Duty bound to aid tax avoidance?

Are accountants obligated help their clients avoid tax?

The Times recently carried the headline 'Accountants must help tax avoiders rules judge' and that “practitioners had a duty to advise wealthy clients to avoid tax”, following its reporting on the High Court professional negligence case of Mehjoo v Harben Barker.

Hossein Mehjoo sued his former accountants, Harben Barker, for alleged negligence, claiming that they had failed to provide advice that could be expected of a reasonably competent accountant.

Mr Mehjoo was born in Iran but settled in Britain where he built up a clothing business which was then merged with a similar business owned by his very good friend, in February 2003. In April 2005 they sold their shares for which Mr Mehjoo received £8.5 million, with resultant capital gains tax  in excess of £800,000.

In October 2004 Harben Barker considered their clients CGT position in anticipation of Mr Mehjoo disposing of his shares but failed to recognise that their client was non-domiciled in the UK. They also failed to seek specialist tax advice or introduce their client to such a specialist, as the matter went beyond their expertise.

At the time of the sale the bearer warrant scheme (BWS) would have been open to Mr Mehjoo to exploit. The scheme allowed UK shares owned by  non-domiciliaries  to be swapped for bearer warrants which could be placed offshore and placed in trust before sale so that they became non-UK assets at the point of disposal thereby avoiding a CGT charge. There was no evidence that the scheme had ever been challenged by HMRC but Mr Mehjoo remained ignorant of it due to his accountants failures.

The judge ruled that the accountant was under a contractual duty  to help its client avoid CGT and rejected Harben Barker's argument that because they had told their client he could claim business asset taper relief there was no need to advise on other tax planning opportunities.

Harben Barker also offered as part of their defence that they were under no obligation to offer unsolicited tax advice and that they were not required to obtain tax planning advice from a non-domicile expert, essentially relying on a literal interpretation of their letter of engagement.

The High Court ruled that Harben Barker should remain responsible for their clients' CGT bill plus Mr Mehjoo's fees incurred in entering into a failed capital redemption plan less costs that would have been incurred with BWS, which The Times reported to be £1.4 million.

Does this latest ruling therefore mean that accountants must assist their clients in avoiding tax whenever possible? Not at all. The judge did not condemn the accountants for failing to advise on a complex tax scheme nor were they held liable for such failure. Furthermore, there was no suggestion that the accountants should have been aware of such complicated tax schemes. What Harben Barker had failed to do was recognise that their client was a non-domicile and the associated tax consequences thereof. From there they could and should have sought outside help from specialist tax advisers.

This case therefore serves as a reminder to accountants of their duty of care and responsibilities to their clients and to give best advice at all times. If the knowledge base does not exist in-house then advice and assistance should be sought from a third party or to introduce their client to such expertise.

The full judgement can be found at http://www.bailii.org/ew/cases/EWHC/QB/2013/1500.html#para177