With much anticipation surrounding the introduction of the General Anti-Abuse Rule (GAAR), tax advisors were understandably surprised by the decision of Silber J. in Mehjoo v Harben Barker  EWHC 1500 (QB), which has widely been reported as placing accountants under a duty to advise clients to avoid tax. The Times hysterically reported that 'the accountancy profession has been thrown into turmoil'.
Having considered the thorough judgment, the case is somewhat less alarming than the headlines might suggest but is a salutary reminder of the importance of a well-documented retainer and the dangers of advising beyond the limits of one’s expertise. Whilst the defendants in this case were accountants, the judgment applies not only to accountants but to all other tax professionals.
Facts of the case
The claimant, Mr Mehjoo, was born in Iran to parents of Iranian origin. For the first 12 years of his life he lived in Iran before moving to the UK to undertake his schooling. He held dual UK and Iranian citizenship.
During a spell as a professional squash player, Mr Mehjoo met Mr Purnell, a chartered accountant at Purnell & Co which, in 1991, merged with Harben Barker (HB). Mr Mehjoo and Mr Purnell became good friends and, as a result, Mr Purnell was retained to complete Mr Mehjoo’s personal tax returns but over time he relied upon him to advise him in respect of all of his personal and business financial affairs. This included tax planning advice which the judge found was habitually provided without any request from Mr Mehjoo. Mr Mehjoo described Mr Purnell as being 'proactive' in his advice.
In 1999, Mr Mehjoo was asked to sign an engagement letter which he duly did. The letter stated that, inter alia, HB would provide Mr Mehjoo with 'general tax planning advice on the best use of reliefs' and confirmed that they were 'willing to provide, if [they] were not already doing so, a more extensive tax and personal financial planning service taking into account all forms of taxation and personal financial planning'.
Mr Mehjoo’s successful clothing business was merged with a similar business in February 2003. Mr Mehjoo sold his shares in the merged business two years later in April 2005 for approximately £8.9 million, realising a gain of approximately £8.5 million. Mr Mehjoo was liable to tax on the gain at an effective rate of 10% after allowing for business asset taper relief.
Mr Purnell accepted that he was aware, since October 2004, of the proposal to sell the shares and that he was retained to advise Mr Mehjoo on planning strategies to mitigate Capital Gains Tax (CGT). Indeed, in what the judged called an 'important passage' during his cross-examination, Mr Purnell accepted that he was 'always required to consider Mr Mehjoo’s best tax position' including when HB met with Mr Mehjoo to discuss CGT mitigation in October 2004.
In August 2005 Mr Mehjoo entered into a capital redemption plan (CRP) and paid the scheme provider a fee of £200,000. On the facts, Mr Purnell both initiated contact with the scheme provider and, in part, facilitated Mr Mehjoo’s entry to the scheme but neither he nor HB specifically advised him to enter the scheme. The CPR was designed to create an artificial capital loss to offset against Mr Mehjoo’s gain. The scheme came under attack from HMRC and ultimately failed. The result was that Mr Mehjoo had to pay the CGT plus interest and penalties for late payment, which he now sought to recover from HB.
As a non-UK domiciled individual, Mr Mehjoo could have used a method based on bearer warrants to reduce his CGT liability. The method requires the shares to be exchanged for bearer warrants which are taken offshore and transferred to a non-UK resident trust, where they would be non-UK situs assets. As such, no charge to CGT arises on a subsequent disposal by the trustees. Crucially, this type of scheme was only available to non-domiciled individuals and had to be implemented prior to the sale of the shares.
Mr Purnell and HB were ‘generalist’ accountants and were unaware of such planning. Mr Mehjoo considered that they should have taken specialist advice or referred him to an advisor with expertise in non-dom planning.
HB argued that such a duty to refer would only arise if a reasonably competent generalist accountant would have been aware that the bearer warrants scheme existed and could be utilised advantageously by a non-domiciliary.
The judge rejected HB’s argument stating that it would be unreasonable to expect a generalist accountant to be aware of precisely how a non-dom specialist could assist, as to be able to do so would be tantamount to being a non-dom specialist.
