The Court of Appeal in England has held that the duty of an accountant to a client is limited to the terms of their engagement letter and to the services that they have been retained to supply to the client. In Mehjoo v Harben Barker (a firm) & Anor  EWCA Civ 358 it was held that the duty of an accountant to give general tax advice did not include a duty to give advice to the claimant on a specialist tax scheme which could carry with it potentially significant tax advantages.
The claimant was born in Iran, went to school in England and was granted asylum in 1981. He became a British citizen in 1996 and built up a share in a successful business which was sold for the sum of £8.5 million. The defendant provided the claimant with accountancy services and general tax advice. The claimant argued that the defendant should have advised him that he had, or very probably might have, non domiciled status which carried with it significant tax advantages and that he should therefore seek and obtain tax advice from a firm of specialist tax advisers or accountants. It was argued that, if the claimant had retained his Iranian domicile of origin for UK tax purposes, he could, by entering into a bearer warrant scheme, have avoided capital gains tax entirely on the disposal of his shares in the business.
The High Court held that the defendant had been negligent and awarded the claimant damages. The judge found that while the claimant's original retainer did not oblige it to advise the defendant as to how to minimise his tax liabilities unless specifically requested to do so, it could be inferred from the defendant's conduct in giving unprompted tax advice that the retainer had been varied to impose a duty to give tax planning advice. The defendant appealed.
Court of Appeal
The Court of Appeal allowed the appeal holding that an accountant who was retained by a client to deal with his personal financial affairs would inevitably give routine tax advice but that was very different from the much more sophisticated form of tax planning exemplified by the bearer warrant scheme which required re-formulation of a transaction rather than mitigation of its consequences. The court held that the defendant was not a specialist tax planner and never offered to give the claimant such advice and the retainer letter listed entirely conventional forms of tax advice. The court noted that a more extensive tax planning service was available only on request and was never requested. On the occasions that the defendant gave the claimant tax advice in a pro-active way it was not of the more specialised kind and the defendant's conduct did not establish a variation of the retainer and 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 tax planning.
The court also noted that there had been a meeting to discuss the liabilities which would arise on the sale of the shares and how the claimant might reduce those liabilities. The defendant had told the claimant that more radical tax schemes might be available, even though he could not say that any would necessarily be suitable or what they were, but the claimant did not take the matter any further. The defendant was not aware of the existence of the bearer warrant scheme and such knowledge would not have been possessed by a reasonably competent generalist accountant at the time.
The importance of an engagement letter which sets out the details and scope of the client retainer can be seen from this decision as can the dangers of straying outside the terms of the retainer. Tax advisers (as well as other professional advisers) should ensure that their clients, at all times, understand the limits of the advice being provided and it might well be prudent depending on the circumstances to recommend specialist tax advice and to record that recommendation in writing.