Mercantile Court

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
BIRMINGHAM DISTRICT REGISTRY
MERCANTILE COURT

		21st January 2010

Introduction

1. This is a professional negligence action brought by a company and its owners against their former accountants in respect of tax advice.
2. The parties are as follows:

a. Midland Packaging Limited ('The Company') manufactures cardboard packaging at its freehold premises known as Aston Works, Cheston Road in Birmingham.

b. Maurice Menir is the Managing Director of the Company. He held 21.5% of the shares in the Company at all material times and until 5^th December 2006 when his shareholding increased to 95.1%. He was born in Egypt but lived with his parents in UK since 1978 whilst working for his father in the family business until taking over his father's role upon his father's death in 1991.

c. Rose Menir (d.o.b. 20/7/1931) is Maurice's mother and has been a director in the company with no executive role. She held 74.9% of the shares in the Company at all material times and until 5^th December 2006 when her shareholding decreased to 4.9%. She was born in Egypt but came to the UK over 50 years ago in 1957 as a refugee with her husband and family. She has remained domiciled here ever since, apart from 7 weeks (49 days) between 16^th March and 4 May 2005 when she and her son sought to emigrate to Israel for tax purposes. She returned after injuring herself badly in a fall on 18^th April 2005.

d. The Defendants ('HW') are a national company providing various accountancy, auditing and taxation services. In 1997, they acquired the local Edgbaston practice of Lucas Howard whose acting partner was Geoff Lucas, the longstanding accountant of the Company and the Menir family. A standard Haines Watts Engagement Letter – Audit was signed between the Company and Haines Watts on 6^th February 1998; otherwise Mr Lucas continued to act for the Company and the Menirs as before as "BKR Haines Watts incorporating Lucas Howard & Co" until his retirement on 31^st March 2000. Thereafter, Henry Briggs, FCA, the Senior Partner of Haines Watts Birmingham office since 1991, took over the role vacated by Mr Lucas in the affairs of the Company and the Menirs, although no other Letter of Engagement was ever signed. This "engagement" continued until 23^rd June 2004 when it was terminated by Mr Menir. Between April 2000 and 15^th September 2003, Nick Owen, described as the "Technical Tax partner" of HW, was delegated the specific role of tax planning for the Company and the Menirs.

3. The claim arises because HW noted, as part of their first year end review of 03/00, that the Company was overly "cash rich" for the purposes of its business trading. This jeopardised exemption from Inheritance Tax of the elderly Mrs Menir's substantial shareholding in the Company by way of the Business Property Relief. The Defendants were therefore engaged some time between July 2000 and 1^st June 2001 to advise on and implement a viable tax avoidance scheme.
4. Crucially, from the outset and throughout the retainer until 2004, the Defendants wrongly assumed, in giving their advice and recommending a scheme, that Mrs Menir was not domiciled here when the true position was that she would have been "deemed" domicile in UK for tax purposes by HMRC. This is the main admitted allegation of negligence in this action.
5. No scheme recommended by the Defendants was ever implemented and so the normal case alleging "reliance" upon wrong advice causing loss and damage is not present to be determined in the usual way. However, the Claimants submit that this negligent error has caused them loss and damage: if the Claimants had been advised of the true position, Mr and Mrs Menir would have emigrated to Israel for 4 years and have established a "distinct break" from the UK for tax purposes or if they had not, then an alternative tax saving scheme would have been more timeously set up.
6. With the Claim Form being issued some considerable time later after these events on 15^th March 2006, there were disputes seemingly upon almost all variable aspects of the case. This is a result of detailed lengthy narrative pleadings.
7. The Particulars of Claim plead 11 breaches of duty and negligence concerning IHT, CGT, Bearer Share Schemes, domicile, and tax free gifts of shares & the family home.
8. In their Amended Defence and Counterclaims, the Defendants admit that they acted in breach of duty as follows:

a. They failed timeously to devise and propose a suitable Scheme to be implemented by a share buy back transaction on 31 December 2002 with investment of the proceeds and any PET by 1^st July 2003 that the Claimants subsequently ought themselves to have completed by 31^st December 2004 ;

b. They failed to raise as one of the options, the possibility of emigration for IHT purposes but that would not have been effective in any event;

c. They missed the point as to deemed domicile for the purposes of IHT until that error was corrected on 11^th February 2004.

9. The parties have subsequently 'refined' the issues in the case to 8 key issues concerning:

a. the date and precise nature of the instructions given;

b. whether emigration should have been promoted and recommended;

c. whether a Bearer Share Scheme ought to have been raised and considered as an option;

d. whether Potentially Exempt Transfers ought have been raised and considered as an option for both the shares and the family home;

e. whether Bearer Share planning would have been taken up if offered;

f. whether emigration for 4 complete years would have been attempted timeously and have been successful for IHT purposes;

g. whether the Claimants have mitigated their losses by putting alternative arrangements in place once they discovered the Defendants had defaulted in making any; and

h. the correct approach to investment return upon the proceeds from the shares in the Company and the half share in the family home.

