When can you sue a Tax Adviser or Accountant for bad or deficient tax advice?
When Tax Advice Goes Wrong
In the UK, individuals and businesses rely on tax professionals to help them navigate complex tax laws. Tax professionals include accountants, tax advisers, and solicitors. While advice from tax professionals is usually accurate, occasionally things go wrong. So what happens when the advice is wrong, deadlines are missed, or HMRC penalties arise because of a professional’s mistake?
In short – you may be entitled to bring a tax professional negligence claim and seek compensation for financial losses caused by negligent tax advice. This guide explains:
- what constitutes tax negligence;
- how to bring a claim; and
- key legal issues, including limitation periods, applicable case law, and thoughts on compensation metrics.
What Is Tax Professional Negligence?
Tax professional negligence occurs when a tax adviser, accountant, solicitor, or other professional provides advice or services to you that fall below the standard expected of a reasonably competent professional in the same circumstances. Importantly, this negligence should cause you financial loss.
What does Tax Professional Negligence look like?
Depending on the circumstances, examples of negligent tax advice might include:
- Negligently recommending a tax avoidance scheme or introducing a client to a tax avoidance scheme without giving appropriate risk warnings.
- Poor structuring (e.g. poor structuring of tax-efficient investments, incorrect structuring of business sales, or poor structuring of trust or corporate structures).
- Giving inaccurate guidance on residency or domicile status.
- Failing to warn about the risk of HMRC challenge or penalties.
- Missing tax deadlines (e.g. for overpayment relief claims or elections).
- Filing incorrect or late tax returns.
- Failing to advise on relevant tax reliefs.
If this kind of error causes you to pay more tax than necessary, face HMRC interest and penalties, or lose out on tax reliefs, you may have a valid claim that we can assist you with.
Who Can Be Sued for Tax Professional Negligence?
You can bring a professional negligence claim against a wide range of tax professionals and advisers, including:
- Accountants.
- Tax advisers or consultants.
- Solicitors or law firms giving tax advice.
- Financial planners offering tax schemes.
- Barristers giving tax advice.
- Fiduciaries or trustees giving tax advice.
Most regulated professionals carry professional indemnity insurance, meaning compensation could be available even if the individual or firm is no longer trading.
Tax Professional Negligence Claims in Existing Case Law
Here are some examples of tax professional negligence claims.
Barker v Baxendale Walker Solicitors [2017] EWCA Civ 2056
One of the key issues in this case was whether a solicitor advising on statutory interpretation is negligent for failing to warn that his opinion could be wrong.
The key issue is summarised in the Judgment as follows:
“The issue is whether a reasonably careful practitioner with the degree of expertise claimed by the Respondents should have warned the Appellant, Mr Barker, before he transferred his shares in Team 121 Holdings Limited (the "Company") to the trustees of an EBT that there was a significant risk that the EBT would fail to deliver the hoped for tax advantages because it did not exclude as beneficiaries after his death, his family members, being persons connected with him in his capacity as a "participator" in the Company. I will refer to such a warning as a "specific warning" and to the relevant risk as "the post-death exclusion construction" in relation to section 28(4) Inheritance Tax Act 1984”
The court found the solicitor negligent for failing to warn the client about the significant risks associated with the scheme.
Halsall v Champion Consulting Ltd [2017] EWHC 1079 (QB)
In this case, four investors brought a claim against their professional advisers on the grounds that they were negligently induced to invest in tax schemes.
It is important to note that Champion were a firm of accountants and not the promoters of the tax scheme. The Court held that they were liable for negligently inducing investors into tax schemes by giving assurances as to the tax effectiveness of the schemes.
Unfortunately, the claims were ultimately time-barred (out of time by reference to statutory periods of limitation). However, this case is useful to support the argument that facilitators or introducers of tax schemes could also be liable for their failure to properly advise their clients.
