Dhillon & Anor v Siddiqui & Ors [2008] EWHC 2020 (Ch) (13 August 2008)

Neutral Citation Number: [2008] EWHC 2020 (Ch) CLAIM NO. HC06CO3036 IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION 13th August 2008 B e f o r e : Bernard Livesey QC sitting as a Deputy Judge of the High Court ____________________ (1) MAJOR DHILLON (2) BACHMANN TRUST COMPANY LIMITED (AS TRUSTEE OF THE MONTILLA TRUST) Claimants -and- (1) JAVED SIDDIQUI (2) PETER RAMSAY (3) MARLBOROUGH HOUSE ASSOCIATES LIMITED (4) CHARTERHOUSE (ACCOUNTANTS) LLP (5) HAINES WATTS LIMITED (6) HAINES WATTS (A FIRM) (7) FOXBOROUGH CONSULTING Defendants ____________________ Mr Richard Lord QC, instructed by Blandy & Blandy, appeared on behalf of the claimant. Mr Thomas Dumont, instructed by Mills & Reeve, appeared on behalf of the 1st to 4th defendants. Mr Simon Howarth, instructed by CMS Cameron McKenna, appeared on behalf of the 5th to 7th defendants. ____________________ HTML VERSION OF JUDGMENT ____________________ Crown Copyright © This is a claim by Mr Major Dhillon to recover damages for financial losses which he claims to have suffered as the result of various breaches of duty on the part of one or more of the defendant accountants who have advised him at times between 1997 and 2004. His background is briefly as follows: he was born in India in 1955 and came to this country as a young child and was educated here, leaving school in 1972 at the age of 16 years. He was variously employed as a trainee motor mechanic and air conditioning salesman. After obtaining a City & Guilds Qualification, in about 1980 he began selling electro-mechanical components which he had assembled in his garage. By September 1980 he was trading through a limited company called Electro Controls Limited ("Electro") which was concerned with the assembly and distribution of electro mechanical and electronic instrumentation to the heating and air conditioning industry. He held 1999 of the 2000 shares issued, his brother holding the remaining share as his nominee. Electro prospered and by 1990 it had an annual turnover of £1.6 million and gross profits of nearly £800,000; by 2005 turnover was £2.2 million and gross profit £972,000. Mr Dhillon used to pay himself an income of £100,000 per annum but also regularly took a substantial annual bonus so as to reduce the incidence of Corporation Tax. He was a man who worked hard but had a simple lifestyle. By 1997, although he had something of the order of £3 million on deposit in accounts with various banks and building societies on the UK mainland, he was still living at home with his parents and owned only an old Ford Escort car. He had one relevant ambition, which was to retire by the age of 50 - an ambition which he achieved on time with the sale of Electro in May 2005 for the sum of £5.7 million. Over the years he obtained the services of various professionals, latterly selecting them himself from advertising and promotional material which he personally evaluated. My judgment is that he was generally distrustful of financial professionals and did not particularly like paying their fees, which he tended to challenge. He was also a man of good intelligence who was able to follow the advice which he was given and became increasingly shrewd and capable as a businessman and, after a while, chose to apply the advice which he had received in the past from professional advisers on his own and without their assistance. He asserted in his statement that "during meetings with my advisers I would accept their advice without questioning it in detail. If they told me that a scheme was the most tax efficient method of dealing with my income or with Electro's profits I would accept their advice". This assertion has not been challenged and from what I have seen, the documentation supports him. He did however become increasingly inquisitive about the advice he received, and tended to scrutinise, what the professionals did retrospectively with a critical eye and with a zeal bordering on the obsessive; further, and unusually, he did not have any inhibitions about challenging the advice he was given or issuing liberal threats of litigation against his advisers during the continuing relationship. He perhaps saw these threats as a means of bringing the best out of them and righting perceived wrongs, an attitude which, in the light of his experience of professionals, I find to some extent understandable. During the period from 1983 to 1997, on the recommendation of his bankers, he retained an accountancy firm in Windsor as both his personal and company tax advisers and also for tax compliance and audits. Over those years, following their recommendations, he made provision for a retirement pension. However, after noting the media coverage about pension mis-selling and at the same time being critical about the performance of his pension investments, he sought other advisers and selected the sixth defendant ("Haines Watts") in 1997 to act on his behalf. There is no letter of engagement but it seems that Haines Watts was retained in about September 1997 to act as auditors and tax agents to Electro and as tax advisors to Mr Dhillon personally. Haines Watts was a firm which had the first defendant (Mr Siddiqui) and the second defendant (Mr Ramsey) as