10. These range over each of the 4 integral elements of negligence and contract: (1) duty/retainer; (2) breach; (3) reliance/causation; and (4) damage. This judgment will therefore review the outstanding issues in that standard agenda.
11. The factual witness evidence comes from Mr & Mrs Menir and Mr Upton for the Claimants and from Mr Briggs of the Defendants. Of the two key protagonists and witnesses, Mr Menir's first witness statement is 187 paragraphs long over 60 small typed pages and is dated 10^th November 2008. His second witness statement is a further 21 paragraphs over 8 more pages. Mr Briggs is a comparatively modest statement dated 10^th November 2008 of 64 paragraphs over 21 pages with a supplementary statement of 2 pages. These witness statements are, in essence, a review of the 600 or so primary contemporary documents in the case. Quite understandably because of her age and fraility, Mrs Menir was unable to attend court to give her evidence and the court duly admitted her written evidence in support of that given by her son. Inevitably the weight to be given to her evidence was thereby lessened where it was inherently in obvious challenge i.e. where Mr Menir's corresponding evidence was directly challenged in cross examination. In those areas, I gave little weight to her written statements prepared by her lawyers preferring to evaluate the evidence of Mr Menir and the contemporaneous documents.
12. Whilst voluminous and thorough, this evidence inevitably suffers from lack of immediacy and from subjectivity compared with the available contemporaneous documentation. This judgment will therefore analyse the issues and the evidence in accordance with the guidance provided in the dissenting speech of Lord Pearce in the House of Lords in Onassis v Vergottis [1968] 2 Lloyds Rep 403 at p 431:

''Credibility' involves wider problems than mere 'demeanour' which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person telling something less than the truth on this issue, or though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by over much discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. [emphasis added] And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness. And motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process. And in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part.'

