Professional negligence claims against accountants: what claimants need to know

Accountants play a fundamental role in their clients’ personal and business affairs, often acting as the primary trusted adviser. When errors are made, the consequences can be significant, including tax penalties, losses concealed until a business is in financial difficulty and decisions made based on incorrect assumptions.

All of these issues can involve delay, distraction and financial loss. We set out below the key issues that arise in claims involving accountants.

Accountant negligence claims

As with any form of professional negligence, the engagement letter or retainer is key. It serves as the usual starting point for understanding the basis and scope of the relationship between the parties. Accountants’ relationships with their clients vary but commonly involve:

• Accounts preparation
• Tax returns
• Tax and succession planning
• Valuations
• Due diligence
• Business advice.

Ultimately, the question the court must resolve if a dispute arises is what the accountant actually agreed to do. In reaching that conclusion, the context is critical. A firm preparing a return is not automatically responsible for a sophisticated tax avoidance structure. Likewise, an accountant who becomes involved in a transaction, gives recommendations or produces a report may assume wider responsibility than is strictly contained in the engagement letter.

Once it’s determined what the accountant is instructed to do or advise on, the standard of care the accountant must provide is that of reasonable skill and care in the particular engagement. On that basis, just because something has gone wrong doesn’t automatically equate to professional negligence. The question is what competent work would have involved and what it would have revealed, which is usually informed by expert evidence as to what other accountants would have done in the same circumstances.

Tax savings advice

Advice on tax compliance and efficiency is a core area of work for accountants and a common source of claims. Historically, some accountants believed they owed a positive duty to ensure their clients saved tax. Some clients actively seek this input and some accountants positively promote tax schemes, from straightforward reliefs to aggressive avoidance structures.

Whichever route is taken, the scope of the retainer is key. It has been held that the occasional provision of routine tax advice doesn’t expand the retainer to include a duty to advise on sophisticated tax avoidance. Best practice for accountants is to ensure that the scope of their role is recorded in writing and updated each time specific tax advice is provided.

A distinction is sometimes drawn between an accountant who merely introduces a tax scheme and one who advises on it. An introducer who simply passes paperwork to the client may escape liability if they didn’t recommend the scheme or undertake any due diligence.

However, courts will look at substance over form. In Knights & Ors v Townsend Harrison Ltd [2021], the court considered the duties owed by an accountant who introduced, and was alleged to have recommended, an investment and various tax schemes. The approach in Knights is consistent with the Supreme Court’s restatement of the principles of scope of duty in the joined cases of Khan v Meadows [2021] and Manchester Building Society v Grant Thornton UK LLP [2021].

Therefore, when it comes to tax advice, whether on inheritance planning, income tax or other direct taxes, the critical question is not the label on the paperwork (although that is the starting point), but the role the accountant actually played and the responsibility they assumed.

Loss

A common misconception is that loss in professional negligence claims against accountants will be a pound-for-pound recovery of the money paid or the tax demanded. In reality, the relevant comparison is between what actually happened and what would have happened if proper advice had been given. The difference between those two positions is the recoverable loss.

This assessment almost always requires expert evidence to reconstruct the hypothetical position. For instance, if negligent advice led to an unexpected tax liability, the question isn’t simply what HMRC demanded, but what tax would properly have been payable if competent advice had been given. Only the gap between those figures represents the true loss.

Timings

It’s not always immediately obvious that you have received negligent advice. The general limitation period for bringing a professional negligence claim is six years from the date on which damage was first suffered.

However, where the damage was not immediately apparent, section 14A of the Limitation Act 1980 provides an alternative period of three years from when you first knew, or ought reasonably to have known, that you had suffered significant damage attributable to the accountant’s conduct. For more information on limitation, see our previous article.

A further complication arises where HMRC is involved. Tax disputes can take years to resolve and HMRC doesn’t always move quickly. This can lead to a difficult situation. A claimant may know that something has gone wrong, but not know the full extent of their loss until HMRC concludes its enquiries. Bringing litigation while the HMRC position remains uncertain carries risk, as it is for the claimant to prove their loss. Equally, there’s a duty to take reasonable steps to minimise loss. Balancing these considerations requires careful judgment.

Conclusion

Claims against accountants can involve complex factual and legal issues, from establishing what the accountant was actually asked to do through to proving loss with expert evidence and navigating limitation periods. The interaction with ongoing HMRC disputes adds a further layer of difficulty.

If you believe you have received negligent advice from an accountant, obtaining specialist legal advice at an early stage can help you understand your options.