No series of articles on professional pitfalls would be complete without reference to the negligent tax advice category. In the high-risk league table, claims relating to overpaid tax or unnecessary penalty and interest charges consistently top the bill as far as the number of claims is concerned, although claims of this nature are near the bottom of the list by reference to value. That, of course, is of no comfort since they are invariably met from the self-insured excess, despite having to be notified!
The most prolific category of tax-related cock-up is administrative failure: missed deadlines for the submission of returns, claims for loss relief or continuation elections. Usually such deficiencies occur as a result of carelessness or poor organisation and the remedy is obvious - improve the quality of record-keeping and buy a diary. Every now and then, however, I come across a situation in which the underlying problem is more difficult to identify, let alone resolve.
The starting point is often the discovery of drawers full of unanswered correspondence from the Inland Revenue in the office of a particular partner who, for one reason or another, has neglected his clients' tax affairs, sometimes for many years. The problem may come to light on the apparently inexplicable disappearance of the partner concerned, usually for a temporary period of recuperation, but sometimes, regrettably, on an all too permanent basis.
The cause of such an unfortunate situation often has nothing to do with the technicalities of the tax regime and everything to do with the culture of the firm. I have in the course of my professional work come across firms whose partners hold formal meetings only when a crisis has arisen, thus depriving themselves of an appropriate forum in which to share information, exchange ideas and provide mutual support. Indeed I acted in an expert capacity for one particular firm in which for four years the two partners communicated with one another only in writing. In such circumstances it is hardly surprising that an individual's inability to cope with whatever pressure he may be under can go undetected by those who purport to be his partners.
Negligent tax advice
The circumstances that can lead to a claim against a practitioner in respect of negligent tax advice are, of course, myriad. However, the majority of claims relate to allegations that fall into the following easily identifiable categories.
1. Provision of incorrect or inadequate advice
The most common situation under this heading exists where an accountant has acted for an individual or an entity from day one of its operation.
Gradually, over a number of years, the business expands and its financial and tax affairs become increasingly complex. Eventually something happens - the business is restructured, or a transaction outside the normal course of trade is undertaken - the tax consequences of which require a level of technical expertise that is beyond the accountant's competence. He nevertheless proffers advice to his client based on his own inadequate research and his wish to appear to be on the ball.
The advice subsequently proves to be incorrect and the client sues for recovery of any additional tax, penalties and interest paid and any other indirect losses that he may have incurred as a consequence of acting on the advice he received (see case study 1).
2. Failure to properly investigate a client's circumstances
There are obvious dangers in providing tax advice to a client with whom we may be unfamiliar without undertaking meticulous research to ensure that we have the full picture concerning his financial situation and sources of income. It can be all too easy to advise on a particular issue in a vacuum, without properly considering other relevant factors that may impact on the overall position (see case study 2).
3. Failure to keep written records
This is an old chestnut that recurs time and time again, particularly in tax-related cases. When an accountant is in almost daily contact with his client, providing advice on a variety of issues either by telephone or face-to-face, it is undoubtedly difficult to ensure that each piece of advice is noted and recorded on file. As one defendant explained recently: 'There was no point in writing to my client - he never reads letters.'
However, it is precisely these circumstances that lead to all manner of arguments concerning who said what to whom and whether or not certain advice was provided at the relevant time. Engagement letters are usually of no assistance whatsoever for this purpose as they are general in nature and so much advice is necessarily provided to clients 'off the cuff' (see case study 3).
• Research the relevant tax provisions thoroughly before providing advice, particularly on complex or unfamiliar issues and, if possible, discuss the circumstances and the advice you intend to give with your partners.
• If the issues are too complex for you to handle, be prepared to suggest to your client that advice should be sought from a specialist on the matter concerned.
• Never make assumptions concerning your clients' financial arrangements - be sure you have a clear understanding of all the relevant facts before you advise.
• Even if you are not in the habit of corresponding with a particular client, always make a written note on file of any discussions or advice given orally. Don't rely on the fact that your client may be as knowledgeable about certain aspects of the tax provisions as you are. If he forgets a deadline and you, as his appointed adviser, haven't reminded him, you could find yourself in the firing line.
1: UNAWARE OF THE RULES
We were instructed by solicitors acting for an accountant whose client was the majority shareholder in a holding company with seven subsidiaries, each of which operated an off-licence liquor store. After almost 20 years in business, the shareholder decided to sell to a third party the trade, licences and assets belonging to each of the subsidiaries. The proceeds of sale of the assets, each of which were qualifying assets for business rollover relief purposes, aggregated some 4.5m.
The accountant advised the shareholder that business rollover relief would be available in respect of the reinvestment of the proceeds of the assets sales so long as the proceeds were reinvested in qualifying business assets. However, he failed to advise, because he was himself unaware of the rule, that the definition of qualifying business assets for this purpose was restricted and did not include shares in a limited company.
The client subsequently invested 2.5m of the proceeds in shares in a limited company. When the Inland Revenue refused to recognise this reinvestment as qualifying for business asset rollover relief the client sued the accountant not only for the tax assessed as payable on the gain from the sale of the original investment, but also on the basis that he would not have purchased the shares had he been properly advised, for recovery of the trading losses incurred by the company in which he had re-invested. The case eventually settled at approximately 75% of the amount claimed plus costs.
2: CHECK THE FACTS
A recent decision of the High Court illustrates the perils of making assumptions without checking the facts. In this case the taxpayer was a non-UK domiciliary who worked for an international bank based in the US. After transferring to the bank's London branch, the taxpayer should have been assessed to UK tax under what was Case II in respect of UK duties and under Case III (the remittance basis) in respect of his duties overseas.
His accountant prepared his tax returns on the assumption that he was being paid abroad, when in fact all his earnings were paid by the London branch. On the basis of the returns received the Inland Revenue issued a PAYE refund which the taxpayer was subsequently required to repay to the Revenue with interest. He took action against the accountant, alleging that they should have alerted him to the potential benefits of payment off-shore in respect of his non-UK duties.
The court found in favour of the claimant but deducted 50% of the damages due to his contributory negligence in not querying with the accountant the reason for the substantial PAYE refund, given his own understanding of the UK tax position.
This decision seems surprisingly harsh bearing in mind his US nationality!
3: OVERSIGHT ON RESTAURANT REINVESTMENT
The accountant acted as de facto finance manager for a client who operated a chain of restaurants in Wales and the north west of England.
They were in daily contact, always by telephone or face-to-face, no written correspondence ever being generated. The client was an astute businessman who had bought and sold numerous restaurants for over 30 years. On one particular occasion he sold a restaurant in Chester, but neglected to reinvest the gain in qualifying business assets within the relevant time period so as to be able to claim rollover relief.
He blamed his accountant for the oversight, claiming that he did not receive the appropriate advice. The accountant's defence was that they had discussed the necessity for reinvestment on a number of occasions and, in any event, the client was fully aware of the relevant tax provisions.
Unfortunately, however, the accountant had no documentary evidence to support his defence. The case settled at almost the full amount of the claim.