You may recall that in July 2013 we reported on the case of Mehjoo v Harben Barker (a firm) & Anor, where the judge at first instance found that a variation to their general retainer meant Harben Barker were under a duty to recognise Mr Mehjoo's non-domicile status and the significant tax advantages that might bring. Furthermore, they were under a duty to refer Mr Mehjoo to a non-domicile specialist for tax advice relating to his status; that advice being outside their area of expertise.
Harben Barker subsequently appealed to the Court of Appeal and judgment in that appeal was handed down on 25 March 2014,  EWCA Civ 358. In his leading judgment Lord Justice Patten allowed the appeal and held that Harben Barker were not in breach of their duty to Mr Mehjoo after all. The terms of their general retainer had not been varied such that they were under a duty to advise on complex tax planning schemes, absent a request to do so.
Background and first instance decision
Mr Mehjoo was born in Tehran but had lived in the UK since he was a child and became a British citizen in 1996. He was a successful businessman whose high street fashion business was sold for a substantial sum in 2005. His share of the business was valued at £8.5 million and this claim arose as a result of the Capital Gains Tax (CGT) liability Mr Mehjoo was faced with following the sale of his shares.
Mr Mehjoo had known his accountant, Mr Purnell (of Harben Barker), for more than 20 years - in both a personal and a professional capacity. Harben Barker were retained as Mr Mehjoo's 'accountants and tax advisers', and the terms upon which they were engaged were set out in their retainer letter in July 1999. This letter referred to Harben Barker providing 'general tax planning advice' and it confirmed that more extensive tax planning services would be available on request.
Between 1999 and 2005, Mr Purnell's relationship with Mr Mehjoo developed and it was Mr Mehjoo's case that Mr Purnell became less of a processing accountant, undertaking routine compliance work, and more of a tax adviser. During this time he would voluntarily offer tax advice to Mr Mehjoo on his personal and business dealings.
This voluntary advice extended to advice given in October 2004 on how Mr Mehjoo might be able to reduce or eliminate the CGT liability that would arise on the sale of Mr Mehjoo's shares in his business.
A key meeting took place between Mr Mehjoo and Mr Purnell on 2 October 2004. In advance of that meeting, Mr Purnell created a document setting out 12 tax saving options that he accepted were all of the tax saving options he and one of his tax partners were able to think of. That 'CGT list' included reference to "various tax saving schemes may be available subject to up front (sic) fees and uncertainty regarding Government action".
Mr Purnell accepted in evidence that it was probable he discussed some of the matters in the 'CGT List' during the 2 October meeting - despite that advice having not been specifically requested by Mr Mehjoo. The court found - and it was not disputed - that Harben Barker charged Mr Mehjoo a fee for that meeting, or they were entitled to so charge him.
No specific tax planning was agreed at the 2 October 2004 meeting. However, following the sale of his business in 2005, Mr Mehjoo was advised to put his share proceeds from the sale into a capital redemption plan (CRP), with the intention of legitimately allowing him to avoid the 10% CGT liability that would otherwise have arisen.
The CRP was subsequently disallowed by HMRC (following the case of Drummond v HMRC  STC 2707 Ch) and Mr Mehjoo faced a tax liability of £850,000 as a result. It later transpired that he could have legitimately avoided paying any CGT had he been advised to enter into a Bearer Warrant Scheme (BWS) - an option available to UK non-domiciled individuals, a category into which Mr Mehjoo fell.
At first instance the court found that the terms of Harben Barker's retainer were extended to cover more specialist tax advice. Harben Barker had been negligent in failing to advise Mr Mehjoo that he had, or very probably had, non-domicile status and that such status carried with it potentially significant tax advantages. The fact that they were not aware of the advantages that might arise as a result of his non-dom status was no defence.
The court found that had Mr Mehjoo been told of the significant tax advantages attached to non-dom status, he would have promptly sought specialist non-dom advice, regardless of whether he was actually asked to seek it. However, the court also held that Harben Barker should have referred Mr Mehjoo to a non-dom specialist, who would have advised him to take advantage of his non-dom status and avoid the CGT liability by placing his proceeds in a BWP rather than a CRP.
