An accusation of negligence can be extremely stressful for a firm and its advisers. The best strategy is to manage risks in this area, but in order to manage risks, you need to identify them.
This is a freeview 'At a glance' guide to avoiding negligence claims.
At a glance
What is negligence in terms of an adviser?
The answer is to consider what a hypothetical reasonably competent accountant would do in the same situation.
- Would they seek specialist advice?
- Would they take a second opinion?
- Would they have minuted (written down) all the advice they have given?
- Would they have recorded phone calls?
What a reasonably competent accountant can do will depend on what terms has the client agreed to:
- Has the scope of the engagement been agreed?
- Is there a signed Letter Of Engagement (LOE) in place?
- Are the terms of the engagement up to date?
No firm is perfect and mistakes do occur.
Firms should assess their risks and vulnerabilities.
- Many advisers can find themselves 'caught between a rock and a hard place' when it comes to agreeing on extra fees with clients in order to deal with some of the more complex and specialist areas of tax.
- Many clients want to fix or cap the fees that they pay for professional advice.
- HMRC's proposals for Making Tax Digital impose a large swathe of extra compliance costs on taxpayers.
- Fixed fees may work well for some aspects of routine compliance but if you unexpectedly find that your client's affairs are beyond the scope of your knowledge and you will need to bring in external technical support, the client must fund that.
- The danger is that if you do not quote high enough, up front, and a case drags on, you may end up cutting corners on the tax compliance work because that comes at the end of the job, and you fail to undertake the planning early on because that cuts your accounting budget.
- Sometimes the most vulnerable taxpayers will not be able to afford your fees at all.
- You may find that you are under pressure to look after the fee-paying clients and if your firm's cash flow is bad you may not devote as much time to the clients who do not bring in the income.
Adviser error can occur at any level and many accountants suffer from high stress levels.
- Stressed people often have time management issues: it can be difficult to file returns on time, which may lead to penalties, extra work in lodging appeals, and more stress.
- It is quite easy to simply forget to do something if you are overworked: the classic example is having a long meeting, misreading your notes and then failing to disallow an expense discussed at that meeting in a tax computation.
- Sometimes stress affects brainpower and silly mistakes are made.
Lack of training/CPD
Typical errors involve:
- Misreading the legislation.
- Not reading the legislation.
- Failing to note that the rules changed in the last finance act or two.
- Not keeping up-to-date after passing exams.
- Not knowing what you don't know until it is too late.
A common excuse (often in relation to late filing penalties) is that the accountant was ill and had no substitute in place.
With the new pressures of Making Tax Digital and so much debate on tax avoidance and the role of accountants and advisers, the best advice may be as follows:
- Limit the scope of any engagement to matters on which you feel you have the skills to advise.
- Set out clearly what you can and cannot do.
- Agree on your terms with your client.
- Include in your letter of engagement that you will engage specialist support, as required.
- Keep the terms of your engagement with the client updated regularly.
- Don't agree to a low-budget fixed fee for any tax work until you have fully evaluated the scope of your engagement.
- Make it clear that a low-budget fixed fee will not cover specialist support.
- Budget for enough time for annual tax planning.
- Budget for internal and third-party reviews where they are going to be necessary.
- Agree on extra fees to cope with the impacts of Making Tax Digital. Allow for the learning curve between taxpayers and accountants.
- If you are providing one-to-one advice, tailored to your client and you are human, then you are not a software house. Abandoning time records is not for everyone. Explore the new pricing models for the digital age and Sign Up to purchase our new guide: 'Pricing for the Virtual Practice'.
- If your client is going to require specialist assistance, for example in areas such as share-based planning, sale and purchase, reorganisations, residency issues, IHT, R&D, EIS or SEIS, capital allowances, VAT and indirect taxes etc (the list should include whatever area you don't cover on a day to day basis) then you will need to either act as the link between the external adviser or have the external adviser acting directly for your client. You need to decide what will suit you and then how you can manage this process. Either way, you are going to need to be able to 'sell' this to the client.
