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Tax Advisers' Negligence

18 August 2004 / Keith M Gordon
Issue: 3971 / Categories: Comment & Analysis

Tax Advisers' Negligence — III


KEITH GORDON MA, ACA, CTA, barrister concludes his series on negligence claims against tax advisers.


Tax Advisers' Negligence — III


KEITH GORDON MA, ACA, CTA, barrister concludes his series on negligence claims against tax advisers.


THE FIRST TWO ingredients necessary for a successful claim in negligence against a tax adviser were set out in the previous two articles of this series (' Tax Advisers' Negligence — I and II ', in Taxation , 8 and 29 July at pages 384 to 386 and 452 to 454 respectively). This article considers the final elements of a successful claim: the need for a loss to have been suffered by the claimant and the need for this loss to have been caused by the negligent adviser. It also considers the partial defence of contributory negligence by the claimant.

Loss must be suffered

Although individuals may feel aggrieved if they have received incorrect tax advice from their professional adviser, there can be no legal remedy in negligence if they have not suffered any loss as a result of the negligent advice. See Example 1 .

Example 1
Ted prepares his client's 2004 tax return and tells his client that she will be required to pay £1,500 on the following 31 January. In November 2004, a notification is received from the Inland Revenue telling Ted's client that a repayment of £375 is due to her. Ted realises that the notification is correct and he had overlooked the relief due on a gift aid donation made by his client. Consequently, the client banks the £375 and makes no payment on 31 January 2005.
While Ted's advice was incorrect, the client did not suffer any loss as a result of the mistake. Consequently, no claim in negligence can be made.
Suppose, instead, the notification had not been received until after the client had made the payment to the Inland Revenue. Then, in theory at least, the client could claim the interest lost (if any) by her for the period that the money is out of her bank account. However, since the erroneous tax payment would be returned to the client and the actual repayment due to her would not be lost to her, the amount of tax paid cannot be claimed again from the tax adviser.

Negligence must be the cause

It is not sufficient for a person to suffer a loss before a claim can be made; the loss must have been caused by the negligent advice. Traditionally, this was dealt with by the 'but for' test: i.e. would the loss have been occasioned but for the tortious act? However, in Galoo Limited v Bright Grahame Murray [1994] 1 WLR 1360, Lord Justice Glidewell restricted the effect of the 'but for' test. That case concerned trading losses that arose to a company following a loan which was made after the negligent publication of incorrect, albeit audited, accounts. But it could equally have arisen in the context of an incorrect tax repayment.

The learned judge held that trading losses, and/or profits, could have arisen in any event and were not a direct consequence of the negligent audit. In other words, he made a distinction between situations where the negligence was the cause of a loss and situations where the negligence was merely the occasion for the loss. How does one tell the difference? In that case, Lord Justice Glidewell said this could be explained 'by the application of common sense'.

The importance of finding that a loss suffered was caused by the negligence was highlighted in the recent cases of Slattery v Moore Stephens [2003] STC 1379 and Grimm v Newman [2002] STC 1388 . In Slattery , the defendant accountants were held to have fallen 'below the standard to be expected of a reasonably careful and competent tax accountant. However, it does not follow that, [for the year in question, the defendants] are liable in damages'. On the facts found, the taxpayer could have saved £13,185 during the 1995-96 tax year, had salary payments been kept offshore. However, the judge held that 'even if he had had his earnings paid into a Channel Islands bank account, [he] would have used his earnings on his living expenses in this country … In the result, I conclude that [the accountants'] omission to advise Mr Slattery about the potential for saving tax … did not in fact cause Mr Slattery any loss in the 1995-96 tax year'.

In Grimm , which also related to the tax planning arrangements of a non-domiciliary, advice was given as to how money could be brought onshore in a tax-efficient manner in order to fund a house purchase by the claimant and/or his wife. The High Court held that the advice had been negligently given. The Court of Appeal held, by a two to one majority, that the advice had in fact been correct. This was sufficient to dispose of the appeal. What was important for the purposes of this article, however, was that the Court also considered what would have been the taxpayer's loss had the advice in fact been incorrect. On this basis, the Court held that, on the assumption that the scheme effected was ineffective, there would not have been a more efficient alternative method of bringing the funds onshore. Consequently, there would have been no loss suffered by the claimant caused by the tax advice given. As a result, the appeal by the defendants was allowed on a second ground: assuming the advice had been incorrect, there would still have been no consequential loss suffered by the claimant.

