When is an accountant obliged to volunteer advice even when that advice has not been specifically requested by the client?
The recent case of Altus Group (UK) Ltd v (1) Baker Tilly Tax & Advisory Services LLP (2) Baker Tilly Tax & Accounting Ltd (Judgement issued on 7 January 2015) has effectively revisited the vexed question of when an accountant is obliged to volunteer advice even when that advice has not been specifically requested by the client.
The accountancy profession breathed a collective sigh of relief when the Court of Appeal reversed the first instance decision in Mehjoo v Harben Barker but the decision in Altus provides a timely reminder that the scope of the obligation to volunteer advice is, in truth, very fact sensitive. Such that the issue and regular review of client engagement letters remains an absolutely critical part of a well-run firm's risk management procedures.
But in a more positive vein the Altus decision provides a useful reminder that for a claim in negligence to succeed it will require a claimant to prove not only a negligent breach of duty but also that the outcome would have been different if the non-negligent advice had been given.
Factual background The claimant was one of two corporate members of an LLP which had been incorporated in order to purchase another business. The acquisition of that business gave rise to an asset in the LLP's accounts in relation to the business's goodwill. It was decided that the goodwill would be amortised over a five year period, concluding at the end of the third quarter of 2012. This would create an allowable deduction against the claimant's profits.
The claimant retained the defendants to prepare its corporation tax returns from 2007. The defendants submitted the returns for the periods ending on 31 December in 2008, 2009 and 2010 on the basis that the claimant had been allocated the deduction. This meant that the claimant had incurred a loss, which it could then carry forward to set aside its liability for corporation tax in future years.
In December 2008, the Corporation Tax Bill was introduced in the House of Commons and the resulting Corporation Tax Act 2009 came into force on 1 April 2009. This Act applied to corporation tax for accounting periods which ended on or after 1 April 2009. The effect of sections 1263 and 1264 of the Act (both of which had been included in the Bill) was that the claimant could not, in fact, be allocated the deduction with effect from the corporation tax period ending on 31 December 2009.
Unfortunately, the defendants did not inform the claimant of the effect of sections 1263 and 1264 on the claimant's tax affairs until October 2011. The following month, the claimant spoke to a tax adviser (Ernst & Young), which proposed a restructure to mitigate the claimant's tax liability. The claimant tried to implement the restructure but ultimately abandoned it in 2012.
The claim The claimant claimed damages for professional negligence from the defendants. In summary, the claimant said that the defendants should have advised it in January 2009 of the effect of sections 1263 and 1264. The claimant further argued that, if it had been properly advised at that time, it would have implemented the restructure within about four months and there would have been a substantial chance that that restructure would have been successful in mitigating the claimant's tax liabilities. The claimant claimed damages for the loss of the chance of implementing a successful re-structuring.
In response, the defendants admitted that they ought to have advised the claimant about the effect of sections 1263 and 1264 in about mid-July 2009, when they prepared the claimant's corporation tax computation for the six-month period up to 30 June 2009. However, they denied that they were under any duty to volunteer that advice in January 2009.
The defendants further argued that, even if they had given the advice, the claimant would not have implemented the restructure and that, even if the claimant had done so, the restructure would have taken approximately nine months rather than four months to implement.
The defendants also said that, as a matter of law, the restructure would not have effectively mitigated the claimant's tax liabilities. However, even if damages for the lost opportunity were recoverable, those damages should be negligible because of the strong likelihood that HMRC would have successfully challenged the restructure.
The judgement – breach of duty Judge Keyser QC held that the defendants were in breach of duty in January 2009. He stated that, if the defendants had become aware or ought to have become aware of the possible change in the Corporation Tax Bill, they should have notified that change to the claimant, not only because it was relevant in 2008 but also because it would be significant for future years. The judge also said that the defendants ought to have considered the relevance of the Bill when dealing with the filing position in 2008 and they should have brought the proposed change to the attention of the claimant.
However, even if the defendants had come to the view that nothing in the Bill affected the risks of the filing position in 2008, the proposed change had such a major effect on the position in future years that the defendants ought to have brought it to the claimant's attention.
In reaching this conclusion the judge seems to have been heavily influenced by the fact that the defendants are and hold themselves out as being ‘a top-end and very large firm of specialist advisers’ and as such it is reasonable to judge them by standards appropriate to that standing. He therefore concluded that the defendants should be expected to have much greater technical resources than an ‘ordinary’ firm of accountants and as a result should be advising on relevant impending changes to tax legislation.
The judge also confirmed that the following well known passage from a solicitors’ negligence case was applicable to accountants too:
Although a professional is not normally under an obligation to advise on matters that go beyond his express retainer if that professional ‘in the course of doing that for which he is retained, [becomes] aware of a risk or a potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing “extra” work for which he is not to be paid. He is simply reporting back to the client on issues of concern which he learns of as a result of, and in the course of, carrying out his express instructions. In relation to this I was struck by the analogy drawn by [the claimant's counsel]. If a dentist is asked to treat a patient’s tooth and, on looking into the latter’s mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if in the course of carrying out instructions within his area of competence a [professional] notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the [professional] must warn him. …’
Is this a ‘loss of chance’ claim? The judge then went on to consider the damages for the consequences of the breach of duty. The judge held that where the breach of duty consists of an omission but the benefit to a claimant, had the breach not occurred, would have depended upon the actions of a third party, the court will usually analyse the case in two stages. The claimant must first prove, on the balance of probabilities, what it would have done had the breach not occurred. If the claimant overcomes this first hurdle, then the damages will be assessed on the basis of the value of the chance that the third party would have acted in such a way as to confer the benefit.
Therefore, the claimant needed to show that, but for the breach, it would have implemented the restructure and then its damages would depend upon the prospects of that restructure not being subject to a successful challenge by HMRC.
Causation The judge had little difficulty in finding as a fact that, if the claimant had instructed Ernst & Young in 2009, it would have implemented the restructure. However, he considered that the significant question was whether the claimant would have instructed Ernst & Young at all in 2009. He was not persuaded, on the balance of probabilities, that the claimant would have consulted them in 2009. And effectively the judge concluded that no other accountant would have recommended the restructure subsequently proposed by Ernst & Young.
Consequently, the claimant had not proved that it would have completed the restructure and so the claimant's claim failed.
Despite the claimant not overcoming the causation hurdle the judge did go on to discuss how damages would have been assessed had they done so. He ultimately concluded that there was only a 7.2% chance that the claimant would have retained the tax benefits of its original filing position. So any damages that the judge might have otherwise awarded would have been reduced accordingly.
Comment Although the claim in this case ultimately failed, the case does provide a useful reminder that those professionals who are or hold themselves out to be ‘top-end’ risk being judged against a higher standard with regard to breach of duty, as the defendants were in this case.
Prepared for Lockton by Claire White and Ross Barker of Bond Dickenson LLP
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