The judge resolved that Mr Mehjoo was likely to have been a non-UK domiciliary (Mr Mehjoo’s non-dom status was confirmed by HMRC in April 2006) and that HB ought to have been aware of this and advised him to seek specialist advice prior to disposing of the shares, especially given their value.
The judge held that HB was under 'a contractual duty or concurrent tortuous duty' to help Mr Mehjoo mitigate his CGT liability and rejected HB’s argument that, in advising Mr Mehjoo that he could claim business asset taper relief, they did not need to consider or advise upon other ways to mitigate the liability further.
The judge found that entering the bearer warrant scheme would have eliminated Mr Mehjoo’s liability to CGT. Furthermore, and crucially, he found no evidence of bearer warrant schemes having been successfully challenged by HMRC at the time in question and Mr Mehjoo claimed that he would have accepted a non-dom specialist’s advice to enter into the bearer warrants scheme and would have had time to implement it before the Government introduced legislation to block the ‘loophole’ with effect from 6 March 2005.
The judge found that HB was in breach of its duty and ordered that it should make payment of Mr Mehjoo’s CGT liability to include the interest and penalties on late payment and the fee paid to the failed CRP scheme provider (less the costs he would have incurred in implementing the bearer warrants scheme).
The judge had to decide whether a generalist accountant was under a duty, contractual or otherwise, to advise his client to seek advice from a non-dom specialist. Despite the reports, this was not a case about whether accountants were under a duty to advise clients to avoid tax.
Mr Mehjoo’s domicile was a central feature but the lessons which flow from this case are not so narrowly restricted and apply equally to other specialist areas of advice.
At no point did the judge seek to criticise Mr Purnell or HB for lacking the knowledge of a non-dom specialist and, to the contrary, described Mr Purnell as an 'accomplished accountant'. He held that HB should have known (and upon the facts did know) that Mr Mehjoo was indeed a non-domiciliary and that this status potentially afforded him opportunities to mitigate his tax liability. That knowledge was enough to impose a duty upon HB to advise Mr Mehjoo to seek specialist advice. That can hardly be described as a burdensome duty or an evolution of the existing law and serves as a reminder to advisors that they leave themselves exposed if they advise beyond their expertise or fail to take reasonable steps to advise a client to seek specialist advice.
The judge drew particular attention to the Professional Rules and Practice Guidelines of the Chartered Institute of Taxation which, at paragraph 7.5.1 state that: 'A member who does not have the expertise or the staff resources available to meet his client’s needs should refer the client to another professional advisor'. There are similar provisions in the Solicitors’ Regulation Authority’s Code of Conduct 2011 which requires a solicitor to ensure that they have the resources, skills and procedures to carry out their clients’ instructions. These guidelines merely set out obligations which are readily implied in a professional advisor’s retainer.
HB fell foul of an inadequate retainer which was evidenced by a letter dated some five years prior to the events complained of. The judge found that HB had, at times, provided unsolicited advice, including tax planning, to Mr Mehjoo. Over time, Mr Mehjoo came to rely upon that advice and the judge found that HB’s retainer extended beyond the terms of the 1999 engagement letter.
So, whilst this case is not nearly as far reaching as first feared, it should serve as a timely reminder to review and keep under review risk management procedures and, in particular, the terms of retainers. Each retainer should be individually negotiated and regularly reviewed and updated when the nature of the advice given or the client’s circumstances change. It is just as important for a retainer to set out unequivocally what an advisor is not going to do as well as what he will be doing.
An advisor will only be under a duty to advise on tax planning if the engagement letter obliges him to do so or, if during the course of the retainer, whether solicited or not, he habitually volunteered such advice.
Interesting times lie ahead now that HMRC has GAAR within its armoury to counteract 'tax advantages arising from tax arrangements that are abusive'. HMRC can penalise clients and their advisors for abusive tax planning, leaving them to consider how best they can avoid being pulled from pillar to post by the risks of professional negligence on the one hand and reprimand from GAAR on the other.
HB is appealing the decision to the Court of Appeal.