In June 2013, Hossein Mehjoo was awarded £1.4 million in damages against his accountants, Harben Barker (HB). HB were found negligent for not recognising and advising Mr Mehjoo that his non-dom status carried significant tax planning opportunities and should have taken advice from specialists, or referred him to a firm with non-dom expertise. On 25 March, the Court of Appeal overturned the High Court’s decision. As tax advisors heave a sigh of relief, Stuart Adams of Penningtons Manches LLP considers the current lie of the land.
When Mr Mehjoo sold his successful fashion business in 2004 he realised a capital gain of £8.5 million with resulting capital gains tax (CGT) of £850,000. As a non-dom, Mr Mehjoo could have transferred his business, in the form of bearer warrants, to an offshore trust and then sold it CGT-free. HB was not aware of the Bearer Warrant Scheme (BWS) (a form of offshore tax planning, which has since been rendered ineffective by legislation) and failed to seek any specialist advice or to refer Mr Mehjoo to a firm with non-dom expertise.
HB’s letter of engagement stated that they would be willing to give more extensive tax advice upon request. At first instance it argued that no such request had been made and, as such, it was under no obligation to provide Mr Mehjoo with tax advice. The judge was not persuaded by this argument and noted that HB had regularly provided Mr Mehjoo with unsolicited advice concerning both his personal and business tax affairs. That conduct was held to have varied the terms of the letter of engagement and, as a result, there was a mutually accepted understanding between Mr Mehjoo and HB that HB was always required to consider Mr Mehjoo’s 'best tax position' and to advise him accordingly.
HB had, therefore, assumed a duty to give tax advice notwithstanding that Mr Mehjoo did not expressly ask them to provide it.
Mr Mehjoo successfully sued HB for professional negligence and won substantial damages. HB appealed the decision.
On appeal, the Court of Appeal stated that the scope and extent of an advisor’s retainer is limited to the terms of their letter of engagement. Those terms are not set in stone, but they will only be varied by an express agreement or a clear course of conduct that can, objectively, be inferred as having that effect.
HB admitted that it had given general tax advice from time to time, however, the odd bit of advice or guidance will not, alone, be sufficient to vary terms of engagement.
During a meeting to discuss the CGT liability on the sale of the business, HB did tell Mr Mehjoo that various tax saving schemes might be available in relation to his imminent gain, but it could not identify any particular scheme or say whether it would be suitable. Mr Mehjoo chose not to follow this up.
The court accepted that the advice given by HB had been routine in nature, and at no time had it ever held itself out as providing (or being able to provide) sophisticated tax planning advice making the best use of Mr Mehjoo’s non-dom status.
The court was satisfied that a reasonably competent accountant would have been unaware of schemes such as the BWS and, it followed, that HB could not be under a duty to advise Mr Mehjoo of the significant tax advantages that, to its reasonable knowledge, did not exist. Equally, HB could not be under a duty to advise Mr Mehjoo to seek advice from a non-dom specialist.
An advisor who is retained by a client to deal with his personal financial affairs will inevitably have to point out what might be the hidden tax consequences of any particular proposal. However, the Court of Appeal found that the judge failed to differentiate between the tax advice of the kind HB gave Mr Mehjoo and the much more sophisticated form of tax planning exemplified by the BWS. A positive duty to give specialist tax planning advice could not be inferred from a course of conduct which did not involve that sort of planning.
The Court of Appeal held that the judge was wrong to find HB in breach of duty and allowed the appeal, dismissing Mr Mehjoo’s claim.
WHY IS IT IMPORTANT?
The headlines that swept through the popular press following the High Court judgment last year would have you believe that a generalist tax accountant (and any other tax advisor by extension) could be liable for failing to advise clients on the availability of intricate tax schemes such as, in this case, the BWS.
The Court of Appeal has made it clear that an advisor’s duty is directly related to the confines of their retainer and, in the absence of an express variation, only clear evidence of a course of conduct can act to vary the terms of the retainer.
Accordingly, the judgment limits the scope for clients to argue that advice should be given for non-routine matters in the absence of express instructions to do so.
HOW DOES THIS FIT INTO EXISTING LAW AND PRACTICE?
The case confirmed the well-established principle in Midland Bank Trust Co Ltd v Hett Stubbs & Kent Ch 384 in which professionals are under no duty to provide advice other than that requested of them and which they agree to provide.
Lord Justice Lewison, who agreed with the lead judgment, added that he felt the judge had lost sight of the 'wise words' of Mr Justice Oliver in Midland Bank Trust Co Ltd at 402:
“There is no such thing as a general retainer […]. The extent of [a solicitor’s] duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do.”
Lord Justice Lewison felt it was 'impermissible' for the judge to infer from the limited occasions that HB provided advice beyond the letter of its retainer that there had been a far reaching (but silent) variation of the retainer which imposed an unrestricted duty on HB.
IN WHAT WAYS DOES THIS AFFECT PRACTITIONERS?
HB did provide Mr Mehjoo with unsolicited general tax advice and, as a result, assumed a duty to advise on routine tax matters. However, this alone did not amount to an assumption of a duty to advice on more sophisticated tax planning beyond their knowledge.
HB was unaware (and reasonably so) that Mr Mehjoo’s potential non-dom status might enable him to reduce, or at best, to eliminate the CGT liability on the sale of his business. Accordingly, it was not under a duty to advise Mr Mehjoo to seek specialist advice.
On the flip side, it must follow that if an advisor were aware that, for example, their client’s non-dom status carried with it certain tax advantages then they ought to advise their client to seek specialist advice as to whether that status might enable the client to minimise or eliminate the tax charge.
WHAT, IF ANYTHING, SHOULD I BE DOING DIFFERENTLY AS A RESULT?
The judgment will be welcomed by accountants and tax advisors generally.
Notwithstanding the finding in favour of HB, this case highlights the importance of having a letter of engagement providing for the scope and extent of engagement. Advisors should ensure that they regularly review and, where necessary, update their letters of engagement to reflect any changes in the client relationship and/or the nature of the instructions given. If HB were guilty of one thing, then it was its failure to give proper regard to its letter of engagement which it considered as a 'formality'. As a result, it was not reviewed or updated and, at the relevant time, was more than five years’ old. Clearly defined disclaimers and boundaries may well have prevented this claim from getting off the ground.
This article was published in The Law Society Private Client Section in April 2014.