The High Court had previously ruled that Mehjoo’s accountants, Harben Barker (HB), a firm of chartered accountants with offices in the West Midlands, had been negligent. It found that, since Mehjoo was very likely to be non-UK domiciled, this would have a bearing on his capital gains tax (CGT) liability. HB should therefore have advised him to seek advice from a non-dom tax specialist. The judge indicated that he was not a tax expert and that the case should have been heard by a tax judge. However, he concluded that had Mehjoo sought specialist advice, he would have learned about the Bearer Warrant Scheme (BWS) and would have been able to avoid the CGT on the sale of his company.
Court of Appeal reversal
In the Court of Appeal, Lord Justice Patten was not so convinced. A key finding was that Mehjoo had accepted in evidence that he would not have gone ahead with the BWS if he had been advised that there was a substantial risk of it being challenged by HMRC.
Lord Justice Patten focused on the terms of HB’s engagement letter with Mehjoo, since an adviser’s duty of care depended on what they had been instructed to do. Based on the terms of its engagement letter, its obligations to provide tax planning advice were limited. However, as is so often the case in practice, HB had created an implied duty of care to provide tax planning advice to Mehjoo, since it had done so on prior occasions.
However, Lord Justice Patten disagreed with the earlier High Court judgment in several important respects. Applying the important test of the hypothetical ‘reasonably competent accountant’, he found that Mehjoo’s non-dom status could not influence the CGT on the sale of his UK shares unless the accountant knew how it was (potentially) possible to change the situs of the UK registered shares into overseas assets. Lord Justice Patten said: ‘As this was something which HB neither knew nor could have been expected to know was achievable, there was no reason to mention the matter, still less a liability in negligence for not having done so.’
Many accountants will be relieved at the more commercial approach adopted by the Court of Appeal. The question of negligence and duty of care is always tested against the hypothetical yardstick of the reasonably competent accountant
He then went on to conclude that, in advising Mehjoo about the tax consequences of selling his UK shares, the reasonably competent accountant would not have been under any obligation to discuss Mehjoo’s domicile status unless it was relevant to the CGT liability on the contemplated disposal. In short, HB was not under any duty to advise Mehjoo ‘…about significant tax advantages which, to their reasonable knowledge, did not exist’.
Furthermore, since HB could not be expected to have knowledge of the BWS scheme, it had no obligation to tell Mehjoo to consult a non-dom specialist.
It is important to understand that the ruling in the Mehjoo case turned on its own specific and specialised facts. Nevertheless, many accountants will be relieved at the more commercial approach adopted by the Court of Appeal. The question of negligence and duty of care is always tested against the hypothetical yardstick of the reasonably competent accountant. Thus, there will be some areas of tax law and practice of which a reasonably competent accountant is expected to have a reasonable working knowledge. And, of course, for the specialist tax adviser the bar is raised even higher.
It is possible to argue that the Mehjoo case was played out against a different legal and moral backdrop, well before Starbucks, Jimmy Carr and the General Anti-Abuse Rule (GAAR). Many accountants would, quite rightly, counsel against aggressive tax schemes that have little prospect of success. Furthermore, all accountants now have an ethical obligation not to bring their professional body into disrepute by engaging in dodgy tax schemes.
The Mehjoo case reminds us of the importance of having the right engagement letter in place and the need to clearly state what the firm undertakes to provide in terms of professional services.
As someone who advises accountants on specialist tax matters, I always say that rather than ‘going it alone’, it always pays to seek expert advice early on when the need has been identified. This is so much better and less expensive than sorting out the proverbial mess later on.
Summary of the facts
- Hossein Mehjoo was born in Iran to Iranian parents in 1959. He was sent to school in the UK in 1971 and had been UK resident since then.
- Mehjoo’s accountants, Harben Barker (HB), had acted for him since the 1980s and had a good understanding of his family background and so on.
- In 2004, Mehjoo planned to sell his co-owned company and took advice from HB on various tax planning schemes.
- The company was sold in April 2005 and Mehjoo realised a gain of £8.5m, which after business asset taper relief, resulted in a CGT liability of £850,000.
- HB did not consider the possibility of Mehjoo being non-UK domiciled and that appropriate specialist tax advice should have been sought. Mehjoo’s potential non-UK domicile status was first discussed in June 2005 and HMRC agreed his non-dom status in April 2006 (via the previous DOM 1 procedure).
- Mehjoo had subsequently learnt that he could (at the time) have used the Bearer Warrant Scheme (BWS), which would have converted his UK shares to a non-UK holding. As a non-dom, this would have enabled him to take advantage of the remittance basis and thus could have avoided his CGT liability.
- Mehjoo claimed that HB had acted negligently since they did not refer him to a ‘non-dom’ tax specialist or alert him to the BWS (which at the time was considered legal, but has since been blocked by legislation). Had he done so, Mehjoo claimed that he would have avoided his CGT liability.
Peter Rayney FCA, CTA,TEP runs an independent tax consultancy, Peter Rayney Tax Consulting