partners. Haines Watts also had associate companies and firms including one (Haines Watts Corporate Finance Ltd – "HW Corporate Finance") which specialised in the sale of businesses, another (Haines Watts Financial Services Ltd – "HW Financial Services") which specialised in giving investment advice and another, the seventh defendant, Foxborough Consulting ("Foxborough"), in which both men were partners, which specialised in providing specialist technical tax advice and services. Mr Ramsey was a generalist accountant who exercised supervisory functions in relation to their engagement by Mr Dhillon and Mr Siddiqui was a specialist technical tax adviser, to whom the former referred clients when specialist tax advice was required. It was Messrs Siddiqui and Ramsey and Foxborough who were responsible for the specialist tax advice given to Mr Dhillon between November 1997 and April 1999. Jumping forward briefly in time: Messrs Siddiqui and Ramsey parted company with Haines Watts at the end of April 1999 and formed Marlborough House Associates Ltd (the third defendants, "MHA") who were later to merge with Charterhouse (Accountants) LLP. After their break from Haines Watts and Foxborough, Messrs Siddiqui and Ramsey continued acting for Mr Dhillon, though they ceded to Haines Watts the audit work, partly because Mr Davidson of Haines Watts asked them to do so and partly because MHA did not have the personnel and capacity to provide audit services. They were named as personal defendants solely in case it was not clear which was the company for whom they were acting at the time when one of the acts alleged to be a breach of duty took place. They continued acting for Mr Dhillon as tax advisers until 1 st October 2001 when Mr Dhillon wrote to Charterhouse notifying them that from that date Haines Watts would be calculating and filing the annual returns for Electro and Hosta and his own income tax returns but yet asking that Charterhouse should be available to provide him with specialist tax advice if and when he needed it. Returning to the narrative - Messrs Siddiqui and Ramsey noted immediately that Mr Dhillon's previous accountants had failed to recognise his non-domiciled status for tax purposes and had also failed to give him competent pensions advice. The end of this part of the story is that Haines Watts on his behalf made a claim against those accountants and secured a settlement in the sum of £250,000 and Mr Dhillon himself, with their assistance, made a complaint to the Pensions Ombudsman who made an award of compensation in his favour of £100,000. At his first meeting with Mr Ramsey on 11 th July 1997 Mr Dhillon explained his position and his ultimate aim of the sale of Electro by 2005 and Mr Ramsey emphasised the benefits of personal tax planning and the aim of putting strategies in place for the avoidance of Capital Gains Tax on the sale of the business; he also introduced him to Mr Wilcox-Jones of HW Corporate Finance, who sent some information about selling businesses, but made no further progress at this stage since Electro was not yet for sale. Haines Watts also introduced Mr Dhillon to Mr Gaius Jones of HW Financial Services who on 24 th September 1997 carried out a review of Mr Dhillon's financial circumstances. A File Note of that date records that Mr Dhillon then had a total of £2.9 million in cash on deposit in building society accounts earning a gross interest before tax at the higher rate of 4.2% and continues "He described himself as a novice investor as although the funds are substantial he has not had time to educate himself into how his money should be invested and was disappointed with his previous advisors for not making suggestions". On that day, after a suggestion made by Mr Jones, some £2.5 million was transferred into an offshore Bond pending the development of a longer-term investment strategy. There is no complaint about this advice in this litigation. On 14 th November 1997 Mr Jones sent Mr Dhillon what was described as an "Investment Report". It recorded that Mr Dhillon's "Objectives" were as follows "To obtain secure capital growth; Investment returns to be in excess of that available from holding cash; time scale is medium to long-term (5 years plus); no income is required at present; administration should be kept to a minimum; Investments should be tax efficient and cost effective; A balance of the Portfolio should be easily accessible in case it is needed at short notice" . In his "Overview" Mr Jones expressed the view that there was a very strong argument to invest in shares and to some extent property and recorded that "As your main concern is to improve upon the return available from cash without the desire to make substantial windfall profits and take the associated risks I would recommend that you place the bulk of your portfolio into investments that are linked to the returns generated by stock markets but which include mechanisms to either lock in gains made or protect against market falls." Mr Jones' "Recommendations" : Because Mr Dhillon wanted £500,000 in cash for contingencies, Mr Jones recommended the sum be deposited in a number of off-shore Building Society accounts producing interest between 7% and 7.8%, "so that any interest will only taxed when