Hossein Mehjoo v. Harben Barker - Professional Advisers Beware!
In Hossein Mehjoo v Harben Barker,  EWHC 1500 a client successfully sued his accountants for negligence for failing to seek out and obtain specialist tax advice.
Mehjoo is an Iranian political refugee who had dealt with the professional advisers for over twenty five years. He sold his UK business and made a substantial capital gain and paid tax. He claimed that his advisers should have considered tax planning appropriate to his non-domicled status. At that time specialists might have recommended a scheme which involved the use of bearer warrants to avoid capital gains tax. The planning could have involved his assets being moved to an offshore trust. Instead of pursuing that planning, the accountancy firm offered Mr Mehjoo a different type of scheme - a capital loss scheme. This was later held to be ineffective. The bearer warrant planning was subsequently blocked by HMRC.
The court held that the accountants were negligent in not taking specialist advice or failing to advise Mr Mehjoo that, as a non-domiciled individual, his tax status was deserving of specialist advice. Mr Mehjoo was awarded substantial damages and the firm was also made to pay his costs for the failed loss scheme.
It is not yet certain whether this case will be appealed.
What does it mean?
Much has been publicised in response to The Times’ coverage on this High Court case, from a variety of professional perspectives. The ruling was based on the key issue that had the same advice been sought from a reasonably competent accountant in 2004/5, they would have mentioned the possibility of the bearer warrant planning. The problem being the accountants in question failed to offer this advice as they lacked the necessary expertise to provide what might have been considered fairly standard advice at that time.
The resulting professional commentary has encompassed a spectrum of views, from "now we have to offer tax avoidance schemes to everyone" to "now we have to offer specialist advice when we think we are out of our depth".
The key question going forward is clearly how far do your obligations stretch when advising a client? The answer is simple, especially if you wish to minimise the risk of PI claims in future: if you feel that you are out of your depth with a client, or are being asked to provide professional advice on a specialist area upon which you do not consider yourself to be an up to date expert, then you should say outright that you feel it is in the best interests of your client to enlist specialist support to advise, even if this incurs additional costs to the client (to be agreed in advance of course). If the client, upon receiving such counsel, does not wish you to seek expert support, then you should ask your client to sign a disclaimer to say that specialist advice was offered but turned down.
What specialist advice is needed?
There is some debate as to whether the bearer warrants planning was risk free and what the outcome would have been had Mr Mehjoo ended up with an offshore trust and a different outcome. Come July 2013 the General Anti Abuse Rule will be enacted and this means that many cutting-edge planning arrangements are likely to be deemed abusive and will fail.
Mehjoo produced a witness-lawyer who had in-depth knowledge of the bearer warrant schemes, however the defence witness-accountant was found to have a limited knowledge of them. It could be presumed then that the scheme was used by some of the big firms but not all, so was arguably perhaps not universal standard planning.
Points to note going forward: tax planning around a business sale or purchase is rarely straightforward for the reason that the terms of any deal may vary and it depends on who you are, what you are selling or buying and the entities involved. It is generally to everyone's advantage to plan ahead. See our fact sheet: Selling Your Company.
If you are out of your depth with a client and especially if your client is involved in a high tax transaction then at least seek a second opinion.
Why does this impact share schemes?
The employment related securities legislation is a minefield for the non-specialist to successfully navigate. We regularly see deficient plans drafted by well-meaning advisers who are not experts on employee share scheme matters.
Often the deficiencies only come to light when due diligence happens at an exit event, by which time rectification may not be possible and a very significant, unwelcome and unnecessary tax cost may result.
Unfortunately, the situation of a client not being presented with the best advice is something we come across too often as share plan specialists. There have been cases when an accountant has opted to set up an Unapproved Share Option Plan (USOP) for clients when the client would qualify for and would greatly benefit from implementing a government approved plan [see EMI vs. USOP] such as an Enterprise Management Incentive (EMI) or a Share Incentive Plan (SIP). We also have examples of legal advisers who have fallen into the EMI traps. Additionally, and picking up the non-domiciliary theme, we have seen top 20 advisers incorrectly state that a company cannot operate EMI if the controlling interest is held by a corporate trustee of a non-domiciled owner’s offshore settlement – we have obtained HMRC advance clearance on this matter successfully for a number of clients because we know the legislative detail to rely on to get eligibility approved in such circumstances.
The difference between going it alone, getting it wrong and getting help to get it right could easily be a tax charge that is 60.8% (combining income tax and NIC) rather than 10% or even a gain that is exempt from tax altogether. Consider the exit values that your clients have in mind and it is not hard to see that the PI claims could be cripplingly high!
The case outlined above details the potential dangers of attempting to go it alone. We are here to help. We can help in a variety of ways:
- Education about relevant matters – contact us about our workshops here
- Health check service for existing plans – see our health check fact sheet
- Work with you to provide the specialist support as required on a non-competitive basis – see how we can do this here.
A little knowledge is a dangerous thing and asking for help is hard to do, but, often, asking for help is the right thing to do.
Rest assured we too know our limits. We are share scheme specialists so we do not compete with advisers’ other services. We do not advise on other matters (even when we have significant knowledge and experience and skills to do so within our team) and if we are asked to do so then we refer the matter out to a community of other experts for specialist support for that client. We feel that is the responsible way to act in the best interests of those who approach us.
For specialist help in relation to share plan matters please call Liz Hunter or any member of the RM2 team on 020 8949 5522.