Duty/Retainer

13. Perhaps surprisingly, there was no specific Letter of Engagement concerning the tax advisory service that Haines Watts was to provide. Haines Watts simply took over from Mr Lucas.
14. The Claimants submit that the Defendants undertook to provide advice on the tax efficient disposal of excessive cash in the Company between July and November 2000. The Defendants admit that they assumed responsibility for putting tax planning in place by 1^st June 2001 and completed 2 years later by 1^st July 2003.
15. It has become apparent that despite the apparent agreement on the terms of this issue, the parties are not strictly ad idem. There can be no dispute that the Defendants assumed responsibility generally to advise on a cash extraction scheme at least on 25^th May 2000 when Mr Owen the technical tax partner did work which was invoiced on 31^st May 200o. The assumption of responsibility to effect such a scheme depended upon final advice on the various options and specific instructions from Mr Menir. However, the critical negligence complained of here as allegedly giving rise to the loss and damage complained of is the failure to advise correctly and in time on "domicile". It is therefore important to look in this context as to when that assumption of responsibility to advise in fact occurred whether expressly or by necessary implication.
16. Where (as here) a professional is under a general retainer to look after a client's interests, it does not extend to matters where specific instructions or authorisation is sought or required: Midland Bank v. Hett Stubbs [1978] 3 AER 571 per Oliver J. at page 583. This was confirmed as a matter of standard practice by both respective expert accountants called by the parties, Mr Walker and Ms Dooley as well as Mr Upton of Friend LLP who eventually devised and implemented a scheme for the Claimants. They all described a 3 staged process where (1) you give general advice upon a range of options and then (2), at an intermediate stage, await specific instructions on matters to be implemented before (3) finally proceeding to implement those specific instructions.
17. Mr Menir gave voluminous evidence upon this; Mr Briggs gave some but it was largely peripheral and Mr Owen was not called as a witness. There are some contemporaneous letters and documents from the Defendant's incomplete files. Mr Jackson submits that the court ought to draw "adverse inferences" against the Defendants on this in favour of Mr Menir's recollection evidence. There is no evidence of "spoliation" of documents by the Defendants either before or after proceedings were issued. Mr Owen's absence does mean that Mr Menir's evidence is unchallenged but I am satisfied that beyond that it would wrong to draw any other adverse inferences: the Defendants have admitted his negligence and it is quite understandable why someone who has left the Defendants in disgrace is unwilling to come to court to give evidence on behalf of the Defendants' insurers. Sufficient unchallengeable contemporaneous documents have been disclosed to present a coherent picture of what happened.
18. The court has to determine what evidence it can rely upon. In my judgment, the recollections of business men concerning business affairs a decade ago are inevitably going to be very hazy and unreliable. Also with the passage of time, memories as reduced to writing much later on inevitably become increasingly subjective at the expense of objectivity that the court is looking for. Mr Menir also demonstrated the traits referred to in Onassis v. Vergottis [supra] of a witness whose "memory becomes fainter and the imagination more active" and of "wishful thinking" when considered alongside the contemporaneous evidence.
19. In my judgment, the best evidence comes from the contemporaneous documents, as commented upon by the witnesses of fact to them. It is necessary to look at the matter in some detail after Mr Owen had been engaged to look into tax efficient cash extraction in May.
20. The attendance note dated 20^th July, the letter of 24^th July from Mr Briggs to Mr Menir and the letter of 24^th October 2000 from Barclays Wealth to Mr Menir all strongly indicate that, whilst the Defendants had raised the issue of specific tax planning on the IHT issue and were offering their specific services on that, Mr Menir had not at that stage accepted the offer. However, whilst undertaking the 1999/2000 income tax returns at the end of October 2000, an attendance note date 30^th October 2000 indicates that another offer was made that was accepted; the notes of a meeting with Mr Menir dated 2^nd November 2000 refer to "domicile in Israel" and Mr Owen suggesting "off shore trusts".
21. In my judgment, the Defendants were specifically retained at the meeting on 2^nd November 2000 to provide an efficient IHT tax planning scheme for the Claimants. This involved the first stage of presenting a menu of options for the Menir's to consider. These would include some preliminary guidance on the pros and cons and a cost: benefit analysis of all foreseeable tax saving options as Mr Upton ultimately presented to the Menirs during his retainer between 2005 and 2007.
22. As part of the first stage of the process of its retainer, any prudent tax adviser should have advised of all alternative options available at that time, such as PET's and Bearer Shares and the advantages and disadvantages of those options (but not going so far as "recommending" options such as emigration – that is an important life decision for the Client not the fiscal adviser). All of Messrs Shaw & Co , Cobbetts and Friend LLP (Accountants and Tax advisers) did so in 2005; Haines Watts should have done so during their retainer when presenting the menu of options. I prefer the opinion of Mr Walker in support of that to the opinion of Ms Dooley upon this issue. He has greater expertise in specialist tax accountancy.
23. However, this did not go beyond that to the next two stages of selection and implementation; the advice was initial and not final until "domicile" had specifically been advised upon. Such advice was the subject to a specific offer to undertake it and that offer remained for Mr Menir to accept. Until that time, the Defendants were not under a specific retainer to do so.
24. The subsequent file note of 7^th December 2000 states "if her (Mrs Menir) domicile is not UK for IHT purposes. But not to take any action until proposed steps run through with us for final advice". This coincides with a letter sent to Mrs Menir on 12^th December 2000 where Income Tax is referred to under one bold heading and Inheritance tax planning is under as second one. This states "…we have recently undertaken an initial review of your assets with a view to considering your Inheritance Tax (IHT) position. … we have calculated an estimate of the possible position on the attached schedule. It may be that, if you are not treated as being "Domiciled" in the UK, overseas assets could fallout of the charge to UK IHT. In any event this is a matter that should be discussed." [emphasis added]. In my judgment, this is an acknowledgement that the Defendants had assumed specific responsibility for advising the Claimants upon Inheritance Tax planning for IHT purposes for which final advice was pending, after initial advice had already been given on 2^nd November. This letter makes plain that advice given was not final but required advice on the key question of "domicile" that could avoid the consequences of the Estimated Potential Inheritance Tax summary enclosed with the letter of advice to Mrs Menir.
25. A letter dated 16^th March 2001 from Mr Owen to Mr Menir specifically seeks instructions from him upon "proposals for two preliminary assignments" and one of them is "Determining the domicile status of you and your mother –estimated cost £450, excluding VAT". It asks for a response "if these proposals are acceptable, please could you let me know and I shall then issue a separate engagement letter to cover this work". In my judgment this constitutes an offer to advise on "domicile" for tax purposes that had not hitherto been the subject of final advice.
26. The personal pre year end Review of Mrs Menir's affairs signed off by Mr Briggs on 27^th March 2001 refers to Inheritance Tax and the priority of IHT planning "in progress" but not to any instruction being forthcoming or letter of engagement being sent regarding the specific issue of "domicile". Similarly the Review for Mr Menir states that "No IHT planning carried out yet although subject has been discussed with client".
27. Mr Menir says in his witness statement in paragraph 62 that he "agreed for this work to be carried out" and refers to a discussion he had had previously on 14^th March following another letter of 12^th March which does not concern IHT avoidance or domicile. In paragraph 63 he goes onto say that he then believed that Mr Owen was thereafter carrying out this express instruction.
28. In my judgment this is a classic example of a witness reconstructing something 7 to 8 years later from his imagination and by wishful thinking. The offer letter from Mr Owen of 16^th March 2001 post dates the irrelevant letter of 12^th March and the discussion on 14^th March leaving an offer on the table to be accepted whereon a separate letter of engagement would be sent. Apart from Mr Menir's bald assertion in his witness statement of 10^th November 2008 that "I agreed for this work to be carried out", there is nothing in writing, nor any records of Mr Menir being in contact with Mr Owen, nor any letter of engagement indicating he had accepted the offer by Mr Owen.
29. Indeed, a subsequent attendance note of Mr Briggs of a phone call of 1^st June 2001 about fees indicates that the "quote for costs" was accepted on that day; it records "he replied + said go ahead".
30. A letter dated 15^th June 2001 from Mr Briggs, as the managing partner of the Birmingham Office of Haines Watts, to Mr Menir puts this in context. Mr Briggs issued a credit note for £2,000 plus VAT against an invoice dated 30^th November 2000 for work that Mr Menir complained Mr Owen had either not been done or was not instructed to do. Mr Briggs explained his erroneous assumption that Mr Owen "has advised on matters relating to your mother's inheritance tax and has subsequently written setting out the costs of the additional work which had been incurred which I understood you had responded to him and said he was to proceed"[ i.e. a misunderstanding; hence emphases added].
31. In my judgment this letter does not confirm, as Mr Menir contends in paragraph 65 of his witness evidence, that "I had instructed HW to proceed and implement their advice". In the first place no advice capable of implementation had been given at that stage and none had been given regarding domicile. Secondly, a credit note for £2,000 had been given for work that had been wrongly invoiced by the company as Mr Owen had not done the work billed nor had he been instructed to do the work on domicile in order to finalise his advice until Mr Menir gave those instructions on 1^st June 2001.
32. In my judgment, the Defendants are correct in their submission that the specific retainer to advice on domicile, finalise their advice and produce a tax scheme capable of implementation occurred over the telephone on 1^st June 2001.

