The owners of a rental property business were given some unprompted written professional advice from their accountants. It involved moving properties out of the property company into personal names to avoid CGT. The advice was taken and acted upon by the owners in good faith but it proved disastrous.
The advice was fundamentally flawed and amounted to professional negligence. The mistake was spotted by chance by another firm of accountants who made the necessary repairs to HMRC to both individual and company tax returns.
It proved very costly for the clients who ended up £50,000 out of pocket. To add insult to injury, some of the rental income ended up being taxed twice suffering both Income Tax and also Corporation Tax.
The clients had written to the original accountants pursuing professional negligence and asking for some compensation for the wrong advice. Unsurprisingly perhaps, both the accountants and his insurers denied any liability. However they went further and blamed the business owners for any loss. This added insult to injury.
We at SME Strategies were asked, as specialist accountants ourselves, to help with pursuing professional negligence by making a claim against the accountants giving the wrong advice.
To be successful, a professional negligence claim has to convince a judge of four things:
- Negligence: This is in two parts. Firstly, that the professional had a duty of care to their client. Secondly, that the service or advice provided was so bad that it fell below a reasonably acceptable standard for the particular trade, industry or profession.
- Causation: The advice or error caused harm to the client – such as financial losses, injury or other suffering. It is important to realise that to win a claim one must be able to prove not only the negligence but also that this was the cause of one’s harm (and one would not have suffered it anyway – even without the negligence).
- Valuation: This is proving the quantum of one’s harm or losses in financial terms.
- Time limits – The claim is made within prescribed time limits.
We satisfied ourselves that there were strong grounds for the business owners pursuing professional negligence against their former accountants.
Although the advice given to the clients was clearly wrong – why else would they end up having to pay £50,000 to correct it? – the claim for correcting it was complex. Pursuing professional negligence is not easy.
This case involved contract law, tort, time limits, taxation of income, eligibility of expenses, transfer pricing and related parties, rules on repairs to tax returns and opportunity costs.
It was true to say that time had elapsed from the wrong advice being given to the time the repairs were made by the new accountants. The repairs themselves however had taken some time to get made owing to the lack of cooperation of the first accountant who maintained to the end that his advice was correct.
The clients’ losses were around the figure where the costs of full legal advice could have been a significant proportion of any successful claim. Getting full costs back in a successful claim is very hard and, as is well known, the outcome of legal action is never guaranteed. The clients felt between a rock and hard place especially as the insurers to the accountants had been unhelpful and completely dismissive of the matter.
It was agreed that some legal advice would be taken but on a limited basis owing to its high cost relative to the claim. This legal advice explored the key legal issues and gave the legal framework in which we worked.
We drafted a fully documented Letter of Claim following the Pre-Action Protocol for Professional Negligence and obtained an expert report from a tax specialist in support of our claim.
This expert report confirmed that the advice fell below a reasonably acceptable standard for an accountant to give.
Under the Pre-Action Protocol, defendants have three months to reply to the Letter of Claim. The other side missed that deadline and requested another two months which deadline they also missed. At which point, we were told that solicitors needed to take instructions.
It was not lost on us that over six months after we sent in our Letter of Claim and having heard nothing by way of a formal response, solicitors for the other side needed to take instruction.
Since insurers were obviously playing for time we applied for a Standstill Agreement which the other side refused. By this time we had received a belated reply from insurers which clearly showed the issues had not been grasped – either by intent or ignorance. We assumed intent as we felt it unlikely that solicitors (although not accountants) would so singularly fail to grasp the issues.
Our clients were threatened by insurers with a counter claim if they pursued the claim. As accountants, we don’t know if this intimidation is a common tactic by solicitors but it certainly significantly inflamed a now acrimonious dispute.
Taking legal action at the High Court can only be done using a solicitor or as a litigant in person. Accountants are not allowed to issue legal proceedings. Any action at court involves risk. Although our clients’ case was extremely strong (remember the £50,000 paid out to correct the wrong advice) court outcomes are rarely guaranteed.
