“the defendants had a contractual duty to advise the claimant that non dom status carried with it potentially significant tax advantages”
Mr Justice Silber, Mehjoo v Harben Barker
The concept of “domicile” has again reared its head – this time in a very recent High Court case involving professional negligence
The case itself appears particularly bizarre.
Briefly, the taxpayer in question realised a significant capital gain on the disposal of his UK trading company. Rather than pay the resulting 10% capital gains tax he entered into an artificial avoidance scheme run by Montpelier, which rather predictably was closed down by HMRC. Strangely though, the case did not involve the latter firm.
Instead, the individual successfully sued his accountants Harben Barker for £1.4m for failing to advise him that as a “non-dom” he could have undertaken alternative, less aggressive tax planning involving the use of bearer shares.
Interestingly the court also ordered the defendants to pay the costs of the failed tax planning scheme that Mehjoo undertook, and which was unsuccessful, attracting penalties with HMRC.
Some of the reporting in the professional press has been frenzied with The Times reporting “the accountancy profession has been thrown into turmoil after a High Court Judge appeared to rule that practitioners had a duty to advise wealthy clients to avoid tax” and Accountancy Live confirming “Accountants must advise on tax loopholes, court rules”.
Whilst Harben Barker intends to appeal the decision, what is clear and indeed always has been so is that the UK tax affairs of foreign domiciled individuals (UK resident or otherwise) are complicated and require a sound understanding of the law. The fact that one of the leading tax publications in this area is now over 3,000 pages is testament to this!
Sadly, the Mehjoo case is not in isolation. Accountancy Age have previously highlighted the continuing importance of being up to speed with the legislation – in brief a Top 20 national accountancy firm were also reported as paying out excess of £1m as a result of a professional negligence claim brought against them by one of their former non domiciled clients.
In essence, the firm failed to take into account their client’s foreign domicile status when advising him to acquire UK property (in this case, Hotels) through a UK limited company.
On the face of it acquiring UK real estate through a UK limited company is a sound commercial choice however, from a tax point of view this proved disastrous in that case.
Unlike the Mehjoo case it is still possible to implement planning in advance of any proposed sale without needing to resort to the more esoteric scheme based ideas to reduce your tax exposure. We have recently received agreement from HMRC on a number of recent cases that have enabled UK resident foreign domiciled clients to genuinely reduce their UK tax exposures.
From our experience, the above two cases are definitely not isolated cases and are the tip of the iceberg with many advisers potentially facing significant PI claims. We are already aware of one particular “no win, no fee” type legal firm who are actively marketing their services against potentially negligent advisers.
If you act for foreign domiciled clients that:
- Hold UK investment property personally (i.e. sole trader, partnership, LLP),
- Hold shares in a UK limited company (trading or investment)
- Own their own UK private residence
then tax planning ought to be considered NOW.
If you do not act now other advisers may well do so and this could prove costly in more ways than one.
If you are not familiar with the tax benefits associated with a foreign domicile then now may be an appropriate time to contact us and discuss whether it may be possible to restructure your client’s business interests and not only reduce their potential tax liabilities, but those of your own practice.
Aquarius Tax Consultancy Limited is a bespoke tax practice that specialise in providing UK tax advice to foreign domiciliaries and their advisers. We have significant experience in advising and establishing tax efficient structures through which inward UK investment can be made and work closely with many private banks and offshore providers.
 Mehjoo v Harben Barker (A Firm) & Anor  EWHC 1500 (QB)