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Tony Wickenden: The real points from the Mehjoo court judgment


A few newspapers have reported on the Mehjoo professional negligence case and concluded that the High Court judgment means that a firm of accountants has a duty to advise wealthy clients to avoid tax through schemes. 

The taxpayer in this case was a UK resident (Iranian) non-dom. It seems that his accountant, while advising him on a scheme to avoid CGT on a sale that didn’t work, failed to make him aware of the Bearer Warrant Scheme (BWS) under which he would have been able to move ownership of his company to an offshore trust. The company could then have been sold on and he would have avoided capital gains tax. The BWS was a scheme that was known to work within the legislation at the time – even though HMRC “didn’t like it”.

The main point to take from the judgment is not that professional advisers are obliged to advise on aggressive tax avoidance schemes that could be accessed by their clients. The key point in the judgment was that the accountants advising the client didn’t have sufficient expertise to advise on a matter that they took on.

Here are two extracts from the judgment:

‘The Defendants had a contractual duty or concurrent tortuous duty as reasonably competent generalist accountants in October 2004 to have advised the Claimant that (i) he had, or very probably (or alternatively might have) had, non-dom status; (ii) non-dom status carried with it potentially significant tax advantages; and (iii) he should therefore take tax advice from a firm of accountants or tax advisers who specialised in advising individuals who had (or might have) non-dom status’


‘I know that this judgment will be a great disappointment for Mr Purnell (Mister Mehjoo’s accountant), who obviously was an accomplished accountant and who was determined to help his clients to the best of his ability. Sadly, he erred by failing to advise the Claimant to take the advice of a non-dom specialist after many years of successfully helping the Claimant and I hope that he understands why I have reached my decision.’

The received wisdom in this area is that professional advisers should guard against claims by including a suitable clause in their engagement letters that makes it clear what their areas of expertise and operation are and are not; and that they will not advise on issues that are not within their stated areas of expertise.

It should also be borne in mind that, in giving advice in the current “climate”, it is essential to take into account the potential impact of the GAAR (when enacted) as well as any relevant TAARs.

Of course, the GAAR was not relevant at the time of this case and HMRC activity against aggressive schemes was not so intense.

Anybody advising clients on any aspect of avoidance would now need to take this “new Zeitgeist”) into account before recommending a scheme – especially if they are specialists.

With the increased publicity being given to HMRC “aggression against aggression” so to speak, public appetite for ambitious tax avoidance is thought to have diminished dramatically and most would ask very direct questions about the chances of a proposed strategy’s success as well as for clarity in regard to the downside risk together with the tax and financial consequences of failure.

It may well become a necessary “hygiene factor” for developers and promoters of any arrangement (even the most straightforward) to run a simple “GAAR likelihood” test. In most cases the “OK” box will be easily ticked. Where it isn’t, the risk of attack and consequences of success (for HMRC) and failure (for the taxpayer) need to be made clear. This will be an important factor for taxpayers deciding whether to enter into the arrangement or not. In one sense our “tax planning lives will never be the same again” but, in another, because the overwhelming majority of the planning carried out by financial advisers is (and will remain) within the “centre ground” the practical reality is that planning recommended pre GAAR will continue to be just as relevant and effective post-GAAR.

Tony Wickenden is joint managing director at Technical Connection

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