Tax Advice Negligence – Can I Sue My Accountant?

by Readers Question

11:20 AM, 4th April 2017
About 2 years ago

Tax Advice Negligence – Can I Sue My Accountant?

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Tax Advice Negligence – Can I Sue My Accountant?

My wife and I jointly own a portfolio of 42 properties. 

We recently sought advice on incorporation from an independent tax adviser who, interestingly, referred us to Property118 and suggested we look into BICT to avoid refinancing. I have to admit to being instantly hooked.

Our reasons for considering incorporation are:-

  1. We want to start transferring shares in our business to our children as part of our succession planning
  2. There are some properties in the portfolio which no longer provide us with good returns. We would like to sell these and replace them with others. Incorporation would re-set our base costs to enable us to trade these properties without incurring tax on capital gains.
  3. We pay substantial mortgage interest of circa £250,000 a year. The restrictions on finance cost relief will hit us hard.
  4. We want to use retained profit to reduce our exposure to finance. At the moment we pay the additional tax rate of 45% but would only pay 19% incorporation tax rate in a corporate structure to do exactly the same thing. Also, corporation tax rates are scheduled to reduce to 17% by 2020.

Our tax adviser is confident that we would qualify for incorporation relief to offset 100% of our capital gains by exchanging equity in our business for shares in the NewCo.

Having looked into BICT it is now also clear that we can avoid the costs of having to refinance.

The problem is SDLT.

Our tax adviser has shown me the legislation which would have resulted in no SDLT being payable if HMRC had recognised us as a partnership.

Furthermore, I understand this would have been a simple task for our accountants to have done by obtaining a Unique Tax Reference number for the business, submitting annual partnership returns and transferring the allocated profits to our self-assessment returns.

The outcome is that if we incorporate now we will incur an eye watering six figure SDLT bill.

If we obtain a partnership UTR now we have been advised to wait three years prior to incorporation so as not to fall foul of anti avoidance legislation. This would cost us an extra £93,750 in tax purely as a result of the restrictions on finance cost relief. This is not to mention the lost opportunities associated with trading some of our properties, succession planning,

Our accountant is clearly ‘on the back foot’ and has written to HMRC to own up to his mistake. He is hopeful that HMRC will forgive him, possibly issue a small fine and backdate their acknowledgement of the partnership. I hope he’s right but I am not convinced.

To our way of thinking, our accountant has been negligent.

My question therefore is; would my wife and I be likely to get anywhere by claiming our losses against his Professional Indemnity insurance?

The second part of my question is, assuming we have a case; should we incorporate and crystallise our losses in the form of SDLT now (which is our preferred option), or should we try to quantify our losses both ways and make a claim on that basis? Presumably the other side would argue either way?

Just to be clear, we are going to give our accountant an opportunity to redeem himself, However, if HMRC decide to be awkward then I don’t see that we have much choice other than to move to another accountancy firm and to launch a claim to recover our losses.

I look forward to reading all responses, particularly from lawyers.

David



Comments

Mark Alexander

11:27 AM, 4th April 2017
About 2 years ago

Hi David

This is an extremely interesting and topical question, thank you.

I am equally intrigued to know the answers to your legal questions as I am to learn about the outcome of your accountants correspondence with HMRC. Please keep us updated, particularly in regards to HMRC's response.

I have invited two very prominent lawyer members of Property118 to comment on this post, the first is Mark Smith of Cotswold Barristers (the architect of BICT) and the other is Ian Narbeth, a solicitor, HMO investor and regular commentator on Property118 forums in terms of legal matters.

As an aside, i totally agree with everything your independent tax adviser has told you. Did you know that I provide the same service for a fixed fee of £400. Hopefully that's not rubbing salt in the wounds too much!
.

David Smith

11:33 AM, 4th April 2017
About 2 years ago

Dear Mark

Thank you for publishing my questions and for editing out my typos before doing so.

I paid significatly more than £400 for the advice I received but I didn't know about you or property118 before that so it has been worth every penny in that regard

Mark Alexander

11:39 AM, 4th April 2017
About 2 years ago

Thank you David 😀

Hopefully, litigation will not be necessary. I've been through it and it is no fun.

Mark Smith (Cotswold Barristers) represented me in a representative action, supported by 300 other Property118 members, against The West Bromwich Mortgage Company. They were illegally overcharging us with a premium on our tracker mortgage margins. We won in the end in the Court of Appeal but it took nearly three years. That said, the other side got their just deserts and were ordered to refund £27,500,000 of overcharged mortgage interest, plus 100% of costs plus interest.
.