returned to the UK" . He correctly stated that the "interest should be credited to a separate account so that it is clear which portion of the funds are income and which capital. ... There should be no tax from the repatriation use of capital. ... There are also mechanisms whereby the interest can be converted into capital and thus not subject to tax on repatriation. This is something which we can discuss in due course." He suggested that the bulk of the remaining monies for investment be placed in a number of off-shore investment funds and Bonds with a balance of £500,000 being "placed with a Discretionary Fund Manager to gain direct exposure to world markets." In "Conclusion" Mr Jones stated that "The portfolio recommended here has a balanced low risk profile which is likely to produce return greater than those available in cash. ... I believe that it meets all the objectives that you have set out fully and will provide a significant improvement that has been held over the previous few years". Mr Dhillon did not at the time challenge the accuracy of the statements contained in Mr Jones' Report nor the advice which Mr Jones had given him. HWFS is not a defendant to the claim and the advice given by Mr Jones is not alleged to be negligent. On 27 th November 2000 Mr Dhillon met Mr Ramsay again and Mr Siddiqui for the first time. Their advice following the discussions at the meeting was set out in a letter dated 4 th December 1997 from Foxborough Consulting signed by Mr Ramsey, but written by a Mr Drysch who was a specialist technical tax assistant who worked with Mr Siddiqui and under his direction. The first part of the advice was concerned with devising and implementing a scheme to enable Mr Dhillon to avoid paying any Capital Gains Tax ("CGT") on his sale (in due course) of Electro. The second part was to advise on the mechanics of putting into effect the investment advice which Mr Jones had recommended. It is relevant to note that the letter of 4 th December did not make investment recommendations. It merely explained the implications and effect of what had been recommended. So that, by way of example, one paragraph began "you are considering investing £1 million in offshore bonds" and then continued to explain the effect and estimated tax savings. One of the implications was the question of "Costs" under which heading it was explained that Based upon the examples above the total tax saving of this structure will be between £30,000 and £42,000 per year in respect of the investments … … once set up, the structure would incur ongoing administration fees (eg. Trustees and directors' fees, and the costs of maintaining the books and statutory records overseas). The level of these fees will depend on the level of activity within the trust and company, but typically would range between £5.000 – 6000 in total per annum. Third party costs for the establishment of the appropriate offshore trust and companies would normally be approximately £5,000. The letter stated that Foxborough's fee for implementing the complete structure would be £25,000 plus vat (which excluded certain costs but included the cost of securing with the Inland Revenue non-domicile status). Mr Dhillon thought that a fee of £25,000 was excessive, especially because he understood that HW Financial Services was going to receive a commission for placing the business, and he said so. In fact, the fee was subsequently compromised in the sum of £3,275 plus vat, on the basis that Mr Jones had agreed to share with Foxborough the commission received by HW Financial Services on the creation of the various investment bonds. I believe it is also probable, despite his assertion to the contrary, that he knew that HW Financial Services were able to negotiate an extra £20,000 commission having regard to the size of the transaction and it was this additional sum that was given to Foxborough to make up the deficiency in the fee for which it had asked. This is a matter about which Mr Dhillon has 'grumbled' during this case but is not a pleaded allegation of breach of duty. After Mr Dhillon had agreed in principle to proceeding in accordance with the 4 th December letter, in January 1998 Foxborough sent an engagement letter to Mr Dhillon in which the scope of the responsibility of Foxborough was closely defined as follows: a. You have indicated that you wish to structure your purchase of certain offshore investment and insurance bonds in a tax efficient manner. b. You also wish to structure your shareholding in Electro in a tax efficient manner to reduce any Capital Gains Tax payable in the event of a sale of this shareholding. c. We will advise you on implementing certain arrangements which are designed to achieve your objectives in 2.1 and 2.2 above. Where necessary we will introduce you to other third parties who will assist in this implementation. ............. The copy before me is unsigned but I understand that this letter set out the terms of the engagement. Pursuant to these arrangements on 19 th January 1998 a Guernsey resident life-interest trust for Mr Dhillon's benefit was established called the Montilla Trust ("the Trust"), whose trustees are the second claimants; The Trust acquired Montilla Limited ("Montilla"), a company incorporated in