Breach

33. The breach alleged occurred on 25^th June 2002, when Mr Owen advised on a negligent tax avoidance scheme.
34. The Defendants admit that they failed to advise correctly on "domicile" and hence on the option of emigration for 4 years. They also admit that that the scheme proposed was therefore latently flawed until the crucial error was revealed on 16^th October 2003 (after Mr Owen had left their employ on 12^th September 2003) and corrected on 11^th February 2004.
35. The breach was reiterated on 11^th April 2003 when the Defendants wrongly contended that the HMRC would treat Mrs Menir as domiciled outside the UK, whereas in fact she was "deemed domiciled" in UK for IHT purposes as she had lived in UK in excess of 17 of the previous 20 years, despite her right to domicile in Israel. She should have been advised that she and Mr Menir would have to emigrate from UK for at least 4 years and demonstrate having made a "distinct break" from living here in order to avoid IHT.
36. Any prudent tax adviser should also have been advised of the alternative options available at that time, such as Bearer Shares and the advantages and disadvantages of those options. Haines Watts did not do so and in my judgment that was negligent. However, they did advise upon the option of PET at meetings on 2^nd November 2001 and 5^th August 2002 as recorded in the contemporaneous notes and cannot therefore be held negligent as alleged by the Claimants in that regard.

Reliance and Causation

37. The primary question arises as to what Mr and Mrs Menir would have done if they had been correctly advised upon domicile and upon Bearer shares on 25^th June 2002 and what effect the breach had.
38. This is a difficult historic hypothetical question that the Court has to decide upon the balance of probabilities: see Allied Maples v. Simmons & Simmons [1995] 1 WLR 1602, at 1610. The court has to determine it as a "matter of inference … from all the circumstances. The plaintiff's own evidence that he would have acted to obtain the benefit or avoid the risk while important may not be believed by the judge, especially if there is compelling evidence that the would not …".
39. However, the Court should have regard to what is known to have occurred: see The Golden Victory [H.L.] [2007] 2 AC 353 and the famous dictum of Lord Macnaughten in Bwllfa and Merthyr Dare Collieries v. Pontypridd Waterworks Co [1903] AC 426, at page 431: "With the light before him, why should [the arbitrator] shut his eyes and grope in the dark" .
40. It is therefore necessary to scrutinise the evidence of Mr and Mrs Menir carefully in the light of the contemporaneous evidence and, in particular, what they did when being advised of all the options as they were by Messrs Cobbetts in March 2005.
41. For the Claimants, seven pieces of evidence were put forward to support the submission that they would have emigrated and made a "distinct break" (the HMRC test for proving non domicile) from the UK:

a. Both Mr Menir and Mrs Menir (in her witness statement evidence) gave evidence that they would have done so;

b. Mr Menir had no wife or immediate family; his mother was his closest family having lived with her all his life apart from when he was a student;

c. They had strong family ties with Israel and Mrs Menir had a burial plot there next to her late husband;

d. They had undeniably ample means to make a successful emigration;

e. The Company with around £10m assets, could be sold and there was no need to live and work in UK;

f. Mr Menir was a bachelor and keen to start his own new Jewish family in Israel.

g. They did in fact subsequently make an attempt to emigrate between 16^th March and 4^th May 2005.

42. The Defendants put forward four other circumstances tending to infer that they would not have earnestly emigrated:

a. Although technically "non domiciled" in UK for income tax purposes, they have still lived in UK since 1957 and in the same house in Edgbaston for 41 years with roots firmly established in that community amongst longstanding friends and their family. Mrs Menir also had great trust in her local doctor

b. Mr Menir single-handedly, and very successfully, ran the Company upon which the whole family depended and thrived – a quintessential small family company in the West Midlands. Otherwise there was one book-keeper and some machinists. He was indispensable to its day to day running and administration. The only option would therefore be to sell the Company but that would be difficult as it would be virtually unmarketable without Mr Menir.

c. Mrs Menir was only just 70, albeit in poor health, and there were less drastic alternative options to consider, such as an alternative sliding scale 7 year option of PET.

d. The flight to Israel was not a genuine attempt at emigration for 4 years; it was a sham and part of Mr Menir's preparation to take action against the Defendants.