Mark Smith (Barrister-At-Law)

11:44 AM, 4th April 2017
About 2 years ago

1. The issue of professional negligence. If an adviser causes loss by not giving you the advice and taking the steps that a reasonably competent adviser would then he is liable for any loss arising. The amount of 'loss arising' is worked out as the extent of unavoidable losses. In this case both you and the adviser should do all that is open to you to minimise (or 'mitigate') the loss by being frank with HMRC and even seeking non-statutory clearance for the incorporation proposed, to ensure the SDLT hit will not arise.

2. The issue of partnership. A partnership arises when two or more people carry on a trade or business together with a view to profit. No formality (or even intention to be, or awareness of being, a partnership) is needed-the status arises from the reality of the business conduct. If you have carried on such a business then you are a partnership, and if it has been extant for three or more years a transfer of a beneficial interest in partnership property would be within the exemption from SDLT. Good practice is to have a partnership agreement, or declaration of partnership, and a UTR on commencing trade, and absence of either of these things will require an audit trail to demonstrate that the business has indeed been a partnership for the requisite period in order to satisfy the Stamp Office.

David Smith

12:07 PM, 4th April 2017
About 2 years ago

Reply to the comment left by "Mark Smith (Barrister-At-Law)" at "04/04/2017 - 11:44":

Dear Mark Smith

For the reasons that Mark Alexander has stated I would very much like to avoid litigation. It is expensive and draining. I have also been through it when my son was involved in an accident.

I am far more interested in the other point you made and I think it's time for me to change accountant. Presumably you have worked with several who have dealt with these matters before and if so could you introduce me to one or two of them please? Ideally somebody in Hertfordshire or Essex, simply because we are based on the border of the two.

Mark Smith (Barrister-At-Law)

12:40 PM, 4th April 2017
About 2 years ago

Dear David,

We have a small panel of accountants across the country who understand and work on BICTs in collaboration with Mark A and me. If you message me via p118 I will make an introduction.

Ian Narbeth

13:34 PM, 4th April 2017
About 2 years ago

It is unlikely to be straightforward to sue the accountant for negligence. Crucially, what were the terms of the accountants' retainer? Did you give them instructions to advise on mitigating tax through a tax scheme? Of did they just prepare your individual tax returns every year?

You would have to show that your business was or could be structured as a true partnership. Simply owning property jointly does not on its own create a partnership. https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

Also s24 Finance Act has only been around for 18 months so if you need three years of trading as a partnership the accountants may not be liable for all the losses even if they were negligent.

David Smith

7:22 AM, 5th April 2017
About 2 years ago

Reply to the comment left by "Ian Narbeth" at "04/04/2017 - 13:34":

Dear Ian

Mark Alexander very kindly passed on your email to me yesterday and I have also spoken to Mark Smith and will be proceeding with BICT.

My wife and I are frustrated with our accountant because we were contemplating incorporation well before clause 24. That was the straw that broke the camels back and resulted in us seeking tax advice from an independent specialist. Our accountant knew we were looking into incorporation at least a year prior to George Osborne's 2015 budget but had always put us off the idea by leading us to believe the costs were too high in terms if CGT, stamp duty and refinancing costs. It now appears he was wrong on all three counts.

David Smith isn't my real name, I have used it on the forum to protect my identity.

My wife and I run a very professional business. we have a trading name, a website, a virtual assistant service to answer telephone calls 24/7, letter heads, business cards and a business bank account.We are both professional consultants and we run the business in our spare time. There is no doubt in our minds that we are running a business. Managing 42 properties is certainly not passive. We spend around 40 hours a week between the two of us, not including the time we pay our virtual assistant for, which is around another 30 hours a month.

We remain aggrieved that our accountant didn't advise us to submit partnership tax returns but hopefully this can be resolved without litigation. Mark Smith has referred us to an accountant in our area and both are confident we will obtain clearance from HMRC to claim incorporation reliefs to mitigate CGT and stamp duty.

Thank you to all who have taken time to respond to my frustrated cry for help.

Ian Narbeth

10:10 AM, 5th April 2017
About 2 years ago

Dear "David"
Thank you for your more explanation. That certainly makes a difference. It does appear that you operate as a partnership. You my well have a claim against the accountant in the circumstances. My comments at 13:34 were lawyerly caution on the basis of what you first posted. I think you are doing the right thing now and when you have quantified your loss you can look at pursuing the accountants.

Mark Smith (Barrister-At-Law)

10:16 AM, 5th April 2017
About 2 years ago

I am in agreement with Ian.

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