Harben Barker wins negligence case appeal

HB director Paul Stanford was “just a little” delighted with the result. “We were surprised and disappointed to have lost the case at the High Court and were very pleased to be able to take the case to appeal,” he told economia. “We are very happy that we have been vindicated.”

Mehjoo, who set up and ran a highly successful fashion business in the UK, paid the firm a retainer to provide him with accountancy services and general tax advice. He took them to court for failing to advise him to join an offshore tax avoidance scheme.

He had entered into an aggressive tax avoidance scheme in 2005 promoted by a company called Montpellier. It cost him £200,000 to enter but he was trying to avoid paying an £850,000 tax bill on the sale of his company, Bank Fashion (BFL). When the scheme was thrown out by HMRC, he sued the firm for failing to give better tax-planning.

The High Court decided that a “reasonably competent” accountant should have realised that, as a “non-dom”, Mehjoo would have been eligible for tax schemes that wouldn’t normally be open to UK citizens.

It concluded that the firm should have advised him to join a Bearer Warrant Scheme (BWS) under which he would have been able to move ownership of his company to an offshore trust. The company could then have been sold on and he would have avoided capital gains tax.

Mr Justice Silber also said that the firm had a “contractual duty” to advise Mehjoo that as a non-dom he had access to “potentially significant tax advantages”. He likened the duty to refer a client to a tax specialist to the doctor who has to refer a patient to a consultant.

However, in a unanimous decision, three appeal court judges said that the judge was wrong to find the firm in breach of duty.

In the written judgment, handed down yesterday, Lord Justice Patten said, “The reasonably competent accountant setting out to advise Mr Mehjoo of the tax consequences of the sale would not, in my 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 the BFL shares unless the situs of the shares could be changed.  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.

“Although not in any sense conclusive, it is not insignificant that none of the other firms of specialist tax advisers whom Mr Mehjoo subsequently consulted suggested he should consult a non-dom specialist or raised the possibility of using a scheme like the BWS.  None of them has been sued in negligence.”

As for the obligation to advise Mehjoo about his non-dom status, the judgment says that this seems to have been based on the fact that HB was aware that the sale of the BFL shares would generate a large cash sum possibly for future investment. “But accountants are not paid to give unnecessary advice and I can see no reason, still less any obligation, on HB to have raised the claimant’s non-dom status at the 2 October meeting when the only issue for discussion was the CGT payable on the disposal,” Patten LJ continued.

He added that he regarded in the same light the claim that the firm should have told Mehjoo that his probable non-dom status carried with it significant tax advantages.

“Again, these were not advantages which were available to the claimant on the sale of UK registered shares and, in the absence of any claim that HB should have known and advised Mr Mehjoo that it would or might be possible to change the situs of the shares without triggering a charge to CGT in the process, it is difficult to understand why they were under any legal duty to bring the existence of ‘very significant tax advantages’ to the claimant’s attention.

“The competent accountant would not have believed that they existed.”

He also rejected the comparison to the GP since the task of the GP is to get his patient treated if necessary by referring him to a consultant. “Here the claimant knew about the tax charge and was told that schemes might exist to reduce it.

“HB did not know what those schemes were nor could they be expected to do so… They had discharged their duty.”

In agreeing with the judgment, fellow appeal court judge Lord Justice Lewison said he felt that the High Court should have taken more notice of the “wise words” of the judge in Midland BankTrust Co Ltd v Hett Stubbs & Kent. They related to a solicitor but can be applied to other professional advisers as well.

“The expression ‘my solicitor’ is as meaningless as the expression ‘my tailor’ or my bookmaker’ in establishing any general duty apart from that arising out of a particular matter in which his services are retained. The extent of his duties depends on the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do.

“Now no doubt the duties owed by a solicitor to his client are high, in the sense that he holds himself out as practising a highly skilled and exacting profession, but I think the court must beware of imposing upon solicitors – or upon professional men in other spheres – duties which go beyond the scope of what they are requested and undertake to do.

“It may be that a particularly meticulous and conscientious practitioner would, in his client’s general interests, take it upon himself to pursue a line of inquiry beyond the strict limits comprehended by his instructions. But that is not the test. The test is what the reasonably competent practitioner would do having regard to the standards normally adopted in his profession.”

Based on other cases, it was clear that the duty was directly related to the confines of the retainer, Lewison LJ added, and he thought it “impermissible” that the judge in the High Court had inferred from the few occasions when HB had made inquiries outside the strict limits of the retainer Mehjoo paid, that there had been a silent variation “which had the effect of imposing an open-ended and apparently limitless duty upon HB”.

Rob Morris at City law firm RPC described the decision as a “huge boost for accountancy firms” as it offers enhanced protection from negligence claims for generalist firms that don’t offer specialist tax planning advice.

“Accountancy firms are facing a high number of professional negligence claims at the moment for recommending tax planning products that have failed,” he said. “This case is unusual because it involves a firm being sued for failing to recommend a complex tax planning scheme.”

For Stanford and his fellow directors, the nightmare is over. “We are very grateful for the support we received from all of our staff and families throughout this difficult time and also our insurers and legal team,” Stanford added.

“We can now get on with our lives and concentrate on the future of the business.”

Julia Irvine