43. Mr and Mrs Menir obviously had a clear option to emigrate but, if that was offered as an option, would they have really done so by making the exacting 'distinct break' required? In my judgment, following the guidance of The Golden Victory [supra], the best answer to that question rests in what actually happened when the option was presented to them in March 2005.
44. On 16^th March 2005 they did leave UK for Israel and Mr Menir told his then advisors that they were emigrating. That is potentially very compelling historical evidence shedding light upon what they would have done if they had properly been advised of it earlier as an option by the Defendants.
45. However the context of that flight to Israel is that Mr Menir had instructed Cobbetts to report on a claim against the Defendants and on plans to leave the UK for tax purposes. On 4^th March 2005, Jon Croxford of Cobbetts sent Mr Menir a detailed 5 page letter of advice on all this. He correctly advised on non residence for just one year and for more that one year as well as other options and strategies. He stressed the importance of demonstrating a "real break in your established lifestyle". He said "as you can see, whilst attractive in many ways, becoming non-UK resident is a very significant step. The costs and practicalities should not be underestimated. The latter point is particularly important given your mother's state of health".
46. He also stressed the need to address his mother's exposure to IHT and of the option of Bearer Shares which did not bear on IHT but CGT.
47. The response from Mr Menir "surprised" Mr Croxford. A telephone note of a conversation with Mr Menir on 16^th March 2005 records that Mr and Mrs Menir was just leaving for Israel for 4 years despite Mr Croxford's cautionary advice and other options. The note indicates that Mr Menir was going to come back for a Bar Mitzvah for a week; there were no plans to sell the house; but that he was planning to sell the rump of the Company for £500,000 to a manager although there had been no planning for this for Corporation Tax purposes. He had not taken any legal advice on any of this. Significantly, in my judgment there are two references to "the Haines Watts case". The note records "His mother is still ill and he said he had doubts about her leaving the UK. He asked whether it is necessary for her to leave the UK given that they did want to mitigate their potential IHT loss (in connection with the claim against Haines Watts). I went through her main other IHT planning options again e.g. making lifetime gifts and insurance."
48. In my judgment, this hasty and, in the light of Mrs Menir's poor health, foreseeably short lived flight from Edgbaston to Israel was not a real attempt to emigrate, as Mr and Mrs Menir now contend. It was ill planned for any "distinct break" and quite at odds with the competent advice being given to him. It was undertaken in the context of a potential claim against Haines Watts for failing to present the emigration option properly. It was made at the last minute despite, and, because of, Mrs Menir's poor health, and the need to try to establish before her death that they would have emigrated if Haines Watts had advised them of the emigration option. However, I do accept that a small part of the decision that Mrs Menir went along with was perhaps to satisfy themselves that it was not a realistic option. I cannot exclude that.
49. Furthermore:

a. Mr and Mrs Menir did not sell, let or clear the house before leaving as one might expect if someone was emigrating for 4 years and as strongly recommended by Messrs Cobbetts in their checklist.

b. His evidence in court that he and his mother would stay in a hotel if they came back to the UK was quite contradictory to his evidence in his supplemental witness statement that "the house would have been left unoccupied because we would have needed it whenever we returned to the UK for visits".

c. no actual arrangements were made before they left on that occasion even beginning to try to demonstrate the "distinct break from the UK" such as such as sale, letting or clearing of the house or the sale of the business or transfer of its management. HMRC would undoubtedly have been unconvinced.

50. In my judgment, as in 2005, emigration for 4 years was never a realistic option for Mr and Mrs Menir even if it had been offered to them by the Defendants during their retainer earlier on account of their entrenched home and business circumstances as well as Mrs Menir's health.
51. Even if (contrary to these findings) they had "emigrated" beyond an exploratory period, then I am satisfied that that this would not have constituted the "distinct break from the UK" for 4 years required by HMRC when it looks at these matters "globally", as it does:

a. Mr Menir could not and would not sell the business that depended upon him running it;

b. Mr and Mrs Menir would not sell the house and sever links with the UK;

c. As a matter of fact, Mrs Menir injured herself in Israel and returned to the UK for medical reasons and to put her trust in her doctor on 4^th May 2005 within 4 years of when she would have emigrated if she had been properly advised. The date of that assumed emigration is uncertain but the negligent advice was dated 25^th June 2002 (just 3 years earlier) and the date of the instructions to advise on domicile (as I have found) was 1^st June 2001 (within 4 years). Accordingly as a matter of historical fact the emigration for 4 years would have failed in any event, as there is no reason to assume she would have acted otherwise.

