The recently published judgment of High Court Judge Mr Justice Silber in Mehjoo v Harben Barker considers whether accountants are obliged to advise their clients to avoid tax and if so, so how does it sit with all the criticisms made of global companies such as Starbucks and Google for avoiding UK tax?
In essence, Mr Mehjoo’s case against his long standing accountants was that they had failed to provide the advice that could be expected from a “reasonably competent accountant”. Mr Mehjoo was born in Iraq and had lived in Iran before coming to the UK as was well known to his accountants. In October 2004 he wanted to sell shares in his company and his accountants realised that there may be a Capital Gains Tax liability of around £800,000. Mr Mehjoo’s chief complaint was that his accountants had not advised him of the possibility that he might have avoided this tax liability by establishing that he was non-domiciled in the UK for tax purposes.
Perhaps unsurprisingly, the Judge was unimpressed with the accountants’ assertion that they were not obliged either to give specialist tax advice to their client given his overseas connections or to recommend that he seek such specialist advice elsewhere. That though was not the end of the story. In order to succeed in his claim for negligence, Mr Mehjoo had to also establish that, had they provided such advice, it would have resulted in a material saving of tax. It is at this point that Mr Justice Silber’s lengthy judgment becomes more controversial.
Having looked in detail at the evidence as to whether Mr Mehjoo was in fact non-domiciled for tax purposes and having concluded that he probably was, the court went on to consider what tax schemes would have been available to him given that status. Two particular tax avoidance mechanisms, which Mr Mehjoo claims he should have been advised about, were put forward on his behalf. The first known as a bearer warrant scheme would have required the change of shares in his company from registered shares to bearer shares which would then have had to have been held offshore through an offshore trust company with the result that the trustees would have been able to sell the shares outside the scope of UK tax. The second was a more aggressive scheme the details of which we don’t need to go into.
Harben Barker sought to persuade the judge that bearer warrant schemes were inherently high risk and therefore unlikely to have achieved the intended tax savings. Unfortunately for them, when the judge came to review the extensive evidence as to the use of such schemes, he was unable to find evidence of their successful challenge by HMRC and was therefore unwilling to conclude that they were either speculative or high risk. On that basis he concluded that Harben Barker was liable to Mr. Mehjoo in damages for the tax he had to pay.
The implications for businesses
What lessons are there here for big companies and their advisers and managers when it comes to the payment of tax? In a sense the starting point for global companies cannot be that different from that of individuals like Mr Mehjoo who may have non dom. status. Both have the potential to avoid tax. The real question they all have to grapple with is how far they should go down that road? Ignoring the issue completely can be dangerous as Mr. Meehjoo’s accountants discovered (although that case is subject to appeal). In the case of global companies, the failure to consider legitimate tax avoidance may similarly incur the wrath of shareholders. Offshore trusts in a tax avoidance context have received a lot of attention from the press in recent months. There are big and interesting legal and moral questions at stake as to the extent of tax avoidance which is legitimate either for the individuals or large corporations. Indeed the issue of tax compliance and combatting tax evasion, illegal and different from its cousin tax avoidance, will be one of the central themes at the G8 and G20 summits later this year. Until we have a broader international consensus, and perhaps particularly in times of austerity, large companies would do well to ask themselves not simply what may be legally possible but also how the scheme might appear if subjected to public scrutiny: the more artificial the constructions, the greater the challenge to justify in the Court of Public Opinion. As we know, it’s not just net revenues but reputations that matter.