In Hossein Mehjoo v Harben Barker,  EWHC 1500 a client successfully sued his accountants for negligence for failing to put him into tax avoidance arrangement suited to his needs.
Mehjoo is an Iranian political refugee who had known his advisers for over twenty five years. He sold his UK business and made a substantial capital gain and paid tax. He claimed that his advisers should have considered tax planning appropriate to his non-domiciled status. At that time specialists might have recommended a scheme which involved the use of bearer warrants to avoid capital gains tax. The downside being his assets may have moved to an offshore trust. His firm offered him a different type of scheme - a capital loss scheme. This was found later not to work and bearer warrant planning was curtailed by HMRC in a later year.
The court held that the firm were negligent in not taking specialist advice or failing to advise him, that as a non-domiciled individual his affairs required specialist advice. He was awarded substantial damages and the firm was also made to pay his costs for the failed loss scheme.
The decision has provoked many different reactions amongst the accountancy profession which range from somewhere like "now we have to offer tax avoidance schemes to everyone " to "now we have to offer specialist advice when we think we are out of our depth".
Whilst the accountants concerned are apparently going to lodge an appeal a key issue going forward is how far do you have to advise any client? The answer is really quite simple: if you feel that you are out of your depth with a client then you need to say outright that you are having to enlist specialist advice and this will be charged perhaps at a higher rate to your own services. If the client does not wish you to do that, then ask them to sign a disclaimer to say that specilist advice was not offered and turned down.
Does specialist advice have to come in the form of aggressive tax planning?
There is some debate as to whether bearer warrants were risk free and what the outcome would have been had Mr Mehjoo ended up with an offshore trust and a different outcome. Come July 2013 the General Anti Abuse Rule will be enacted and this means that the sort of aggressive profit extraction or capital gains disappearing schemes that probably arrive in your inboxes and that you see from time to time in HMRC's Spotlights, or hear about in the press are likely to be deemed abusive and will fail. Without any doubt the specialist tax firms that create abusive schemes will be creating more but the chances are that form of tax planning will move offshore. Whilst it will always remain attractive for high net worth indivudals and large corporations it will be unsuited for the majority of the population.
Before being critical about the decision it might be worth reading the full judgment. The judge, not a tax expert made cavalier if not, quite sweeping remarks about the different tax avoidance schemes on offer. It might be reassuring to advisers to find that that Part 7 of ITEPA 2003 is merely part of the benefits code (!) and there were never risks in bearer warrant planning. The judge took that view that the defendants should have known that the alternative scheme, sold to the client by so-called tax scheme specialists was artificial and high risk, again this might be quite difficult to stomach as it was sold by alleged specialists.
Mehjoo produced a witness-lawyer from KPMG who had an indepth knowledge of the bearer warrant schemes, however the defence witness-accountant from Grant Thornton was found too have a limited knowledge of them. It could be presumed then that those schemes was used by some of the big firms but not all but the decision is unclear.
If firms have litigious clients with deep pockets then it seems that they should beware of what planning services were not offered in the past.
Points going forward: tax planning around a business sale or purchase is rarely straightward for the reason that the terms of any deal may vary and it depends on who you are, what you are selling or buying and the entities involved. It is generally to everyone's advantage to plan ahead so in an ideal world you know your tax position before you sell or buy.
if you are out of your depth with a client, if your client is involved in a high tax transaction then seek a second opinion. This is exactly what our Virtual Tax Partner support service is for.