52. What then would the Claimants have done if they had been properly advised on 25^th June 2002 and what would that advice have been? Upon the assumption that the Menirs would not have taken the "Emigration Route", the parties are agreed that the alternative share buy back transaction would have taken place by 31^st December 2002 with PET occurring by 1^st July 2003.
53. However, the Defendants do not accept:

a. A half share in the house would have been included in the transfers;

b. A Bearer Share arrangement would have been made as it would be expensive and attract unwelcome attention from HMRC and was not taken up when subsequently offered;

c. The Claimants acted with reasonable haste in the devising and implementation of a proper Scheme after their errors came to light on 16^th October 2003. They allege that the Claimants failed to mitigate their losses: they ought to have had a proper scheme devised and fully implemented with investment by December 2004, rather than a share buy back in December 2006 and investment by June 2007.

54. Various conjectures have been advanced (in advance of my findings above) but, in my judgment, the best answers to these hypothetical human questions is first of all to look to see what has actually happened subsequently:

a. House: During the course of their retainer a meeting was held on 5^th August 2002 between Haines Watts and Mr Menir. A note of the meeting records "IHT & the family home. MM wishes to leave as is". I have no doubt that this accurately reflects Mr Menir's firm wishes on the sensitive issue of the family home at that time despite Mr Menir's present explanation that he was under the impression that was relying upon a discussion he had had with Mr Owen a month earlier that the family house would be placed in a trust sheltered from tax anyway making the need for IHT planning obsolete. This is purportedly supported by a very odd note produced by Mr Menir that appears to amount to an unsigned confession of the same by Mr Owen. I place no reliance upon that note as a piece of evidence as I have grave doubts about its authenticity. I simply do not believe that Mr Menir's retrospective current belief is accurate or true; I believe the note of 5^th August to be an accurate reflection of Mr Menir's true position on the family home at the material time.

b. The Bearer Share Scheme: This was perfectly legitimate and available until 16^th March 2005. In January and February 2005, Mr Menir sought and obtained the advice of new advisers mainly Shaw & Co and Cobbetts. Both raised all the options and explained them options open to Mr Menir, including the Bearer Share Scheme. On 16^th March 2005, Ian Croxford of Cobbetts, without knowing that the Bearer Scheme was to be scrapped that same day, had a detailed telephone conference with Mr Menir upon all the options presented to him. Mr Croxford presented it to Mr Menir as a fairly complicated and expensive option only related to CGT saving. The note clearly indicates that Mr Menir was simply not interested in progressing this any further: it was complicated requiring tax counsel's advice and HMRC scrutiny, something to be avoided. It was potentially expensive (Mr Walker an expert in this area said in evidence that a simple scheme would cost at least £20,000) and only dealt with a fairly modest CGT liability of £100,000 - £200,000 compared to the IHT issues and amounts that loomed far larger. In my judgment, the note accurately reflects Mr Menir's true feelings whilst the Bearer Share option was still viable before 16^th March 2005.

c. Mitigation of Loss: The Defendants claim that the Claimants did not proceed with urgency. They made 6 specific criticisms of the Claimants in this regard (the 6^th now being no longer live in the light of my finding above):

i. They consulted 4 different advisers after them;

ii. They failed to terminate the Defendants' retainer in December 2003 when they had lost confidence in them;

iii. They attempted to emigrate when it was doomed to fail;

iv. They instructed Friend & Co to advise on a claim against the Defendants and waited 6 months or so before instructing them to devise and implement a Scheme;

v. Friend & Co delayed in their work;

vi. Mr Menir delayed in the transfer of the house.

55. In my judgment, these are harsh and unfair criticisms, particularly so coming from the Defendants who themselves took three and a half abortive years over the problems and issues presented to them. Mr Menir was quite properly a very exacting client often disposed, out of an abundance of caution, to seek further advice elsewhere during a retainer on a project as he Menir did when he went to Barclays Wealth in October 2000 whilst Haines Watts were generally retained. After his bitter experience at the hands of Haines Watts, he was quite justified in his role of a prudent trustee of the family wealth to seek advice from Shaw & Co, and Cobbetts before ultimately relying upon Friend LLP. Mr Menir was under no illusion throughout this time, (as is made clear in the telephone note made by Cobbetts on 16^th March 2005). He knew full well he had to act reasonably in mitigating his loss. The note records "His mother is still ill and he said he had doubts about her leaving the UK. He asked whether it is necessary for her to leave the UK given that they did want to mitigate their potential IHT loss (in connection with the claim against Haines Watts). I went through her main other IHT planning options again e.g. making lifetime gifts and insurance." He was in a difficult position as he needed to get an efficacious scheme implemented at the same time as keeping his eye on the undoubted liability of Haines Watts for getting him into this difficult position. Hence taking advice on both matters and balancing them.
56. In my judgment, it was entirely reasonable for Mr Menir, in a family trustee role, to take time and great care in finding close advisers he could rely on, as well as trust, having been with Mr Lucas for many years until being so badly let down by Mr Owen and the Defendants. Eventually, he found Mr Upton who devised and fully implemented an exemplary scheme in just two years.
57. It was perfectly reasonable for Mr Menir to wait from October 2003 until June 2004 before terminating the Defendants' retainer – Mr Owen had left and Mr Kirkpatrick took over his role under Mr Briggs trying to get matters back on track.
58. In my judgment the attempt at emigration was mainly made in the context of the Haines Watts claim but the time lost is relatively little and there may have been an element of proving to themselves and Mrs Menir that the emigration option had to be ruled out. In my judgment it was therefore reasonable for Mr & Mrs Menir to try emigration between March and May 2005 but the time taken for this foray is minimal.
59. Once that was ruled out a scheme involving share buy back, PET transfers and gifts of half the house of half of the house and subsequent investment, all as advised and effected by Mr Upton, were an obvious way ahead.
60. In May 2005, Mr Menir sought the advice of Frank Upton of Friend LLP of Birmingham originally upon this claim. He was subsequently specifically instructed by Mr Menir to provide future tax advice towards the end of 2005 having done much underlying work on the files.
61. He was a witness of fact in this case and I ignore the opinions he has offered upon tax and accountancy matters. However, having seen him and seen his work, I accept that:

