In Hugh McMahon v Grant Thornton UK LLP [2012] CSOH 50, a firm of chartered accountants were not found to be negligent in failing to recommend some Entrepreneurs’ Relief planning in the event of a share sale. Such ad hoc advice was not listed within the scope of their personal tax compliance services and had not been requested by the client.

  • Mr McMahon sold his motor company in July 2012 making a capital gain of £14.75million.
  • His gain exceeded the then lifetime limit for Entrepreneurs’ Relief.
  • Most tax professionals will know that basic Capital Gains Tax (CGT) planning advice, in advance of a share sale, might well have been to suggest a gift of shares to a spouse (or civil partner) in the expectation that the donee would then meet the qualifying conditions for ER and could use their lifetime ER limit to reduce the overall tax bill for the couple.
  • Grant Thornton acted as the taxpayer’s personal tax advisers and they also advised his company. Their Letter Of Engagement (LOE) with him specified the scope of their personal tax compliance services. In respect of tax planning, the LOE said:
  • “AD HOC ADVISORY SERVICES For the avoidance of doubt, whilst we will always seek to inform you of tax planning ideas of which we become aware that may be of assistance to you, we cannot accept a duty to monitor and unilaterally suggest tax planning advice on specific matters. Advice on the tax implications of such specific matters will be given once you have referred it to us. On receipt of the referral, we will contact you by letter setting out the scope of our work and the fee quote...”
  • An approach to buy the company came out of the blue. Mr McMahon contacted Grant Thornton to obtain its assistance in relation to the proposed sale. A separate LOE set out the terms of engagement for that work and listed services related to sale preparatory work, project management, the completion of the sale. They did not include any tax services.
  • As the completion date grew near the advisers realised that the taxpayer was not aware of the potential CGT planning issues of the sale. In a pre-sale meeting to discuss tax issues post-sale, they did not suggest that it might be possible to transfer some shares to his wife and delay the sale.
  • The taxpayer paid approximately £750k more than he might have had he followed the basic tax planning of gifting his shares to his wife. He sued his advisers for compensation.

The Scottish Court of Session found that:

  • Even if CGT advice had been given at the outset, it would have been necessary to delay the sale for at least a year to ensure that the taxpayer’s wife could qualify for ER. To delay the sale would be risky due to rule changes in the franchising rules in the motor industry, the delay could be expensive and might reduce the offer price.
  • Turning to the LOE, it was clear that even basic tax planning came under the heading of ‘Ad hoc advisory services’ and the advisers had no obligation to offer CGT advice unless specifically requested to. As indicated by the LOE this task would then have been subject to a separate LOE setting out the scope of such advice.

Judgement was found in favour of the advisers.

Comment

It is often difficult for clients to grasp that ad hoc tax planning advice is not automatically part of day-to-day accounting and tax compliance. The case shows how important it is for an LOE to contain a really accurate scope of services and how important it is to explain to the client the exact scope of what you are offering and if necessary remind them to take advice in respect of any transactions that are beyond the scope of normal activities. Clearly, the way to avoid unexpected tax bills is to plan in advance. 

Our practical tax guides

Entrepreneurs' Relief: Start here
What types of disposal may qualify for relief

Entrepreneurs' Relief: Company sale
Disposal of shares in a personal company and tracker of all the recent changes to the rules.

Virtual Tax Partner© ER share disposal toolkits
Work through the complex ER qualifying conditions in a matter of minutes.

Virtual Tax Partner© ER disposal of a business & its assets toolkit
Save at least three hours. Fully check the Entrepreneurs' Relief conditions for the disposal of the whole or part of a business or assets used by the business when it ceases.

Capital gains tax: reliefs
Overview of the different CGT reliefs which may apply when an individual or company replaces or disposes of a business asset, or a business, or shares in a company.

External links

Hugh McMahon v Grant Thornton UK LLP [2012] CSOH 50

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