The Court of Appeal decision
Harben Barker appealed against the decision. On liability they contended that:-
- The judge was wrong to find that their retainer extended to advising Mr Mehjoo in relation to his tax affairs when they had not been requested to do so;
- No such duty arose separately from the meeting held on 2 October 2004 and to the extent any duty arose to advise on the availability of specialist advice that duty was discharged by the discussions at that meeting;
- A reasonably competent accountant would not have been aware that the tax advantages stemming from being a non-dom could apply to Mr Mehjoo's share proceeds from the sale of his company;
- There was no admissible evidence before the court that a non-dom specialist existed as a recognisable class of adviser which the reasonably competent accountant should have been aware of.
The Court of Appeal found that Harben Barker had not breached their duty to Mr Mehjoo. Their duty was limited to the scope of their retainer. Harben Barker's conduct, in providing some voluntary tax advice, did not establish a variation to their retainer. The appeal was allowed and the claim against Harben Barker dismissed.
Lord Justice Patten concurred with the judge at first instance that the 1999 letter did not impose any obligation on Harben Barker to advise Mr Mehjoo as to how he might minimise his tax liabilities unless they were specifically requested to do so. He went on to say that under the terms of their 'retainer' Harben Barker were "charged with preparing annual tax returns for Mr Mehjoo and his company and with advising them on the availability of reliefs in connection with their annual tax liabilities". Any specialist services required beyond the scope of this retainer would only be considered following a specific request from Mr Mehjoo.
Lord Justice Patten confirmed that there is no such thing as a general retainer and the terms and limits of the retainer and any consequent duty of care therefore depend on what the professional is instructed to do. Harben Barker were not, therefore, "under a general roving duty to have regard to and to advise on all aspects of the claimant's affairs absent a request to do so".
It was accepted that on many occasions Mr Purnell took the initiative and offered advice to Mr Mehjoo on aspects of his business and personal financial affairs, and this included providing some tax advice voluntarily. Lord Justice Patten did not, however, accept that this 'unprompted' advice amounted to a course of conduct from which the court should infer a change in the terms of Harben Barker's retainer.
The Court of Appeal accepted that when preparing for the 2 October 2004 meeting Mr Purnell was aware that Mr Mehjoo would dispose of his shares in his fashion business and would receive a large cash payment in return. The tax consequences of the sale and Mr Mehjoo's capital gain were clearly matters for discussion at that meeting - as illustrated by the 'checklist' prepared by Mr Purnell in advance.
The 'checklist' contained all of the possible CGT saving ideas which Mr Purnell and his tax partner were able to think of and these were the ideas that Mr Purnell very likely discussed with Mr Mehjoo at the 2 October 2004 meeting. This would have included Mr Purnell mentioning that more radical tax schemes might be available, even though he was not in a position to say what might be suitable or what those schemes might be.
The majority of the tax saving measures on the 'checklist' were or should have been obvious possibilities to any competent general accountant. Measures such as the BWS were not obvious possibilities and as such Harben Barker were not obliged to provide advice on them.
Lord Justice Patten went on to say that the reasonably competent accountant setting out to advise Mr Mehjoo of the tax consequences of the sale would not, in his view, have been under any obligation to raise for discussion the claimant's domicile unless it was relevant to the CGT liability on the disposal. The accountant would have known that it gave Mr Mehjoo no tax advantages in relation to the sale of his shares unless the situs of the shares could be changed. As this was something which Harben Barker neither knew nor could have been expected to know was achievable, there was no reason to mention the matter and they were not liable in negligence for failing to do so.
Harben Barker were therefore under no duty to draw Mr Mehjoo's attention to any significant tax advantages derived from his non-dom status which might be relevant to the sale of the shares. It therefore followed that Harben Barker did not have a duty to advise Mr Mehjoo to consult a non-dom specialist.
