Accountant successfully sued for £1.4 million for NOT advising client to avoid tax

I don't often have cause to feel sorry for accountants, but this week I have to express a twinge of sympathy for them.

Over the last couple of years the accountancy profession has been trying to adjust to a “new morality” which seems to be sweeping across the world, which blurs the line between tax avoidance and tax evasion, and increasingly deems both to be morally repugnant.  In the face of this, the use of entirely legal schemes which to keep tax bills to a minimum can result in clients and their advisers being hauled before parliamentary committees to be given a metaphorical public flogging. Given this climate and the impact of the recently enacted GAAR, one might have thought that accountants holding themselves out as advising on tax mitigation would start to become rarer than hen’s teeth.

But just as we were starting to adjust to an apparently new paradigm, a High Court judge has thrown a spanner into the works, by finding that an accountancy firm were negligent for not advising a client how to mitigate his tax bill by using a highly artificial offshore structure.

Hossein Mehjoo is a UK resident “non-dom” who built up a multimillion-pound fashion business in Britain.  After selling his business, he successfully sued his local accountancy firm for £1.4 million for failing to advise him to enter an offshore tax avoidance scheme known as the Bearer Warrant Scheme, which was at the time available (it is no longer) and which enabled non-doms to avoid paying capital gains tax on the sale of companies.

Mr Justice Silber, said that  “The defendants had a contractual duty to advise the claimant that non-dom status carried with it potentially significant tax advantages” and went on to say that if the firm itself did not have the expertise to advise on the scheme, then it should have referred the client to another firm which did, in much the same way as a GP would refer a patient with complex medical needs to a specialist.

Using this logic, an accountant advising a firm on how to structure its intellectual property rights (Google/Amazon etc) would have a duty to advise them that structuring business through somewhere like the Netherlands or Ireland could well save a small fortune in tax.  But then that very same accountancy firm can fully expect to be publicly berated for carrying out his legal duty of care to his client.  It does seem to be something of a no-win situation.

Many directors have been vocal about the fact that they too have a duty to the shareholders of their company to keep the level of tax that they pay to the lowest amount permissible by the law, and that subjective views on what it ethical and what is not cannot override that duty.  It would seem that Mr Justice Silber would agree.

Not surprisingly, yesterday’s judgment has got Richard Murphy et al up in arms, demanding that something must be done to protect accountants who act ethically.  But the whole issue of trying to blur the lines between illegality and immorality is opening up an enormous can of worms.  If governments around the world want to stop certain types of tax avoidance then they need to make it illegal.  Having it as legal, publicly and political unacceptable, and a professional duty all at the same time leaves companies and their advisers in a complete Catch 22 situation – damned if they do, and sued if they don’t!