McClean v Thornhill [2023] EWCA Civ 466
The claimants (McClean and others) sought to bring a professional negligence claim against Andrew Thornhill KC, a tax barrister.
The claimants had participated in failed film finance tax schemes. The schemes were promoted to assist potential investors, as partners in limited liability partnerships (LLPs), to claim tax relief for anticipated trading losses in the LLPs to set off against their personal income or capital gains thereby reducing their tax liability to HMRC.
As explained in the Judgment, Andrew Thornhill KC was “engaged by [the promoter of the tax scheme] to advise [them] on devising and setting up [the scheme] and on the tax consequences of the schemes”. Mr Thornhill’s advice was shared with those who had participated in the scheme. The question before the Court was whether the claimants were able to take legal action against Mr Thornhill KC – despite him not having been engaged to advise them directly.
The Court concluded that Mr Thornhill KC did not owe a duty of care to investors to whom his advice had been made available by the promoters. An information memorandum promoting the scheme had advised potential investors to consult their own tax advisers, and no investor had been allowed to subscribe to the scheme without warranting that they had taken and relied on their own tax advice. If there had been a duty of care, so the Court said, it would have been breached, as no reasonably competent senior tax barrister at the time could have expressed such an unequivocal view that the intended tax reliefs would be available without identifying any associated risks.
How To Start a Tax Professional Negligence Claim in the UK
Step-by-Step Guide:
- Gather Documentation
Collect emails, tax returns, advice letters, engagement terms, and HMRC correspondence. The more comprehensive and organised your information the easier it is to proceed with the next steps. - Get Legal Advice
Get advice on your rights from a reputable law firm, such as Brown Rudnick, specialising in professional negligence and tax law disputes. It is important that you do this promptly. There are strict time limits to bring claims under the Limitation Act 1980 (see below) and e.g. waiting to resolve the tax position with HMRC could jeopardise your rights of recovery against the tax professional. - Send a Letter of Claim
Before commencing any Court action, a solicitor acting for you in a tax negligence claim should usually (subject only to issues of limitation requiring more immediate Court action) first send a Letter of Claim under the Pre-Action Protocol for Professional Negligence. The proposed defendant is required to acknowledge and respond to this letter, in detail, within 3 months and 21 days. The purpose of this correspondence is to see if the matter can be resolved without reference to the Court through settlement and, in any event, to seek to narrow the issues in dispute should the matter proceed to litigation. - Negotiate or Litigate or Both
If the proposed defendant (or their insurer) decline to settle the matter early, you may issue a claim in Court - usually in the High Court or County Court, depending on the value of the claim. If the proposed defendant is open to settlement, then it might be appropriate to arrange a settlement meeting or a mediation after issuing proceedings. Note that even if a defendant initially refuses to engage in settlement discussions, statistically most professional negligence claims do settle and don’t go all the way to trial. There are many reasons for this including avoiding litigation risk, limiting costs and obtaining certainty of outcome at an early stage.
Timelines to Bring Tax Professional Negligence Claims
Under the Limitation Act 1980, you typically have 6 years from the date on which the cause of action accrued to bring a claim.
In negligence, the cause of action generally accrues to you when you suffer financial loss. When financial loss is suffered, as a matter of law, has been debated at length in case law. In tax cases, it is typically when you enter into the transaction or arrangement which gives rise to the tax loss. However, there are exceptions to this, and the rules are complex. Seek professional advice on this issue at the earliest possible opportunity to protect your position.
There are some exceptions to this general rule to be aware of.
Section 14A Extension – Date of Knowledge
You may have 3 years from when you knew, or could have reasonable known, about the relevant issue (the so called “date of knowledge” extension). The date of knowledge extension is usually relied upon as a last resort as it is preferable to bring the claim within the normal 6-year window. Again, the rules that apply here are complex and you should seek professional advice promptly.
This “date of knowledge” extension is subject to a “longstop” date. All claims must be brought within 15 years of the date of the negligence, even if the issue wasn’t discovered until later. This longstop date provides certainty to potential claimants and defendants.
