Don't panic! is the message despite avoidance scheme ruling

AT FACE VALUE, this week’s High Court ruling that advisers must refer clients to avoidance schemes is a fundamental shift in how tax practitioners advise their clients.

In a judgment that ran to just shy of 66,000 words, Judge Justice Silber ruled practitioners have a duty to advise clients to avoid tax.

Iranian refugee Hossein Mehjoo – who had established a multi-million pound fashion business in Britain – successfully sued his local accountancy firm for £1.4m after it failed to recommend he enter an offshore tax avoidance scheme.

Mehjoo gained asylum in the UK in the 1980s after claiming his life would be endangered should he return to Tehran, and had attempted to avoid a £850,000 tax bill on the sale of his co-owned business, Bank Fashion.

In 2004, Mehjoo placed around £200,000 in an avoidance scheme run by Top50+50 firm Montpelier, but when HMRC shut it down, he sued local firm Harben Barker upon whose advice he had acted on.

He claimed that in not drawing his attention to a scheme known as the Bearer Warrant Scheme, they had acted negligently. After years of dispute, the High Court ruled in Mejoo’s favour.

The ruling, though, is far more nuanced than that. In essence, there is no fundamental change. Despite reacting with initial horror, much of the profession’s great and good are now of the opinion the ruling is not the edict it appeared to be.

Those concerned that the case could present a conflict with ethics – in the sense that advisers should not be forced to promote avoidance schemes despite doubts about their viability – needn’t panic.

Taken to the ‘nth degree’, there was also a concern among some practitioners the ruling could see the cost of PI cover could rise, due to the risks inherent in promoting such schemes.

According to the ICAEW and tax advisers, the salient point to come is simply this: don’t provide advice where you lack sufficient experience.

There are many other aspects to take into account, though. Chief among them is that this ruling is not final. An appeal is already in the pipeline.

The ruling states Mehjoo’s accountant at Harben Barker had known him for around 20 years, and in his familiarity, many of the standard provisions normally drawn up between accountant and client were overlooked. As a result, the importance of engagement letters, for example, is thrown into sharp focus. The scope and limitations of such work is pivotal.

That said, some have raised questions over the judgment itself, noting Judge Silber is a common law judge, and not a tax expert.

Be that as it may, if there was any doubt over the need for pain-staking care in engaging clients, then they have been emphatically dispelled. But foisting aggressive and contentious tax schemes upon clients seems unlikely, despite initial impressions of the court’s findings.