Guernsey, whose function was to hold the £1 million in insurance bonds and the £500,000 invested according to Gaius Jones' advice. A company called Hosta Investments Ltd ("Hosta") was incorporated in Guernsey; it was wholly owned by the Trust but its director was Mr Dhillon and therefore it was UK resident for tax purposes. Its function was to hold the shares in Electro and on 4 th March 1998 Mr Dhillon and his brother transferred all the shares in Electro to Hosta, and Mr Dhillon gifted the beneficial ownership in them to Hosta by Deed of Gift. The OHM Ltd Scheme: At the end of February 1998 a further personal income tax saving scheme was proposed by Messrs Siddiqui and Ramsey acting through Foxborough. Briefly, the scheme involved two separate parts. In the first part Electro would pay the sum of £1 million into a Funded Unapproved Retirement Benefit Scheme, otherwise referred to as a "FURBS". Electro itself would be entitled to claim a deduction for corporation tax in the sum of £1 million but the benefit was deemed to be to Mr Dhillon and Electro immediately incurred a liability to pay the sum of £110,000 in respect of Employer's National Insurance. Mr Dhillon would incur a liability to pay income tax in respect of this benefit in kind in the sum of £400,000. The second part of the scheme involved the transfer by Mr Dhillon of the sum of £1.4 million by way of a loan to a new offshore company created for the purpose which was called Ohm Ltd. By the agreement, the loan was to be for a term of 30 years with interest payable on the loan of only 0.5% per year, a figure very substantially below the market rate, with a premium of 20 per cent of the value of the loan to be paid on redemption. The market value of the loan instrument would obviously be only a fraction of its face or nominal value. Mr Dhillon then transferred the benefit of the agreement to the Trust, creating a capital loss of £1 million, which he set against the benefit he had received in respect of the FURBS, reducing by £400,000 the tax which he would otherwise have had to pay. This scheme was described as being "cutting edge". Before it was recommended and adopted Mr Dhillon attended at a meeting on 17 th February 1998 with Mr Siddiqui and Mr Ramsey. A note of the meeting recorded that Mr Dhillon was warned that the scheme was "for the brave", a point which Mr Dhillon disputes but which I accept was stated during the course of the meeting, and "that the arrangement would undoubtedly be challenged by the Inland Revenue". It is not certain that this scheme will succeed though there is no sign at the present time that it might not do so. It is not alleged in these proceedings that it was negligent of the relevant defendants to have recommended it. It is relevant at this point to record that upon their creation Montilla, Ohm and Hosta became "associated companies" of Electro, though as we shall see, Hosta was entitled to the benefit of an exemption while it remained dormant. This potentially had significant taxation consequences. That is because Electro was a small company for corporation tax purposes and so was chargeable at the small companies' rate of 20% on the first £300,000 of profits; on profits above £1.5 million at the rate of 30%; on profits between £300,000 and £1.5 million at the marginal rate of 32.5%. The benefit of the small companies' allowance was split equally (but not shared) amongst however many associated companies there were in the group of companies: thus, if Electro had one associated company, its allowance was one half of the £300,000 band; if it had two, then its allowance was one third, and so on. Both the creation of these companies, and their annual maintenance, incurred significant expense. The extra expense pleaded at the start of the trial was in the sum of £62,699, all of which had been incurred by Electro. In addition, there was a significant effect on the small companies' taxation position of Electro which was not immediately understood by those accountants who had responsibility for compliance decisions. In the result decisions made upon the basis that Electro had nil associated companies had adverse tax consequences once it was realised that it had two or three associated companies and when the problem came to light Electro was required to repay the additional corporation tax. Additional tax in the total sum of £87,087 overall was payable and this is claimed as part of the associated companies claim in these proceedings. The first issue in this litigation is whether it was inappropriate to create structures which imposed these additional costs and expenses. Following from this a second issue concerns the complaint of Mr Dhillon that the letter of advice dated 4 th December 1997 [see paragraph 18 above] was negligently written in that it failed properly to explain the full nature of the ongoing expenses of maintaining the associated companies and did not explain at all that their existence imposed tax liabilities on Electro, as described in paragraph 25 above. He alleges that had he been properly informed as to the true position and the alternative tax saving device known as "source ceasing" he would not have adopted the recommendations but would have placed his funds instead in off-shore deposit