Hossein Mehjoo v Harben Barker (A Firm), Harben Barker Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lady Justice Sharp,Lord Justice Lewison |
| Judgment Date | 25 March 2014 |
| Neutral Citation | [2014] EWCA Civ 358 |
| Docket Number | Case No: A2/2013/1863 |
| Court | Court of Appeal (Civil Division) |
| Date | 25 March 2014 |
[2014] EWCA Civ 358
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
SILBER J.
HQ10X02724
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Patten
Lord Justice Lewison
and
Lady Justice Sharp
Case No: A2/2013/1863
and
Roger Stewart QC and Jonathan Bremner (instructed by Eversheds LLP) for the Appellant
Mark Simpson QC and Isabel Barter (instructed by Wragge & Co LLP) for the Respondent
Hearing dates : 4 th and 5 th February 2014
Introduction
The appellant, Harben Barker Limited ("HB"), is a firm of chartered accountants with offices in the West Midlands. Until 2003 it operated as an unincorporated practice under the name of Harben Barker but the practice was then taken over by HB and I shall use those initials to describe them both. Both before and after this change it acted for the respondent, Mr Hossein Mehjoo, and provided him with accountancy services and general tax advice. Mr Mehjoo's point of contact in HB was Mr Alan Purnell who had acted as his accountant from about 1980 when he practised on his own account as Purnell & Co. This was taken over by HB in 1991 and Mr Purnell continued to act for Mr Mehjoo after the merger as a partner in HB.
Mr Mehjoo was born in Iran on 15 October 1959 of Iranian parents. He lived there until 1971 when he was sent to school in England. He has been resident in the UK since that time. After school he became a squash professional for about 9 years during which time he met Mr Purnell. In 1981 he was forced to contest an attempt by the Home Office to remove him back to Iran but he claimed asylum and in 1981 he was granted indefinite leave to remain. Since 1996 he has been a British citizen.
He retired from playing squash competitively in about 1989 and then built up an extremely successful retail fashion business. All of his business interests were in the UK where he has continued to live with his partner and two children. His first shop was established in 1983 through a private company called Hossein Sports Limited ("HSL"). In 1998 the company moved to larger retail premises in Birmingham and in 1995 HSL changed its name to Hoss Ventures Limited ("HVL"). In 2003 Mr Mehjoo merged his business with that of Mr Andrew Scott ("Mr Scott") and they became shareholders in a new company called Bank Fashion Limited ("BFL"). In April 2005 BFL was sold for £22m of which Mr Mehjoo's share was £8,508,586.50.
The litigation between Mr Mehjoo and HB centres on his attempts to avoid the payment of capital gains tax ("CGT") on the disposal of the shares. At the heart of the claim is the allegation that Mr Mehjoo retained his Iranian domicile of origin for UK tax purposes and could, by entering into what is described as a Bearer Warrant Scheme ("BWS"), have avoided CGT entirely on the disposal of his shares in BFL. It is not alleged that HB were a firm of accountants which specialised in giving tax advice of this kind; that they were ever asked to give such advice; or that they ought to have known of the existence of the BWS or any other specialised scheme designed to reduce or eliminate CGT on a disposal of shares in a UK registered company by a non-dom like Mr Mehjoo. It is accepted that they were generalist accountants. But what is claimed is that HB, through Mr Purnell, had, as a reasonably competent chartered accountant, the obligation to advise Mr Mehjoo that he had or very probably might have non-dom status which carried with it significant tax advantages and that he should therefore seek and obtain tax advice from a firm of tax advisers or accountants which specialised in advising non-doms on their tax affairs. Mr Mehjoo's case was that, armed with this advice, he would have gone to such a specialist; been advised to enter into a BWS; and implemented that advice before the scheme was blocked by primary legislation introduced by s.34, Schedule 4, part 1, para 4(1) (4) of the Finance (No.2) Act 2005 with effect from 16 March 2005.
CGT is chargeable on chargeable gains accruing to a person in any year of assessment during any part of which he is resident in the UK: see Taxation of Chargeable Gains Act 1992 (" TCGA"); s.2(1). A chargeable gain arises on the disposal of an asset wherever situate: see TCGA s.1. But s.12 TCGA provides that individuals who are resident, but not domiciled, in the UK shall not be charged in respect of disposals of assets situated outside the UK except insofar as the proceeds of sale are remitted to the UK.