Not too remote

A further, but more established, restriction on the type of loss that may be recovered is that it must not be too remote from the negligent act or omission. This restriction was held by the House of Lords in Owners of Liesbosch Dredgers v Owners of Steamship Edison [1933] AC 449 to be based, not so much 'on grounds of pure logic, but simply for practical reasons'. Thus, the courts will impose a cut-off so that a tax adviser is not held liable for claims in respect of losses which are too removed from the negligent act or omission complained of. See Example 2 .

Example 2
Suppose a tax adviser fails to tell a client how to avoid an unnecessary tax liability. Consequently, the client receives a tax bill of £100,000 (instead of £20,000). In order to raise the additional £80,000, the taxpayer realises an investment, incurring fees of £2,500.
It was held, in similar circumstances, in Braid v W L Highway and Sons (1964) 191 EG 433 that, while the tax adviser would be liable for the additional tax liability, the cost of realising the cash would not be recoverable. In the judge's opinion, this cost 'flowed directly from the defendants' breach ... But it would seem contrary to all principles if this [additional cost] were allowed. What [the claimant] had to pay was a sum of money. How he raised that money was a very long way from the defendants' breach'.

Intervening cause

Equally, a negligent tax adviser is not liable for losses accruing subsequent to the negligence of the claimant or a third party. See Example 3 .

Example 3
Continuing the facts of Example 2 , the taxpayer delays (for no good reason) sending the cheque to the Inland Revenue so that interest charges and surcharges are incurred.
It would appear that these charges have been incurred because of the negligence of the taxpayer, even though the adviser would have been liable for the original tax bill. Consequently, the taxpayer would not ordinarily be able to claim the interest and surcharge from the negligent tax adviser.


A further limit on the amount that may be claimed is that the loss suffered must be foreseeable. This is one area where the rules differ slightly depending on whether the claim is made on the basis of a breach of contract or of a duty of care owed to the client.

Claims in contract require the loss to have been within the reasonable contemplation of the parties. Claims for breach of a duty of care consider whether the type of loss suffered, but not necessarily the extent of the loss, is reasonably foreseeable. See Example 4 .

Example 4
Rick is negligently advised to enter into a convoluted tax-avoidance scheme which involves the transfer of his house to an offshore company. Rick is subsequently relocated by his employer to another part of the country and has to sell his home and move. It is at this stage that the negligent advice comes to light and Rick is unable to sell the house as promptly as would otherwise be the case. He is therefore required to reduce the sale price and, for a while, incur travel expenses between his home and his new place of work.
Following the decision in Pilkington v Wood [1953] Ch 770 (which was decided on the basis of a claim in contract), Rick will be entitled to claim for the loss in value of the home. However, the travelling expenses incurred are peculiar to Rick and would not, ordinarily, have been a foreseeable consequence of the negligence.

Contributory negligence

Under the Law Reform (Contributory Negligence) Act 1945, damages are proportionately reduced where the claimant is partly to blame for the loss suffered. Although contributory negligence is generally hard to prove in cases of professional negligence (it is for the defendant to raise it), such a claim was upheld in Slattery .

The Slattery case concerned unnecessary tax liabilities over several years. In the last of these years, the taxpayer was surprised to receive from the defendants a tax refund of over £127,000. This repayment arose because there had been an assumption that the taxpayer was indeed being paid overseas. Had the taxpayer queried this repayment with his accountants, or at least asked for an explanation for it, he would have learnt that payment overseas would have saved him considerable tax. The taxpayer could then have made arrangements to minimise future liabilities; in particular, the tax due in respect of a bonus which was paid nearly four months later.

The judge held that the taxpayer's lack of attempt to query the repayment amounted to contributory negligence and, on the basis of the facts of the case, he reduced the damages for that year by 50 per cent.

Reckless behaviour

There are situations where a claimant's actions are so reckless that they amount to an intervening act and therefore stop the claimant from proving that the loss was caused by the defendant's negligence. This proposition was considered in Slattery but, quite rightly in my view, the judge held that the taxpayer's inaction in that case fell far short of this sort of recklessness.


Issue: 3971 / Categories: Comment & Analysis
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