James Shepherd v Byrne & Partners - “unprompted” voluntary disclosure in the context of tax saving schemes

Published 31 octubre 2017

Although a claim against solicitors, this recent tax negligence case is worthy of note by those working in the accountancy field.

During 2010, Mr Shepherd sought advice from the defendant solicitors as to how he and his wife might voluntarily disclose to HMRC income that had been credited to various bank accounts in Geneva but which had not been declared to tax when it should have been. Mr Shepherd had been prompted to take action when his bank informed him that there had been an unauthorised removal of a large quantity of data by a former employee that could include details of his accounts.

After several meetings, Mr Shepherd terminated his retainer of the solicitors and instructed a specialist tax investigation accountant. A voluntary disclosure of Mr Shepherd's untaxed income was then made under HMRC's Code of Practice 9 (COP 9).

Mr Shepherd subsequently issued proceedings against the solicitors alleging that they should have advised him to disclose his offshore undeclared income using a facility which was available at the time: the Liechtenstein Disclosure Facility (LDF). This would have been more advantageous than using COP 9. Under the LDF, the number of years investigated could be capped and the penalties charged were likely to be lower.

The solicitors contended that they did not advise Mr Shepherd that the LDF was not available to him but only that they would make enquiries as to whether it was; Mr Shepherd then instructed the tax investigators to initiate a disclosure and request for a COP 9 investigation before that advice had been received. In any event, it was asserted that Mr Shepherd and his wife were not eligible to register under the LDF.

There was a conflict of evidence on the advice that was given by the solicitors. There were no attendance notes and just one letter of advice which was sent to Mr Shepherd only after the retainer was terminated.

Decision

The absence of an engagement letter made it harder for the judge to ascertain the scope of the retainer. The judge found that the solicitors were retained to provide, at the least, advice on all disclosure routes known to them or which ought reasonably have been known to a solicitor of reasonable competence and skill practising in the area.

The judge found that, by the time the tax investigators were instructed, Mr Shepherd had been advised that there were no relevant voluntary declaration schemes available and if a voluntary disclosure was to take place then it was likely that there would be a COP 9 investigation culminating in a requirement to pay the outstanding tax, interest and penalties.

The LDF was only available if the disclosure was "unprompted". The judge rejected the solicitors' arguments that the disclosure was not unprompted as it was driven by a fear of imminent discovery. The disclosure was voluntary and took place before any contact had been made with Mr Shepherd by HMRC or before HMRC received any relevant information. The judge also held that the fact that the offshore assets included criminal property did not affect eligibility and was only relevant to whether there was immunity from prosecution. Mr Shepherd was therefore eligible to register under the LDF.

The judge found that if properly advised Mr Shepherd would have registered for the LDF and his liabilities would have been capped at the level provided for by that scheme. He had decided to make a voluntary disclosure by the end of his final meeting with the solicitors. The only issue that remained was whether it should be engineered using COP 9 or by registering under the LDF. Mr Shepherd's damages were therefore the difference between what he actually paid by way of penalties and interest and what he would have paid had he registered under the LDF: circa. £320,000.

Comment

The case serves as a reminder of two issues. First, the value of timely detailed attendance notes and a formal retainer letter. Notwithstanding the caution the judge had to apply to Mr Shepherd's oral testimony - he had dishonestly evaded tax for many years and attempted to "repatriate" his income using false accounting - the solicitors' absence of attendance notes and contemporaneous time records of critical meetings led to Mr Shepherd's evidence being accepted in various material respects and the scope of the solicitors' duty being found to be wider than they sought to assert.

Secondly, the decision provides guidance as to what amounts to 'prompting' in the context of voluntary disclosure for the purposes of tax saving schemes, notwithstanding that it might be said to be out of step with the current general public policy of attacking attempts to avoid taxation. The fact that Mr Shepherd had engaged in criminal tax evasion merely emphasises the point.