Overview
Tax and Accountancy advisers must actively ensure their advice is free from errors that could lead to financial loss for clients. If an adviser provides negligent advice – whether through an innocent mistake or otherwise – and the client suffers economic loss (e.g., tax liabilities, penalties, or interest), a claim for negligence may be made.
In negligence claims, the key question is whether a reasonably competent adviser, with appropriate expertise in the relevant area, would have provided the same advice at the time. If the answer is “yes”, there is no negligence, even if other competent advisers would have offered a different opinion.
Key Legal Principles in Professional Negligence
1. Duty of Care
A professional has a duty of care to their clients, and sometimes to third parties, especially when damage to a third party is foreseeable as a result of the advice. This duty is recognised by law and requires the adviser to exercise reasonable skill and care.
The duty of care is typically determined by the terms of the retainer (i.e., the engagement letter or contract). If the contract is silent on the standard of service, it is implied that the adviser will perform their duties with reasonable skill and care.
2. Professional Standards and Rules
Advisers regulated by professional bodies, such as The Chartered Institute of Taxation (CIOT), Association of Taxation Technicians (ATT), Institute of Chartered Accountants in England and Wales (ICAEW), must adhere to specific standards and guidelines. These bodies require their members to act with reasonable care, integrity, impartiality, and professionalism.
For instance, CIOT/ATT Professional Rules and Practice Guidelines emphasize the duty of tax advisers to:
- Act with reasonable care and skill in all client engagements.
- Consult colleagues and seek second opinions where appropriate, especially when advising on significant tax matters with high financial risks.
- Clearly document advice in writing and outline the potential risks involved, especially in complex or uncertain tax areas.
3. Breach of Duty
A breach of duty occurs when an adviser fails to provide advice that meets the required standard of care. This can happen if the advice is:
- Incorrect or incomplete, failing to address all relevant matters.
- Not in line with current tax laws or HMRC guidance.
- Not based on adequate facts or information provided by the client.
In cases of breach, the adviser may be liable for the resulting economic loss. This includes any tax liabilities, penalties, or other financial consequences that the client suffers due to relying on incorrect or negligent advice.
4. Risk Warnings
It is essential that advisers provide risk warnings where necessary which are clearly and appropriately communicated to the client. For example, if there is a chance that HMRC may not accept the nature of the advice or interpretation of tax law which is relied upon, the adviser should clearly outline (as appropriate) the potential risks and consequences of relying on the advice.
The key question is whether a reasonably careful professional, with the adviser’s level of expertise, should have warned the client about the risks. Failure to provide such warnings can expose the adviser to a claim for negligence.
5. Causation and Loss
For a claim in negligence to succeed, the client must prove:
- Causation: That the adviser’s negligence directly led to the client’s loss.
- Loss: That the loss is economic and linked to the negligence. This typically includes increased tax liabilities, penalties, or interest arising from reliance on faulty advice.
In the case of pure economic loss (e.g., a client suffering financial damage due to negligent tax advice), the following criteria must be satisfied:
- Reasonable foreseeability of damage.
- Proximity between the adviser and the client (or third party).
- Just and reasonable to impose a duty of care in the circumstances.
6. Limitation Periods
Claims for professional negligence must generally be brought within six years from the date the cause of action accrued (Limitation Act 1980, Section 2). This period may be extended in cases involving latent damage (where the client is unaware of the loss until later).
Best Practices to Minimise Professional Negligence Risks
To reduce the risk of negligence claims, professionals should, among other things:
- Use clear written terms of engagement that define the scope of services and exclude specific areas of advice.
- Ensure thorough fact-finding to understand the client’s objectives and the relevant issues.
- Seek second opinions for complex matters with significant consequences.
- Stay current with evolving laws and HMRC guidance.
- Comply with relevant professional standards set by governing bodies like CIOT, ATT, or ICAEW.
By following these practices, tax advisers can help ensure that their advice remains reasonably competent and reduce the likelihood of facing negligence claims.
This article was authored by tax barrister Julian Hickey who advises on all aspects of tax appeals, judicial reviews, tax-related criminal investigations (defence), matters arising from professional negligence, and appeals before the Disciplinary Tribunal (CIOT/ATT). If you require advice or representation in a tax matter, you can instruct Julian by contacting Burnell Chambers or emailing jhickey@burnellchambers.co.uk
Disclaimer
This article has been provided free of charge for information purposes only. Although care is taken to ensure the information is accurate no responsibility is assumed by the author or any member of Burnell Chambers for reliance on the content or the accuracy of such content. The information, and/or commentary, does not constitute legal advice and if you have a legal dispute you should seek advice from a solicitor or barrister about your case. Accordingly, no member of Chambers shall be responsible for any action you take or refrain from taking in reliance of anything in this article or case summary.