Summary

Tax accountants were negligent in failing to advise a client who was resident, but not ordinarily resident, in the UK for tax purposes of the obvious tax mitigation solution of having his employment earnings paid into a Channel Island bank account.

Facts

Claim for professional negligence arising out of the tax mitigation advice and tax return services provided by the defendant chartered accountants ('MS') to the claimant ('S'). S was resident in the UK and employed in London, but travelled frequently on business and was not domiciled in the UK. The returns for the tax years 1996/97 and 1997/98 were drawn up on the basis that: (i) S was being paid abroad; and (ii) the amount of his earnings brought into the UK did not exceed the amount attributable to his work in the UK, which amount was subject to UK tax in any case. However, S was in fact being paid all his earnings in the UK and he was not actually entitled to the refund of PAYE tax deducted at the source. S complained in relation to the way the MS prepared his UK tax returns and the quality of tax advice given to him in light of his UK tax status as resident but not ordinarily resident for the tax years 1995/96, 1996/97 and 1997/98. He complained that MS's negligence had denied him tax savings he could have made if he had been properly advised by them to arrange for his employment earnings to be paid into a Jersey bank account. MS relied on a telephone conversation prior to completion of the 1995/96 tax return in which S was allegedly advised of the desirability of being paid abroad and consequently told the MS employee responsible for his tax at the time that he would arrange for his salary to be paid in New York. This understanding was purportedly reflected in a letter of 18 October 1996, which accompanied S's 1995/96 tax return for his approval.

Held

(1) The failure to alert S to the potential benefits of offshore payment for the tax year 1995/96 was a breach of the duty owed by a reasonably careful and competent tax accountant to their client. However, that breach did not cause actual loss for the tax year 1995/96 and therefore no damages were payable in respect of that tax year. (2) There had been a breach of the duty owed by MS to S for the tax years 1996/97 and 1997/98. It had not been established that S had said he would arrange to be paid in New York, as contended by MS. Neither of MS's tax advisers who dealt with S ever suggested the obvious tax mitigation solution of being paid into a Channel Islands bank account. In addition, when S's tax returns for 1996/97 and 1997/98 were prepared it was assumed that S was being paid abroad. (3) There was no contributory negligence on the part of S in failing to raise the issue of payment in the Channel Islands. However, there was contributory negligence on his part in that had he queried the tax refund of over £127,000 for the tax year 1996/97 when he was informed of it in November 1997, it would have been discovered then, rather than in June 1999, that the assumption he was being paid abroad was incorrect. S's fault in not taking up the matter of the large refund with MS was not reckless behaviour of the kind that entirely negated the consequences of MS's breach of duty. A reduction of 50 per cent from the damages for the loss from the 1997/98 tax year was appropriate. (4) S was awarded damages totalling £197,092.48 to reflect the tax savings that he would have been entitled to for the 1996/97 and 1997/98 if he had been advised to investigate having his earnings paid into a bank account in the Channel Islands.

Claim allowed.