Time had elapsed although the precedents set in case law for time limits involving tax give significant additional leeway. This is because tax can be a contingent liability ie tax becomes due each tax year as the taxpayer’s tax affairs for that year are aggregated together with allowable tax reliefs – not when the taxable event is first set-up. In Law Society v Sephton & Co & Others  UKHL 22, Lord Hoffman summarised his conclusion in Sephton in this way: “30. In my opinion, therefore, the question must be decided on principle. A contingent liability is not as such damage until the contingency occurs.” This is important as a loss must have been incurred in order for that loss to be claimed. Furthermore, tax mitigation could have been put in place by our clients that might have reduced the crystallisation of the loss.
Undeterred by the intimidation of the other side (or perhaps even more resolute because of it) it was decided to commence legal proceedings. The claim was divided into three claims (in the names of Mr Client, Mrs Client and Company Client) and these were lodged at the Small Claims Court. (In fact, there isn’t actually a Small Claims Court as such. Lower value claims are dealt with in the small claims track of the civil courts (in the County Court) but ‘Small Claims Court’ is used as a phrase for convenience.)
By going to the Small Claims Court, it meant solicitors did not have to be instructed and, significantly, any adverse order for costs could not be made against our clients in the event the claims were unsuccessful. Success, as noted earlier, cannot be guaranteed.
Three claims were submitted by our clients (one in the name of each of the client parties) to the Small Claims Court. Each was for the full maximum Small Claims Court value of £10,000 (so £30,000 in total plus court fees). The respondents continued to deny any liability and still failed to engage with the issues. The clients were ready for the court to set a date for the cases to be heard.
As part of a claim, the parties are invited to consider mediation. If they refuse to try mediation (or an ADR – Alternative Dispute Resolution) this is seen in an unfavourable light by the court. We had indicated our willingness from the start to seek an ADR to the matter.
The other side accepted (in practice they were obligated to accept) the invitation to mediation. We were asked by our clients to conduct the mediation on their behalf. Preparing for mediation is vitally important. The issues need to be set out succinctly by each party who also both need to have a good handle on the weaknesses and strengths of their respective case. The representatives at mediation need clear authority in which to mediate and this was established for us beforehand in writing. Mediation requires a balance of both firmness, boldness and flexibility.
The mediation was conducted by a trained mediator of the Small Claims Court who was very professional and completely impartial but was able to draw out the key issues.
Within an hour, an agreement had been reached between the parties by which the clients received most of what they were claiming. Pursuing professional negligence in this case had been successful.
The irony was that the agreed settlement was in excess of the quantum the clients asked for in their very first letter to the accountants seeking some redress two years ago.
“We were very impressed and more than delighted with the care, attention to detail and professionalism shown by David Eaton of SME Strategies. David knew that we had a strong case against our former accountants and his experience and encyclopaedic knowledge was put to good use to present a very detailed and robust case to the insurers. David was aware what information was required and how to obtain it. In many instances he was able to pre-empt a good number of the counter arguments the insurers hoped to use, to try to avoid paying compensation, for their client’s incompetence.
At all times David made us aware of what was and was not possible and the likely outcome depending on the tactics used. We were able to use informed decisions as to how to progress, and all the costs involved. The outcome exceeded our expectations. We could not recommend David more highly.”
Business owner, Essex
“If you would like impartial third party accountancy business advice from someone who understand small and family businesses you will find that David Eaton is an exceptionally good listener. Don’t let David’s politeness fool you. When he gets his teeth into a case he is like a veritable terrier.”
Business owner, Berkshire
If you have a troublesome dispute which you would like to discuss, please call us for a complementary initial conversation.
NB Only solicitors can give legal advice and issue proceedings in the High Court and we therefore work very closely with solicitors. In our experience, close liaison between specialist accountants and specialist solicitors gives the most cost-effective result for clients in disputes such as illustrated in this case study arising from incorrect tax advice.
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