The recent decision of Mr Justice Silber in Hossein Mehjoo v Harben Barker (A Firm) and Harben Barker Ltd  EWHC 1500 (QB) has attracted a great deal of publicity in the general press, as it considers the important area of an accountant’s duty to his client to advise him how best to mitigate his liability to tax.
Mr Mehjoo (the claimant) claimed damages against his former accountants, Harben Barker. The claimant, who was born in Iran, had built up a clothing business, Bank Fashion Ltd (BFL). The claimant’s shareholding in BFL was sold in April 2005 for some £8.5m and his liability for CGT was £847,458. The case was concerned with the steps which the claimant argued his accountants should have advised him to take, in order to eliminate or reduce his liability to CGT on the disposal of his shareholding in BFL.
Essentially, the claimant contended that the longstanding retainer of his accountants included an obligation, prior and subsequent to the sale of his shareholding in BFL, to advise and to assist him in relation to his personal, financial and tax affairs, including identifying and advising him of possible methods by which he could minimise his tax liability including giving appropriate advice on the proposed sale of his shares in BFL without being expressly requested to do so. In this respect, any reasonably competent chartered accountant would have been obliged to advise him of the significant tax benefits of his non-domiciled (‘non-dom’) status and, in consequence, he should have been told to obtain tax advice from a firm of accountants or tax advisers who specialised in advising individuals who had or might have non-dom status. The claimant’s accountant did not specialise in this field.
The claimant gave evidence on his own behalf and he called three witnesses of fact to give evidence on his behalf. There was no suggestion that any of these witnesses were not honest witnesses. Expert evidence was also produced by both parties.
Mr Justice Silber was satisfied that the claimant was a ‘careful and reliable witness who was telling the truth and whose evidence I should accept’. This was despite a ‘careful, thoughtful and detailed cross-examination by Mr Goodfellow’ (counsel for the defendants). The judge accepted that the other witnesses of fact were doing their best to recollect matters of importance and were honest witnesses.
The scope of the retainer
Mr Justice Silber accepted that the defendants’ retainer did indeed extend to advising and assisting the claimant generally in relation to his personal and financial tax affairs, including identifying and advising the claimant of possible methods by which he could minimise his tax liability, including giving the claimant CGT planning advice on the proposed sale of his shareholding in BFL even where they had not been expressly requested to do so.
The key issue was whether the defendants had a contractual or tortious duty, as reasonably competent and generalist accountants in October 2004, to advise the claimant: that he had, or very probably might have, non-dom status; that non-dom status carried with it very significant tax advantages and that he should, therefore, take advice from specialists in this area. It was accepted that the claimant had an Iranian domicile of origin, but the issue was whether he had subsequently acquired a domicile of choice in the UK. The defendants argued that there was no rule of professional conduct or professional guidance which required a referral by the defendants to a non-dom specialist, and this was not a case in which the claimant was facing some unforeseen liability, as he had only to pay the greatly reduced GCT rate of 10% as a result of the availability of business asset taper relief on which the defendants had advised the claimant. Furthermore, the duty to refer to a non-dom specialist could only arise if it was known to the generalist accountant that it could have at least a reasonable chance of success.
Mr Justice Silber concluded that, from the evidence which he heard, the claimant was ‘very probably or possibly might have been a non-dom in October 2004 and that he should have been so advised by the defendants’. Moreover, the expert evidence called by the claimant supported the fact that ‘a reasonably confident accountant should have raised the topic of domicile with his client’.
The judge also accepted that the defendants did indeed have a contractual or tortious duty to advise the claimant about his non-dom status. The judge said (at 204): ‘I cannot understand why the duty to advise the client to consult a non-dom specialist where there is £800,000 at stake is not part of the duty described by Lightman J in Hurlingham Estates Ltd v Wilde & Partners  STC 627, 634 in this way and with emphasis added: “The test to be derived from the authorities is whether, having regard to the terms of the retainer in all the circumstances which were known or should reasonably have been known by [the solicitor], [the solicitor] should reasonably have appreciated that [the client] needed his advice and guidance in respect of the tax liabilities which entry into the transaction will expose.”’
The judge also accepted that the claimant would have made time in his ‘busy timetable’ to see a non-dom specialist and a meeting could have been speedily arranged for this purpose.