Example:
Your accountant misses a CGT relief election for you in your tax return in 2018. You only discover the issue after an HMRC investigation into your affairs in 2024.
You may still be able to succeed with a tax professional negligence claim against them until 2027 using the 3-year date of knowledge extension rule. You could argue that the commencement of HMRC’s investigation was when you first became aware of the issue. The success of this argument would depend, in part, on you showing that you reasonably could not have been aware of the issue before HMRC commenced its investigation.
Contractual Limitation Clauses
Note that some professionals seek to include time limits in their engagement letters and standard terms of business within which a professional negligence claim must be brought e.g. an engagement letter might seek to disapply the provisions of the Limitation Act 1980 and say that claims must instead be brought within 3 years of the cause of action accruing (rather than 6 years under the Limitation Act). Large accountancy firms and some unregulated tax advisers have been known to include such terms in their engagement letters. It is questionable as to whether these terms are effective as a matter of law and much will depend on the factual circumstances of a particular case. This only serves to underline the importance of getting professional advice from a reputable firm of solicitors without delay.
FAQs: Tax Professional Negligence Claims
Can I sue a tax adviser for bad advice?
Yes – if the advice was negligent (below the standard of a reasonably competent adviser acting in the same situation) and caused you financial loss. You’ll need to prove that they had a duty of care to you and breached it.
What compensation can I claim?
This will depend on the facts and circumstances of your case.
However, you can typically claim the:
- Extra tax you had to pay to HMRC.
- Penalties and interest imposed by HMRC.
- Costs of defending an HMRC investigation and regularising your tax affairs with HMRC.
- Professional fees paid for the negligent advice that caused you financial loss.
Can I sue for lost tax relief?
Yes – examples include loss of overpayment relief, entrepreneurs’ relief (now known as Business Asset Disposal Relief) or other reliefs like Multiple Dwellings Relief under the Stamp Duty Land Tax (SDLT) regime or Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS). These are often some of the largest components of a tax negligence claim.
Do I need expert evidence?
Almost certainly and it is important to keep this in mind at the start of your matter. The court often requires expert evidence in cases outside of its area of expertise e.g. on questions as to what a reasonably competent tax adviser would have done in the same circumstances. The court is made up of lawyers – not accountants or tax specialists – and they need help with such questions.
The court also seeks expert evidence on issues such as quantification of loss and, on occasion, on complex issues (such as tax). As such, even if the claim is against a solicitor who is alleged to have given negligent tax advice, the court may still seek expert evidence.
Experts can either be individual (i.e. each party instructs their own expert) or single, joint (i.e. where the parties share an expert). It is also not unusual to have multiple experts in a case e.g. you might have a valuer giving evidence and a tax adviser giving evidence on separate issues in a tax professional negligence claim.
What if the adviser has gone out of business?
If they had professional indemnity insurance (as most do), you may still be able to claim under it. That is because policies can include “run off cover” (i.e. cover for a set period – usually 6 years – after a business ceases to trade). It is a requirement of some regulators (e.g. the Solicitors Regulation Authority – the SRA) that run off cover is in place.
If there is no run off cover in place, recovery may be more difficult.
Get Legal Help: Specialist Tax Professional Negligence Solicitors
If you’ve suffered financial loss due to poor or negligent tax advice, you may have a strong claim for compensation. These cases are time-sensitive as limitation periods can bar late claims. It is in your interests to act quickly! Do not wait for matters to be resolved with HMRC first – act without delay and get advice from a reputable firm of solicitors specialising in tax professional negligence claims.
We offer:
- Fixed-fee case assessments and engagements.
- Expert legal support from tax litigation solicitors.
We are highly experienced in bringing tax professional negligence claims. We can support and guide you through the process.
Contact us today to find out if you can make a tax professional negligence claim in the UK.
Matthew Sharp
+44 .20.7851.6068
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