The Court of Appeal found that Harben Barker alerted Mr Mehjoo to the fact that various tax saving schemes might be available in relation to his impending capital gain, but Mr Mehjoo chose not to follow up the possibilities. It had been alleged that Harben Barker were negligent in failing to specify what type of advice Mr Mehjoo should seek, although they had no reason to believe that that type of tax saving existed. Lord Justice Patten concluded that Mr Mehjoo knew about the tax charge and had been told that schemes might exist to reduce it. Harben Barker did not know what those schemes were nor could they have been expected to do so. They had therefore discharged their duty to Mr Mehjoo when they told him that other tax saving schemes might exist.
Lord Justice Lewison and Lady Justice Sharp concurred with Lord Justice Patten. Lord Justice Lewison concluded by saying "it was impermissible for the judge to infer from the limited occasions upon which Mr Purnell pursued a line of inquiry beyond the strict limits of his retainer that there had been a far reaching (but silent) variation of the retainer, which had the effect of imposing an open-ended and apparently limitless duty upon Harben Barker".
The importance of terms of engagement and retainers cannot be underestimated - this case is a clear example of that fact.
- Although the Court of Appeal confirmed that a written retainer is capable of being varied by subsequent conduct, any such variations should fall within the range of advice contemplated by the original letter (unless there is an express agreement to the contrary).
- This decision reinforces the supremacy of engagement terms, although it also demonstrates the need for caution if services provided by an accountant (or other professional service provider) extend beyond the scope of the retainer.
- Accountants still need to be wary of being too helpful to their clients and straying outside the scope of the original retainer. Although the Court of Appeal found that there was no general retainer in this case, that conclusion was reached in circumstances where there was at least a formal engagement letter. Absent written terms of business, there must still be a risk of professional advisers being deemed to owe a general duty of care (albeit a reduced one).
- In this case, it was clear from the evidence that the accountant, Mr. Purnell, "did consider that he owed a duty to his client to avoid unnecessary (and perhaps unforeseen) adverse tax consequences when it was possible to do so". However, the tax advice in issue in this case was not considered by the Court of Appeal to be "routine tax advice". The retainer letter had listed entirely conventional forms of tax advice only. Mr. Purnell did produce a check list of issues for discussion with Mr Mehjoo. That checklist included something of a catch all, namely that 'Various tax saving schemes may be available...'. In the opinion of the Court of Appeal that was sufficient to discharge Harben Barker's duty.
- While identifying obvious tax saving possibilities did fall within the scope of the accountants retainer (being matters that any competent general accountant should have been aware of) the particular planning scheme in issue in this case, the BWS, was outside of that scope - even though more substantial firms were advising clients to pursue such tax saving strategies at the time. This case confirms there is no duty to advise on issues of which the adviser is not 'reasonably' aware.
- It is perhaps fortunate for Harben Barker that the general reference to the possibility of various other tax saving schemes being available was deemed sufficient to discharge any further duty to warn or refer. The onus (so said the Court of Appeal) was then on the claimant to take the matter forward - something that he chose not to do. This does seem somewhat harsh given that no specific options were identified that might have triggered in the claimant's mind the need to consult others who might have been able to advise on other viable options.
- The case is good news for small and medium sized accountants who can give some limited tax advice in connection with a transaction and not be negligent when they do not address wider tax issues such as (as in this case) domicile.
- However, some clients may be concerned about the ruling; smaller/medium sized accountants could be wrong (causing clients to incur substantial sums in tax unneccesarily) but not be negligent. When the need arises, clients should ensure they seek advice from a firm qualified to give specialist advice - or else risk receiving wrong but not negligent advice. This is potentially good news for larger firms of accountants, who may be viewed as the safer option from whom to seek advice that has the potential to be more than general in nature.
- How far a generalist accountant can go without being negligent is unclear. In this case Harben Barker advised - at the meeting on 2 October 2004 - on potential tax savings as esoteric as using a double taxation treaty in Belgium to avoid CGT liability, yet they were under no duty to advise Mr Mehjoo that he was likely to have non-dom status. It will be hard to draft a tax retainer letter that accepts liability for advice in relation to say a double taxation treaty in Belgium but does not accept any liability to provide advice on (as in this case) the potential tax benefits of being non-domiciled.
- It should also be noted that there was no liability cap in this case. Care should be taken if advice is sought and given beyond the scope of an original retainer; any cap on liability under that original retainer may not apply to the further advice given.