accounts. Had he done so he would have avoided the expenses and losses caused by the existence of the associated companies. He therefore seeks to recover these losses and expenses. The Dividend Issue: Returning to the narrative, Messrs Siddiqui and Ramsey continued to act as partners of Haines Watts until about the end of April 1999. But it has since become apparent that as at that date they commenced in practice on their own account as Marlborough House Associates ("MHA"). And it was at this point that they are alleged to have been responsible for giving advice to Mr Dhillon in relation to the declaration by Electro on 6 th May 1999 of a dividend in the sum of £500,000, payable to Hosta its holding company. The dividend was indeed paid to Hosta and was retained in its accounts until 2005. Because the benefit of the dividend was not passed from Hosta directly to The Trust, Hosta lost its exemption [1] from being considered to be an associated company of Electro with the consequence, so far as Hosta was concerned, which I will deal with below. The significance of this effect appears not to have been noticed by any of the first to fourth defendants, who had primary responsibility for ensuring the appropriateness of the tax advice given to Mr Dhillon until they ceased to act in October 2001. Nor was it noticed by Haines Watts, who had retained the responsibility for completing the personal and company tax returns during that time; nor was it noticed by them after October 2001 when they resumed responsibility for providing tax advice as well. The problem was picked up by the Inland Revenue and brought to the attention of Haines Watts who did themselves no credit whatsoever in the manner in which they dealt with the problem. The third issue in this litigation is to identify which defendant or defendants were responsible for the losses thereby sustained – which appear to amount in total to £12,627.34. The Bonus Issues – 2000 to 2003: For a number of years prior to the arrival of Haines Watts Mr Dhillon had adopted the practice of awarding himself substantial annual bonuses in addition to his modest salary of £100,000 per year. That is because he had learned that it was better to take the money out of the company in the year in which the profit was earned than to leave it in the company at that time and take it out later. The reason for this, I find, was that he understood quite well that while taking a bonus would incur tax and NI of 48%, as compared to corporation tax of 30%, if he left the bonus in Electro and took the equivalent funds out later, Electro would pay corporation tax of 30% on retained funds and further tax would be payable when the funds were later extracted by way of dividend. Over the years he tended to declare himself a bonus at a level designed to bring Electro's chargeable profits down into the small companies' rate for corporation tax purposes or, in some cases, to reduce profits to zero and eliminate the tax entirely. Messrs Ramsey and Siddiqui contined to act as Mr Dhillon's tax advisers until 1 st October 2001 when Mr Davidson of Haines Watts took over. During the earlier period, in November 2000 Mr Dhillon declared himself a bonus of £400,000 (net £381,800) in respect of the financial year ended 2000 in order to reduce Electro's liability to tax to zero. After October 2001 it was on Mr Davidson's advice that further bonuses were declared in November 2001 in the net sum of £586,100; in November 2002 in the sum of £580,000 and in March 2003 in the sum of £600,000 for the year ended 2003. Mr Dhillon alleges that in each case the advice to declare the dividend was negligent. That is because he alleges that it would have been 'best advice' to leave the money in Electro so that, when Electro came to be sold, the sale price of Electro would have been much greater (reflecting the additional cash within it); although Electro would pay corporation tax at 30 per cent on the profit in the year it was made, no further tax would be payable when the company was sold; this would result in a saving of 18% - the difference between the 30% rate and the 48% rate of tax payable on a bonus. Mr Dhillon claims that this difference amount to a total loss of £374,123 over the four years. The final issue in this litigation is whether the relevant defendant in respect of each of the years was in breach of duty for failing to advise Mr Dhillon that he should not pay himself the substantial bonus in each of the years in question and, if the defendants were in breach, what is the amount of loss which Mr Dhillon sustained. I propose to deal with each issue in turn. But first I should give my findings on the credibility of the witnesses who appeared before me. The Trial: The trial of this action took place over seven days. Evidence as to fact was given by five witnesses, Mr Dhillon, Mr Siddiqui, Mr Ramsey, Mr Davidson and Mr Ford. Each party called an expert accountant to support his case: Mr P. J. Bramall of BDO Stoy Hayward LLP for Mr Dhillon; Mr P Holgate of Kingston Smith LLP for the Charterhouse defendants; Mr Richard Mannion of Smith & Williamson Limited for the Haines Watts defendants. As regards the witnesses as to fact: I found that the recollection of each was affected to a significant effect by the