Accountants cleared of negligence

Posted: 25th March 2014

RCJA highly successful entrepreneur who incurred a Capital Gains Tax (CGT) liability in excess of £760,000 on the sale of shares in his company has failed to convince the Court of Appeal that an accountancy firm gave him negligent advice.

Iranian-born businessman Hossein Mehjoo had established a thriving clothing company after settling in Britain in the 1970s. He had eventually sold his shares in the company for more than £8.5 million, on which CGT of £763,658 was charged.

He successfully argued before the High Court that he was potentially entitled to non-domiciled status and thus could have taken advantage of an avoidance scheme which would have extinguished his exposure to CGT. Accountants Harben Barker were found to have been negligent in failing to advise him to seek specialist tax advice.

Allowing the firm’s appeal against that decision, the Court of Appeal found that it was not part of Harbens' retainer to give guidance on specialist tax matters. A competent accountant in general practice would not have been aware of an avoidance scheme which would have rendered the sale of shares in a UK-registered company free of CGT.

The claimant had known that CGT would be payable on the transaction and had been informed by the firm that ‘schemes might exist to reduce it’. The firm did not know what those schemes were, nor could it be expected to do so, and it had therefore discharged its duty to give reasonably competent advice.

The High Court had awarded Mehjoo damages to reflect his CGT liability, as well as £180,000 that he had spent on an abortive attempt to enter an alternative tax avoidance scheme. The Court of Appeal stripped him of those awards and ordered him to pay the action’s substantial legal costs.