02 Jan 2020

Accountants: Scope of Duty

As mentioned in our Review of the Year last year, the case of Manchester Building Society v Grant Thornton LLP [2019] EWCA Civ 40 remains a relevant case in relation to Accountants' scope of duty – this time on appeal.

Manchester Building Society (MBS) was advised by Grant Thornton (GT) that it could apply an accounting treatment (hedge accounting) to offset the volatility of the mark to market (MTM) of interest rate swaps. In reliance on that advice, MBS entered into a programme of fixed rate mortgages, hedged against long term swaps. MBS suffered losses and sued GT. At first instance, it was held that GT had not assumed responsibility for the MTM losses, but had only advised how these could be treated in the accounts (providing information as opposed to giving advice) so that MBS losses arose from the swaps and not from the advice given by GT as to how those could be applied. MBS appealed.

The appeal considered SAAMCO issues and the question of whether GT was giving advice on the hedge fund actions or providing information only, as well as what losses arose from such actions. It was found that GT was giving information only (and was not advising on the hedge fund activities that MBS were entering into). GT was not found to have assumed responsibility for the swap transactions which MBS entered into, but only for the known consequences of the advice of the hedge fund accounts treatment being wrong. MBS had not proved that the MTM losses would not have been suffered had that advice been correct and therefore the MBS appeal was dismissed.

This is an interesting case, not least for the explanation of which losses flow from "advice" as opposed to "information". In July 2019 the Supreme Court granted permission to appeal.

Accountants: tax schemes and limitation

An interesting case on limitation in cases against those who advise on tax schemes is the case of Evans v PwC [2019] EWHC 1505 Ch.

PwC advised on a "round the world" tax scheme for the claimants in 2000/2001. The scheme involved a trust becoming non-resident, by appointing trustees in a jurisdiction that did not tax capital gains, and then, later in the year, returning to the UK. That happened in 2001 and shares in the trust were sold while the trust was resident in that offshore jurisdiction. The claimant claimed relief from tax relying on a double tax treaty.

In 2013 the offshore jurisdiction told HMRC that it considered the trust was not resident within its jurisdiction. In 2014 HMRC advised the claimant that he had a liability to pay the tax which the "round the world" scheme had sought to avoid. In November 2016 the claimant paid the tax, and in December 2016, issued proceedings against PwC.

The question arose as to whether the claim against PwC was statute barred under the Limitation Act 1980.

PwC sought strike out on a summary basis, arguing that the limitation period began in August 2001 when the shares were sold, because that was when the claimant's position irretrievably changed (on a "wrong transaction" basis).

The claimant maintained that he did not suffer damage until the HMRC enquiry closed, in March 2014, because until then, the liability was "contingent".

The Court held that, whilst this was a "wrong transaction" case (which ordinarily would support PwC's position), all the claimant assumed at that stage was a risk that the two taxing authorities (the offshore jurisdiction and HMRC) would decide that the taxing state was the UK, rather than the offshore jurisdiction. On that basis, in fact, it was a pure contingent loss, and therefore, loss only accrued when the offshore jurisdiction advised HMRC in 2013 that HMRC was the true taxing body. That was when the risk of loss became a reality.

As mentioned above, this was a strike out case, and until a full trial is heard on the matter, the issues will not be fully debated. At that stage, the question of what loss, if any, arises, will also need to be considered. If the "round the world" scheme had not been entered into, would the liability always have arisen?

Accountants: tax and employment status

There have been a wealth of employment status cases in the last year (referred to often as "IR35") most notably involving celebrities such as Lorraine Kelly, Christa Ackroyd and, most recently (in November 2019) Helen Fospero. In many of these cases, the taxpayer has succeeded in establishing that they were self-employed rather than employed, but in others, including Joanna Gosling, David Eades and Tim Wilcox, HMRC have been successful. Where HMRC have succeeded, substantial tax interest and penalties will have been payable to HMRC.

What will not be widely known is that, in many of the cases, whether HMRC have succeeded or lost, the advisors behind the "status dispute" cases will be facing claims from their taxpayer client for allowing them to enter into potentially very damaging and costly disputes. The litigation can be costly, and in many HMRC cases (unless the case is deemed to fall within the "complex" regime) even if the taxpayer succeeds in his litigation, he will not recover his costs. Claims against the advisors often follow.

What is on the horizon for 2020?

Accountants: tax and status disputes

HMRC are making a number of changes to "off payroll" working (IR35) which are effective from 6 April 2020 and which will affect any contractors working through a personal service company, recruitment agencies and also larger entities. It is expected that there will be a number of cases brought by HMRC challenging status thereafter. As mentioned above, behind each HMRC status dispute, is likely to be a claim against the advisor. More importantly, perhaps, is the fact that the end client is now responsible for determining whether a contract is inside or outside of the IR35 rules. This could have a significant impact on those who contract with personal service companies (not just those who use a personal service company to reduce their own tax bills) and the accountants and tax advisors to those entities will also be vulnerable to claims.

Regulatory changes

Following the collapse of a number of high profile companies, including Thomas Cook in 2019, the issue of audit regulation remains under intense scrutiny. In March 2019, the government announced the creation of a new regulator the Audit Reporting and Governance Authority (ARGA), in place of the Financial Reporting Council ( FRC) "to transform the audit and accounting sector" following Sir John Kingsman's review of the FRC in 2018. The Competition and Markets Authority (CMA) also completed a market study of statutory audit services in 2019 in which it recommended the separation of audit from consulting services, mandatory joint audit and further statutory regulatory powers. The Business, Energy and Industrial Strategy Committee in parliament conducted an inquiry in April 2019 into the likely impact of the CMA market study and Sir John Kingsman review. Finally, Sir Donald Brydon's independent review on the quality and effectiveness of audit was published in December 2019. This sets out a number of recommendations to improve the quality and effectiveness of audits including the creation of a corporate audit profession to be regulated by the ARGA. We expect that the issue of audit reform will remain firmly on the political agenda in 2020 and the outcome of these investigations will become clearer.