Accountant Duty to give choices to clients on Tax savings

Accountant Duty to give choices to clients on Tax savings Judge rules that accountants are duty-bound to advise clients on tax planning 

A recent ruling in the Court of Appeal has caused quite a stir among legal and accountancy professionals as it appears to suggest that accountants are duty-bound to advise clients about effective tax-planning.

According to an article in The Times this week, Hossein Mehjoo, an Iranian-born non-domicile who had built up a multi-million pound fashion business in the UK, successfully sued his accountancy firm for professional negligence for failing to advise him about a tax loophole, winning a whopping £1.4 million in compensation. The High Court judge ruled that the accountancy firm should have told Mehjoo, about an offshore, legal, tax-avoidance scheme.

Mehjoo wanted to avoid an £850,000 tax bill on the sale of a business he co-owned, Bank Fashion Ltd. In 2005, he paid £200,000 to enter into a tax avoidance scheme run by the firm, but not satisfied with the service he received, Mehjoo sued the firm over its failure to give him adequate tax-planning advice.

Mr Justice Silber found that a "reasonably competent" accountant would have recognised that, as a non-domiciled citizen, Mehjoo was eligible for tax schemes not available to domiciled UK citizens. Mehjoo, the judge said, should have been told about a scheme called the Bearer Warrant Scheme (BWS) which, until 2005 when it was quashed by HMRC, allowed non-domiciles to transfer ownership of a company to an offshore trust: the judge described the BWS as a "tax mitigation" scheme, noting that "the main reason for creating the trust would be to enable the client to receive the capital ... tax free," that is, without paying any Capital Gains tax.

In his ruling, the judge said "the defendants had a contractual duty to advise the claimant that non-dom status carried with it potentially significant tax advantages." He likened the accountancy firm’s duty to refer a client to a tax specialist to that of a GP, whom he said would refer a patient to a specialist if the medical condition warranted it.

The accountancy firm is appealing against the judgment, which is not a surprise. From my point of view I would advocate that accountants should advise their clients of all legal ways to minimise their tax liability. Of course, DNS consistently look at ways we can minimise our clients’ tax bills. However, I do think this is a really tough ruling, and that it might give rise to many similar situations with clients attempting to sue their accountant for not pointing out every single loophole in the highly complex, every changing UK tax system. But this is one of the advantages of using a firm like DNS, because among us all, we have knowledge, experience, ideas and access to contacts and a collective expertise that we hand on to all of our clients.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.