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An accusation of negligence can be extremely stressful for a firm and its advisers. The best strategy is to manage risks in this area, but to manage risk you need to identify them.

At a glance

What is negligence in terms of an adviser?

The answer is to consider what a hypothetical reasonably competent accountant do in the same situation?

What a reasonably competent accountant can do will depend on what terms has the client agreed to:

No firm is perfect and mistakes do occur.

Firms should assess their risks and vulnerabilities.

Problem areas

Fee pressure

Stress

Adviser error can occur at any level and many accountants suffer from high stress levels.

Lack of training/CPD

Typical errors involve:

Illness

A common excuse (often in relation to late filing penalties) is that the accountant was ill and had no substitute in place.

Reducing risks

With the new pressures of Making Tax Digital and so much debate on tax avoidance and the role of accountants and advisers, best advice may be as follows:

Illustrative cases

It can be difficult to glean why errors occur from tribunal case decisions particularly if the adviser is not present. Here are a few cases to illustrate the potential issues.

Adviser error?

In Peter Stratton v HMRC [2013] TC02967 a taxpayer acquired employment related securities (ERS) but his adviser ignored earlier advice by the management of the company and used the wrong legislation. They advised that the profit on disposal was subject to CGT and not PAYE. This resulted in a tax penalty. Although the adviser had made an error, the taxpayer was found to be negligent because he had been given and ignored the correct advice by the company. His advisers, the judge noted, "seemed unwilling to engage with HMRC" in respect of the correct legislation, and failed to understand ERS.

Case management is very important in relation to hearings

In Michael Phair v HMRC TC02752 [2013] a taxpayer and his adviser failed to understand the rules concerning costs once a case had been transferred to the complex track of the First Tier Tribunal (FTT). The ruling left the taxpayer responsible for HMRC's costs following an unsuccessful appeal.

In Pete Matthews and Keith Sidwick UKUT 229 [2012] the taxpayers made an unsuccessful appeal to the Upper Tier Tax tribunal. They wished to claim that they were employees so that as ship cabaret entertainers they could claim exemption from tax. They were found to be self employed. They had tried to claim that the case was a test case, however HMRC did not agree and neither did the Upper Tier Tax Tribunal so this left them with an apparently unexpected costs order.

In Kent County Council v HMRC TC02730 [2013] the FTT did not allow a council a late appeal against a a PAYE Regulation 80 Determination. The council blamed an internal reorganisation on its failure to lodge an appeal on time however the Tribunal did not find this a reasonable excuse. Judge Sir Stephen Oliver QC said that "The reorganisation of Kent County Council’s Human Resources directorate should have been conducted in a manner that enabled the Council to comply with its obligations owed to HMRC under the Taxes Management Act."

Whilst this case involved a council, it can be seen that any commercial organisation could have a similar problem.

The 2013 decision in the case of Mehjoo v Harben Barker where advisers were sued for negligence for failing to provide a non-domiciled individual with a suitable tax mitigation scheme caused a stir amongst professionals. It involved a large firm who did not know the existence of an offshore planning scheme. 

Insufficient warnings from the adviser

In Barker v Baxendale Walker Solicitors (a firm) & Ors [2017] EWCA Civ 2056 the Court of Appeal overturned the high courts decision and found that the solicitors advising on an EBT structure were negligent in not warning their clients that the scheme could fail. The case turned on the interpretation of s28 IHTA 1984 in respect of the transfer of shares into an EBT. The court of appeal agreed with HMRC's interpretation that the inheritance tax exemption did not apply and found that the advisers, Baxendale Walker (BW) should have specifically advised their client of the risk of this and that a general warning about entering into a tax avoidance scheme was not sufficient; BW were found to be negligent. Mr Barker had already settled with HMRC, paying over £11million in tax and interest.

Failure to advise on tax planning?

In Hossein Mehjoo v Harben Barker, [2014] EWCA Civ 358 a client sued his accountants for negligence for failing to put him into tax avoidance arrangement suited to his needs. Whilst the high court initially found in the taxpayers favour, the court of appeal allowed the accountant's appeal and held HB were not negligent in not taking specialist advice or in failing to advise him on the use of a tax scheme. HB did not say that they offered specialist tax advice, if they had done so it is possible that the result may have been different as they would have been held up to a different standard of care.

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