a. he is a highly competent accountant and suitable tax advisor who would have provided appropriate advice if he had been instructed rather than the Defendants in the first place;

b. the time of 2 years taken by Mr Upton to implement an appropriate scheme was a reasonable one from the time he was instructed in May 2005 for this type of case with a very demanding client who was already threatening litigation against one of his peers.

62. Mr Upton gave evidence that tax planning is complicated and painstaking. It also involves large sums of money, complex law and practice. It requires the gaining of the trust, understanding and confidence of HMRC and clients whose interests are conflicting when tax avoidance is the issue. I accept Mr Upton's evidence that "it is not unusual of the process to take many months from the time of first consultation to the completion of the work".
63. In my judgment, Mr Upton acted reasonably and timeously and so did Mr Menir in his instructions and in his reactions to the advices given to him by Mr Upton whom he trusted with his complicated family and business tax affairs. Mr Menir was perfectly justified in taking his time to get all this right. A lot was at stake for him and his family. All the disruption in the Claimants' plans for the implementation of an efficacious tax avoidance scheme flow from the breach of retainer by Mr Owen in producing an erroneous advice on "domicile" on 25^th June 2002 and covering up the grave error and its consequences until over a year later on 16^th October 2003.

Remedies, Loss & Damage

64. There are 5 heads of loss & relief claimed:

a. Wasted payments for worthless advice;

b. Additional Corporation Tax

c. Capital Gains Tax

d. Loss of Investment return

e. IHT indemnity in respect of share cash and half the family home.

65. (a) Worthless advice: In anticipation of the findings above, the parties are agreed after detailed consideration of the invoices, payments and work purportedly undertaken that a net sum of £14,859.56 is due under this head of damage.
66. (b) Additional Corporation Tax: I accept Mr Walker's calculation of £40,496 as the additional corporation tax that would otherwise have been saved in the period from when the share buyback should have occurred (1/12/02) to when it actually did occur (31/12/06). He has limited his calculation to the corporation tax payable at the higher rate in consequence of trading profits being pushed into the higher tax bracket by the interest income. Ms Dooley uses a less incisive hypothetical basis that results in a much higher figure and the Claimants honestly do not seek that.
67. (c) Capital Gains Tax: A figure of £176,118 was agreed subject to liability. The Claimants became liable to CGT on the Share buyback scheme that could have been avoided if the now redundant Share Bearer scheme had been utilised. However, in the light of my findings the Defendants are not liable for this as Mr Menir would not have opted for it if he had been offered it as an option by the Defendants.
68. (d) Lost investment return: This is an area where, curiously, a substantial dispute has continued between two investment experts (Mr Morse for the Claimants; Mr Hamilton for the Defendants) concerning the investment of the proceeds of the cash of £5,159,295 realised in the Scheme.
69. In this instance we do have actual evidence of investment advice being considered at this time and subsequently without the need for hypothetical conjecture. On 22^nd April 2003, Mr Menir met Mr Humphreys, a financial adviser with HWFS, to consider an Investment Recommendation Report that, inter alia, described his attitude to risk as in just below the middle of 10 bands: Band 5 "Moderate". The portfolio spread is World wide equities 20%; Gilts 15%; Corporate Bonds 15%; Cash 15%; Commercial Property 35%. One particular fund suggested as appropriate that included commercial property investment was however due to close on 23^rd April and was no longer available.
70. After the meeting, Mr Humphreys prepared a further Report dated 9^th May 2003. This report profiled Mr Menir as "cautious" in a mid rating in a 3 band register of Risk Profiling. This included various funds including Commercial Property funds. Various specific funds were then recommended for the investment portfolio at that time but none specifically were in commercial property.
71. The original witness verified statement of Mr Menir stated clearly that he "would have followed this advice because I trusted Mr Humphreys and the investments suggested were all categorised as Cautious Risk Investments and this accorded with my desire not to invest in higher risk investments".
72. However, in contradiction, the Claimants verified pleaded case was that an APCIMS Stock Index Scheme Index should be reasonably adopted by the Court.
73. The parties originally took positions at polar extremes: the Claimants pleaded that the APCIMS Stock Income Index was theoretically a reasonable one to follow; the Defendants contended that the Court should adopt a simple off shore deposit rate suitable for "very cautions" investors such as Mr Menir or in the alternative the HFWS portfolio but without including property funds.
74. In my judgment, there is no reason to adopt the hypothetical APCIMS pleaded and adopted by the Claimant's expert Mr Morse. This is not a case where damage is alleged to have been caused by negligent investment advice and there is no criticism of Mr Humphreys. Moreover, the Claimants' original witness evidence was not supportive of that approach and the Claimants have now abandoned it.
75. The Claimants now contend through Mr Morse that the return on the HWFS portfolio, without investing in property funds, would have produced a 6.58% pa return on £5,159,295 invested during the 3.5 year period between June 2003 and December 2006 of £1,188,185.60 (less £547,583 earned in interest in any event) equalling a total of £640,602. 60.
76. However, the Claimants further contend that the advice of 9^th May that would have been followed if funds had been available included commercial property funds. This was later proffered by Mr Humphreys in July 2003 in the form of Standard Life Property income funds which only became available in December 2003. This would have materially raised the rate of return to 9.36% pa over the 3.5 year period producing a net figure of £1,142,602, (nearly doubling the £640,602.60 figure above), according to Mr Morse.
77. This latter inflated position was supported in evidence by the oral evidence of Mr Menir that, contrary to his earlier deposed witness statement, his attitude to risk was "a little bit more than moderate but I would not say I was speculative or greatly speculative" .
78. Both of Mr Menir's recent contradictory statements do not align with his historical profile that Mr Hamilton carefully analyses in his expert Report of 25^th February 2009:

a. By the relevant time of 2003, despite their wealth neither "Mr Menir and his mother had ever had investments in life assurance plans, unit trusts, gilts or equity funds and their risk was limited to domestic property and substantial cash holdings", according to paragraph 2.16 of the Report.

b. Mr Hamilton noted in paragraph 2.12 that Mr Menir's witness statement stated that his approach as Managing Director of the Company "has been to maintain and protect the wealth built up for the family" i.e. the role of a cautious risk free prudent Trustee.

79. They do not align either with the contemporaneous chronological dealings recorded in 2003 he had with Mr Humphreys whom he says he was relying upon:

a. The initial April Report described him having a "moderate" attitude to risk;

b. He met Mr Humphreys on 22^nd April 2003 to discuss the Report.

c. The subsequent May Report revised the risk attitude down to "cautious".

d. The amount of cash to be held increased without any rise in higher risk investments;

e. 35% investment in property (higher risk) was excised (and subsequent offers of property investment were not taken up);

f. 64% of investments were in low risk categories;

g. The stated objectives were lowered from "maximise return, subject to an acceptable level of volatility" to "invest for income/capital growth" and "to have a tax efficient investment which would potentially provide greater capital returns over the medium to long term in comparison with Bank/Building Society Deposit accounts". i.e. on shore cash deposit cp off shore.

h. Immediately under "Recommendations" are off shore Bank Accounts with a risk warning even upon them that "There is a belief that cash investments do not carry risk, however it must be remembered that banking institutions can also be vulnerable. This will reduce the overall risk and unfortunately will usually reduce the overall return".

80. In my judgment, Mr Hamilton has adopted the correct approach to this issue that involves a careful analysis of what actually happened in 2003 rather than the hypothetical approach of Mr Morse based upon Mr Menir's current instructions that are contradictory and unreliable.
81. In my Judgment, Mr Hamilton is correct in his analysis of Mr Menir's actual recorded attitude to risk in 2003 and that he was in fact "very cautious". He would not have taken up any property investment opportunities that carried much higher risk. He would have opted for the first safe recommended tax efficient option of going off shore with the funds. In my judgment, this was his primary purpose throughout here; he was not embarking on a major investment enterprise with the family funds that would have been outside the scope of the risks all parties had in mind.
82. I accept the calculation provided Mr Hamilton and Ms Dooley that for the period from 1^st July 2003 to 31^st December 2006 the gross sum earnable off shore was £1,130,008 whereas the net sum earned in the Company was only £ 547,583 [see volume 2; page 300] leaving a difference of £ 582,425 that the Defendants are responsible for in terms of damage under this item for failing to implement the tax scheme properly and in time.
83. (e) IHT exposure: Upon the above findings there has been undue 7 year tailing off IHT exposure on the gifts made by Mrs Menir of the proceeds of sale of her shares as from 28^th June 2007, when this exposure should have commenced on 1st July 2003. However, for the reasons given above, I find that the Defendants are not liable for the deferred transfer of her half share of £475,000 in her home in Arthur Road on 1^st September 2006
84. Mrs Menir is still alive and well, so far as I know. Accordingly, the parties are agreed that this award should be in the form of a declaration with an agreed schedule of dates, rates and amounts to work from upon the event of her death should it be within the period of IHT exposure.

His Honour Judge Simon Brown QC

21^st January 2010

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