Non-doms therefore receive favourable tax treatment on gains on foreign assets just as they do in respect of foreign income. In both cases they are taxed on a remittance basis. But s.275(e) TCGA (which defines the location of assets for CGT purposes) provides that registered shares are situated where they are registered. The shares in BFL (an English registered company) were therefore UK assets in respect of which Mr Mehjoo was liable to pay CGT on any disposal.
The BWS, which seems to have been marketed mainly by Grant Thornton and KPMG, aimed to change the situs of the shares prior to their disposal in order to take advantage of s.12 TCGA. To achieve this, the shares were converted from registered shares to bearer shares which would have required both a special resolution and a change in the company's articles of association. The share certificates would then be cancelled and the company would issue bearer warrants in their place. These would then be taken offshore (normally to Jersey) where an offshore trust would be set up. The shareholder would then gift the bearer warrants into trust. The trustees (who would also be non-resident) would then convert the warrants into registered shares and dispose of them to a third party free of CGT as foreign assets.
The claimant accepted in evidence that he would not have gone ahead with a BWS if he had been advised that there was a substantial risk of it being successfully challenged by HMRC. One potential risk considered at the trial was that the bearer warrants would not fall to be treated as located in Jersey unless they were also marketable in that jurisdiction. This point is based on a decision of Nicholls J in Young v Phillips [1984] STC 520 which concerned renounceable letters of allotment. He said:
"For an instrument to be treated as analogous to a chattel for situs purposes more is required of it than mere transferability of title by delivery. What is required is that in practice the value of the instrument can be realised by sale of the instrument for money in the country where the instrument is found".
In Chandrasekaran v Deloitte & Touche Wealth Management Ltd [2004] EWHC 1378 (Ch) I expressed the view that:
"… it is not necessary for me to determine whether the decision in Young v Phillips applies equally to share warrants issued in accordance with s.188 of the Companies Act, and in the absence of full argument I prefer not to do so. What, however, is clear is that there are obvious parallels between renounceable letters of allotment and share warrants issued to bearer, and that the application of Nicholls J's reasoning would obviously cause the prudent tax adviser to be cautious about recommending the Bearer Warrant Scheme where no obvious market in the securities existed in the foreign situs at the date of transfer".
The claimant's expert witness, Mr Kilshaw, who was also an expert witness in the Chandrasekaran case, gave evidence to Silber J that HMRC had not in fact challenged the effectiveness of the BWS on these grounds and that they were, in the end, dealt with by primary legislation but it remains an issue on the appeal whether the competent specialist tax adviser would have told the claimant in 2004 that there was a risk of challenge.
In the event, Mr Mehjoo did not enter into a BWS or indeed any tax saving scheme prior to the sale of the shares. He had discussions prior to the completion of the sale with Mr Purnell and at least two firms of tax advisers, Ford Campbell and MTM (Midlands) Ltd, neither of which suggested using a BWS. But on 16 February 2005 he wrote to Mr Purnell saying that:
"Obviously until we are 100% sure that the deal will go through I think it is dangerous that I commit myself to any scheme and then there is the consideration of what is the total tax on the deal – has to be worth it!".
The sale of the shares was completed on 19 April 2005 by which time the blocking legislation in relation to a BWS had taken effect. Mr Mehjoo then took tax advice from MTM who recommended that he entered into a tax scheme known as a Capital Redemption Plan ("CRP") which was implemented in August 2005. The CRP was an artificial tax scheme designed to create a capital loss which could be set off against the relevant liability to CGT which it was sought to avoid. Mr Mehjoo paid a fee of £200,000 to MTM for the scheme which was designed to produce a capital loss of £10.5m for the tax year 2005/2006.
HMRC challenged the loss and the effectiveness of the CRP and, after negotiations, an agreement was reached between Mr Mehjoo and HMRC on 23 May 2012 under which the loss was disallowed and the claimant agreed to pay penalties and interest. As part of his claim in these proceedings, Mr Mehjoo sought to recover the fee and the interest he had paid but not the penalties.
HB denied any liability in negligence. They contended that they were not obliged to give tax-planning advice unless...
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