Hossein Mehjoo v Harben Barker  – a timely lesson that one of the advisor’s primary duties is to alert his client to tax savings.
Facts of the case
Mr Mehjoo claimed damages against his former accountants, Harben Barker (“HB”). The claimant, who was born in Iran, had built up a clothing business, Bank Fashion Limited (“BFL”). His shareholding in BFL was sold in April 2005 for £8.5 million and his liability for capital gains tax was in the region of £800,000. 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.
In a High Court decision released this July it was held that HB had a duty to advise a client that he may have been a non-domiciliary so that he could then have consulted an appropriate tax specialist to consider what tax planning opportunities might have been available to him. The client may then have saved the CGT on the sale of his business.
The judge found that Mr Mehjoo was likely to have been a non-UK domiciliary and his accountants should reasonably have advised him to take the advice of a specialist when he was about to dispose of his profitable business. Mr Mehjoo could have used a method based on bearer warrants to reduce his CGT liability. The method required the shares to be exchanged for bearer warrants which are taken offshore and transferred to a non-UK resident trust, where they would be non-UK situs assets. As such, no charge to CGT would have arisen on a subsequent disposal by the trustees. Crucially, this type of scheme was only available to non-domiciled individuals and had to be implemented prior to the sale of the shares. Because of his accountant’s failure to advise, Mr Mehjoo was not given the opportunity to learn about the scheme and save tax.
The judge ruled that HB was under a contractual or a tortious duty to help its client to avoid CGT. He rejected the argument that because Mr Mehjoo had been advised that he could claim business asset taper relief, there was no need to advise him of other tax planning possibilities.
Having found that HB was in breach of its duty, he ruled that the firm should cover Mr Mehjoo’s CGT bill less the costs he would have incurred with the BWS.
Why it matters
There has been much made of the fact that taxpayers should pay their ‘fair share’ of tax. However, accountants must always in their professional duties ensure their clients 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. This case confirms that such advice extends to providing specialist advice on tax mitigation arrangements.
HB’s knowledge of Mr Mehjoo’s domicile status was enough to impose a duty upon HB to advise him to seek specialist advice. This decision serves as a reminder to advisors that they leave themselves exposed if they advise beyond their expertise or fail to take reasonable steps to advise a client to seek specialist advice.