- If a client does not take your advice in bringing in specialist help and you consider that it is negligent not to have assistance, you should reconsider your position. You will need to draft a disclaimer for you and your client to sign, this will not always be an easy document to draw up, as you have to ensure that your client fully understands the consequences of their action. It puts an adviser in a difficult place and practically it may just be easier to resign.
- If a client has taken up an avoidance scheme created by someone else it is unwise to offer any advice in relation to that planning.
- If you are preparing a tax return where the taxpayer has used an avoidance scheme always check whether the scheme has a Disclosure Of Tax Avoidance Schemes (DOTAS) number and ensure you complete the tax return accordingly.
- If a scheme is included in HMRC's spotlights or is deemed abusive according to Part D of the General Anti-Abuse Rule guidance then you might be considered negligent if you recommend anyone to take it up or fail to mention to your client that it is deemed abusive.
- If in any doubt about any matter, however small, obtain a second option.
- Keep up to date technically (you can Sign up here to use this service).
- Ensure that your professional indemnity insurance covers you for the type of work that you undertake.
It can be challenging to glean why errors occur from tribunal case decisions particularly if the adviser is not present. Here are a few cases to illustrate the potential issues.
In Peter Stratton v HMRC  TC02967, a taxpayer acquired Employment-Related Securities (ERS) but his adviser ignored earlier advice by the management of the company and used the wrong legislation. They advised that the profit on disposal was subject to CGT and not PAYE. This resulted in a tax penalty. Although the adviser had made an error, the taxpayer was found to be negligent because he had been given and ignored the correct advice by the company. His advisers, the judge noted, "seemed unwilling to engage with HMRC" in respect of the correct legislation and failed to understand ERS.
Case management is very important in relation to hearings
In Michael Phair v HMRC  TC02752, a taxpayer and his adviser failed to understand the rules concerning costs once a case had been transferred to the complex track of the First Tier Tribunal. The ruling left the taxpayer responsible for HMRC's costs following an unsuccessful appeal.
In Pete Matthews and Keith Sidwick  UKUT 229, the taxpayers made an unsuccessful appeal to the Upper Tribunal. They wished to claim that they were employees so that as ship cabaret entertainers they could claim exemption from tax. They were found to be self-employed. They had tried to claim that the case was a test case, however, HMRC did not agree and neither did the Upper Tribunal so this left them with an apparently unexpected costs order.
Ensure controls are in place to meet deadlines
In Kent County Council v HMRC  TC02730, the First Tier Tribunal did not allow a council a late appeal against a PAYE Regulation 80 Determination. The council blamed an internal reorganisation on its failure to lodge an appeal on time however the tribunal did not find this a reasonable excuse. Judge Sir Stephen Oliver QC said "The reorganisation of Kent County Council’s Human Resources directorate should have been conducted in a manner that enabled the Council to comply with its obligations owed to HMRC under the Taxes Management Act."
Whilst this case involved a council, it can be seen that any commercial organisation could have a similar problem.
Failure to advise on tax planning?
The 2013 decision in the case of Mehjoo v Harben Barker where advisers were sued for negligence for failing to provide a non-domiciled individual with a suitable tax mitigation scheme caused a stir amongst professionals. It involved a large firm that did not know the existence of an offshore planning scheme.
The decision was later overturned: In Hossein Mehjoo v Harben Barker  EWCA Civ 358, the Court of Appeal held that an accountant was not negligent for failing to advise his client on the use of a tax planning scheme involving Bearer Warrant Shares (BWS).
Insufficient warnings from the adviser
In Barker v Baxendale Walker Solicitors (a firm) & Ors  EWCA Civ 2056, the Court of Appeal overturned the High Court's decision and found that the solicitors advising on an EBT structure were negligent in not warning their clients that the scheme could fail. The case turned on the interpretation of s.28 IHTA 1984 in respect of the transfer of shares into an EBT. The court of appeal agreed with HMRC's interpretation that the Inheritance Tax exemption did not apply and found that the advisers, Baxendale Walker (BW) should have specifically advised their client of the risk of this and that a general warning about entering into a tax avoidance scheme was not sufficient; BW were found to be negligent. Mr Barker had already settled with HMRC, paying over £11m in tax and interest.