Professional Negligence and Tax Planning?

Hossein Mehjoo v Harben Barker: Professional Negligence and Tax Planning?

The recently reported High Court case of Mehjoo v Harben Barker has attracted a lot of attention both in the media and amongst accountants, as it regards specialist tax advice.

Some reports are saying that the High Court requires accountants to advise on complex tax avoidance schemes, but this is not quite how I interpret the decision. Mr Mehjoo was born in Iraq in 1959 and his parents were of Iranian origin. His accountants were aware of this background as they had acted for him for a number of years, including preparing his first tax returns several years earlier.

The issue was whether the accountants had been negligent in failing to identify his non-domicile status and advise on the impact this would have on his UK tax position on making a gain.  The case found that a reasonably competent accountant would have known it was important to consider Mr Mehjoo’s domicile status in the context of his tax affairs. Of course, in practice it can be difficult to confirm a domicile status.

In October 2004 the accountants advised on the CGT position on Mr Mehjoo selling his shares in a company. The firm did not appear to have considered the non-domicile status of their client or the impact this could have. The firm provided tax advice, but failed to offer planning only available to non-domiciled individuals.

The accountants argued that they were not required to give tax planning advice due to the terms of their engagement letter, unless they were specifically asked to do so.  This was rejected by the High Court, in part due to the fact that they had provided such advice on a number of occasions without express instruction.

The judge therefore found that the accountants had been negligent in not considering the fact that Mr Mehjoo was non-domiciled, and that as this was outside of their area of expertise, they should have sought specialist tax advice or advised Mr Mehjoo to do so himself. It seems that the lesson to be learnt by professional advisers is to know when a second opinion is needed.

If you do need a second opinion, Edward Hands and Lewis provide specialist tax support.

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