the limits to their knowledge and refer to specialists where those limits are exceeded.
Accountants and other professionals need to be aware that volunteering assistance to clients can establish a course of conduct that negates any limits to the scope of a retainer stipulated in an engagement letter. This may apply particularly where accountants enjoy long-standing close relationships with their clients who then expect advice as a matter of course.
The second key message from this case is that each professional firm should understand the limits of its expertise and ensure that expert assistance is enlisted as needed.
The decision may be appealed.
Further reading: Mehjoo v Harben Barker  EWHC 1500 (QB)