Bearer warrant scheme
The claimant argued that, had he sought advice from a specialist non-dom accountant or tax adviser, he would have been advised to enter into a bearer warrant scheme (BWS), which was a tax saving arrangement which could be utilised by non-doms. The claimant would, at the relevant time, have been able to enter into a BWS. Such an arrangement was made ineffective from 6 March 2005 (F(No. 2)A 2005 s 34, Sch 4, Part 1 para 4(1), (4)).
Mr Justice Silber considered whether, having regard to the circumstances, the specialist would have advised the claimant that there was a substantial risk of a successful challenge by HMRC to his non-dom status and/or a substantial risk that the BWS entered into by the claimant would be successfully challenged by HMRC. The judge also considered the possibility of advice that there might be a change in law before the claimant was able to enter into a BWS.
The claimant argued, however, that a reasonably competent non-dom specialist would indeed have advised the claimant that there was no material risk of a successful challenge by HMRC to his domiciled status. The reason for this was because HMRC had accepted, in January 2006, that the claimant was a non-dom without raising any queries after the defendants submitted a domicile form, Dom 1, to HMRC. The judge found that nothing had been put forward which showed that the HMRC ruling was based on incorrect or incomplete information. As a result, there was not a substantial risk of a challenge by HMRC to his domiciled status as a non-dom.
The judge then commented on what advice the specialist non-dom adviser would have given as to whether there was a substantial risk that the scheme would be successfully challenged by HMRC on the grounds ofYoung v Phillips  STC 520, a decision that held that for an instrument to be treated as situated in the jurisdiction in which it was physically located, the instrument must also be marketable in that jurisdiction. In this respect, the judge accepted the evidence of Mr Kilshaw, the expert called on behalf of the claimant. Mr Kilshaw’s evidence was that his firm, KPMG, did not regard Young v Phillips as a material risk because the then Inland Revenue had not taken the point in the context of bearer shares and in any event it could easily be addressed by holding the bearer shares offshore for a short period before placing them in a trust. The judge said (at 279–280): ‘… significantly by 2004, the risk posed by Young v Phillips had receded … I conclude that the specialist non-dom adviser would not have given any advice that there was a substantial risk that if the claimant had engaged in BWS, it could be successfully challenged by HMRC on Young v Phillips’ grounds. For what it is worth, this advice has been borne out by subsequent experience.’
The claimant sought recovery of damages for the CGT he had to pay together with interest. The claimant also claimed the cost of entering into an abortive tax arrangement, provided by Montpelier, which had not been successful and on which he had spent £200,000 in fees. The judge held that the claimant was indeed entitled to recover £847,458 less the legal, accountancy and trustee expenses that he would have incurred had he, as he should have been advised, entered into a BWS.
The claimant argued that he was also entitled to £200,000 in relation to the Montpelier arrangement because, had he been properly advised by a non-dom specialist, he would not have signed up to it. The claimant’s case for recovering the costs of entering into the Montpelier arrangement was not that the defendants were negligent in causing him to enter into the Montpelier arrangement, but rather that these costs were foreseeable damages flowing from the defendants’ failure to advise the claimant to seek the advice of a non-dom expert. The judge agreed and said (at 526): ‘I do not consider that a reasonably competent non-dom specialist would have advised the claimant, who clearly was a non-dom, to enter into a CRP scheme in the light of its obviously artificial nature and the fact that it was based on a second hand insurance policy scheme which was blocked by the 2003 Budget … he would not have used the Montpelier scheme.’
Where does this leave us?
Much is made by HMRC of the necessity for taxpayers, both corporate and individual, to pay their ‘fair share’ of tax, whatever this phrase might mean. However, accountants and other professional advisers, such as solicitors, must remain alive to the professional duties that they owe to their clients to ensure that they receive proper advice, or are referred to other professional advisers who have the necessary expertise to enable advice in a particular specialist area to be given. Such advice may, in certain circumstances, extend to providing specialist advice on tax mitigation arrangements. Given the decision in Mehjoo, it will be interesting to see whether the Solicitor’s Regulation Authority will revisit the advice it has issued to solicitors in relation to SDLT planning arrangements.