However, the accounting industry’s concern over the case, Hossein Mehjoo v Harben Barker, is tempered by the fact that a number of key factors at issue in the case have changed since it was brought, including the introduction of a general anti-avoidance rule that, today, accountants could point to in defending their failure to recommend a tax avoidance scheme.
Also, the specific type of tax avoidance scheme mentioned in this case ceased to exist in 2005.
Handed down down last week, the case involved a businessman and Iranian refugee named Hossein Mehjoo, who had built up a significant fashion business, Bank Fashion Limited, that he sought to sell in 2004.
On advice from his accountants, Mehjoo finally sold the business in 2005 for £8.5m, on which he paid a capital gains tax to HM Revenue & Customs of £850,000.
According to the judge in the case, Justice Silber, Harben Barker – the defendants – ought to have told Hossein about the existence of a capital gains tax avoidance strategy which used so-called “bearer warrants” to reduce his tax liability.
Had Harben Barker done so, Hossein would have been able to transfer his business to an offshore trust before he sold it, and in the process, save almost £800,000 in capital gains tax.
Harben Barker are appealing against the judgment.
"I think the outcome is not that we, as tax practitioners, will need to appraise clients of every hare-brained scheme that is being flogged out there – as some of the more hysterical commentators seem to be suggesting – but rather, to ensure (as, in my experience, the more sophisticated tax advisers in top accountancy practices already do) that we are very specific in our terms of engagement as tax advisers," said one private client tax specialist, who requested anonymity because of the "controversial" nature of the decision.
Another likely outcome, he suggested, is that accountants and their clients in the future will be more aware than previously as to whether a particular accountancy "can genuinely claim appropriate expertise" in advising a particular client – and if the match is not right, they both may be be quicker to take action than might have been the case in the past.
"What may have happened in this case was that there was a very satisfactory, long-standing relationship between [this] client and his adviser, and sadly, the adviser let his guard drop," he added.
"One of the lessons here is that however cosy any relationship is, a client will always turn and [attack] if he feels he is out of pocket, and can somehow blame someone other than himself for the predicament."
Implications for advisers
Gerry Brown, technical manager at Prudential, said the case had implications for financial advisers as well as accountants and lawyers.
"The judge said that the accountancy firm involved had a contractual duty to point out to the client that as a ‘non-dom’ he could enjoy ‘potentially significant tax advantages’," Brown said.
"[He] went on to state that the accountants were under a duty to consult with, or refer the client to, specialists.
"I understand that this decision will be appealed, and the thoughts of the Court of Appeal will be of interest to all professionals."
Sale of fashion business
Handed down down last week, the case involved an Iranian businessman and former refugee named Hossein Mehjoo, who had built up a significant fashion business that he sought to sell in 2004.
On advice from his accountants, Mehjoo, who was a non-dom, sold the business for £8.5m, on which he paid a capital gains tax to HM Revenue & Customs of £850,000.
According to the judge in the case, Justice Silber, Harben Barker – the defendants – ought to have told Hossein about the existence of a capital gains tax avoidance strategy which used so-called “bearer warrants” to reduce his tax liability. In the 116-page decision, he noted that Harben Barker, which was not a specialist in advising non-doms and the tax mitigation schemes available to them, had failed "to advise the claimant to seek the advise of a non-dom expert, who would have advised [him]to use [the Bearer Warrant Scheme]".
"Sadly, [Harben Barker] erred by failing to advise the claimant to take the advice of a non-dom specialist after many years of successfully helping [him]," Justice Silber wrote.
To read and download a 122-page copy of the decision, click here.
