Accountant not liable for introduction to failed tax schemes

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A firm of accountants has escaped liability for introducing its clients to a failed tax scheme. The High Court held that the firm did not owe a duty of care to its clients when it introduced them to three tax schemes and a foreign exchange trading scheme.

Mr and Mrs Knights appointed Townsend Harrison as their accountants. As part of their service the firm introduced the couple to the tax schemes. When the schemes failed to deliver the expected savings and the foreign exchange trading scheme failed with a total loss of funds, the Knights started a claim against Townsend Harrison for damages.

Mr and Mrs Knights alleged the firm owed them a duty of care and provided advice in relation to the schemes and was therefore liable for their losses. In response Townsend Harrison argued that it simply introduced the couple to the schemes and provided no advice. The firm’s engagement letter, which Mr and Mrs Knights had signed, clearly stated that the firm did not provide recommendations about specific investments.

The High Court agreed with Townsend Harrison and denied the Knights’ claim. The judge accepted that it was reasonable for the firm to tell the couple about the tax schemes as part of its business relationship, but that it did not owe them a duty of care in relation to their investment. The judge also observed that the Knights had not established that they would not have used the schemes had Townsend Harrison not been involved.

This is one of the first professional liability claims to consider a professional’s ‘duty of care’ since the seminal Grant Thornton v Manchester Building Society case (See Brunel News, August 2021), which clarified the scope of duties of care owed to clients.

James Burgoyne, Divisional Director – Claims & Technical, Brunel Professions said: “This case demonstrates yet again the importance of well drafted engagement letters. In this case, Townsend Harrison was able to point to an explicit clause which stated it did not provide recommendations or advice about investments.”

He continued: “The professional indemnity insurance market has been concerned about exposures to tax mitigation scheme based claims for a number of years. This judgement was positive for defendants but the judge’s comments regarding possible situations where a duty of care might have arisen are less reassuring. These would be very dependent on their specific facts however.” (Practitioners may want to refer to paragraphs 253 and 254 of the judgement).

Reports about the case have been published by Brodies and Herbert Smith Freehills.

Brunel secures competitive professional indemnity insurance cover for financial services professionals. To find out more visit the Brunel website or call Mark Sommariva on 0203 475 3275.