passage of time – a period of up to 11 years from some of the earliest matters in issue between the parties. There were fortunately many documents recording events and it was in these that I found an important anchor and guide to what had happened. As regards Mr Dhillon: he gave evidence clearly and in an easy and friendly manner. I judged him to have a better memory for some events than Messrs Siddiqui and Ramsey: this is understandable since the matters in question involved him in a very personal way. However, he was in my judgment unreliable in a number of respects. First, when he complained about a breach of duty he tended to make sweeping complaints against all advisers. Secondly, when he came to explain what he either understood, meant or intended at particular points in time, his recollection was demonstrably affected by the benefit of hindsight and, I thought, motivated by a desire to succeed in making a recovery of damages. There was a very clear example of his unreliability as a witness which is demonstrated in passages at paragraph 117 and 119 of his witness statement where he reported, inter alia, that he did not appreciate that the tax charges on him would be greater if he received the money from Electro as a bonus payment (when there would be a 48% charge overall) than the corporation tax payable on the money retained as Electro's profit (30%). The notion that Mr Dhillon could have run a business for tens of years and not know what was the rate of corporation tax and how it compared with the tax payable by him personally when he received a bonus or dividend was inherently unlikely. Yet this is was the position which Mr Lord QC opened to me as part of Mr Dhillon's case and Mr Dhillon maintained on oath before reluctantly accepting to me that the notion was not correct and that he did know. This seriously damaged his credibility in my eyes. There are other instances to which I will draw attention later in this judgment. Mr Siddiqui frankly accepted that he had no independent memory apart from what was contained in the documents. He answered shortly and with precision. I noted and accepted that he was very clear about the fact that he was a highly specialised technical tax adviser and, importantly, that he neither had nor purported to have any expertise in or responsibility for investment advice. Mr Ramsey also accepted that he had no memory for the initial discussions with Mr Dhillon. Generally he gave evidence in accordance with the documents and I accepted it as truthful and broadly accurate except on some details. He correctly described himself as the person who gave general accounting advice though I did not feel that his skill at that was at a high level. For example, I did not feel that he understood the effect on Hosta of the declaration and retention of Electro's dividend. Mr Davidson was responsible for representing Haines Watts with Mr Dhillon from May 1999 until 2006, at which point this litigation made it inappropriate for him to continue acting. I thought that he had a good understanding of his client. However, he did not display a high level of technical competence, being unaware of the implications of the creation of associated companies on the small companies' corporation tax rate or the declaration of a dividend on Mr Dhillon's personal tax position. I was also sad to note that in his dealings with the Revenue, in particular in relation to their enquiries into the associated companies' issue, he was evasive and untruthful. I thought he showed a tendency to answer defensively, deflecting criticism from himself and pointing it at others. Mr Ford was employed by the Haines Watts subsidiary, Oasis, and was the person responsible for marketing and negotiating the sale of Electro. He gave evidence as to fact in a largely dispassionate manner which I broadly accept. As regards the expert witnesses: Mr Bramall, I found, was quick to criticise but his criticisms, although to an extent justified, were sometimes superficial and not properly thought through. By this I mean that the criticisms were often matters of detail which did not lead to a serious attack on the essential advice being given, although he made appropriate concessions under cross-examination. Of the three expert witnesses, I preferred the evidence of Mr Mannion. His reports appeared to me to be clear, balanced and fair and he supported his position well during his evidence. The associated companies claims: An analysis of the associated claims issues reveals that there are three claims to be considered: the first, in relation to Hosta; the second in relation to Montilla; the third in relation to Ohm. In addition, on the back of these claims, Mr Dhillon makes a further claim. I will take the claims in that order. Although Hosta would incur both incorporation and annual expenses, it would not have been regarded as an associated company (and therefore incurred additional taxation expenses) had it merely acted as a dormant non-trading holding company intermediate between Electro and The Trust, pursuant to an exemption in section 13(4) of ICTA 1988. The exemption would not have been lost had the dividend which had been declared on 6 th May 1999 been passed directly to the Trust. Because the dividend was retained, Hosta lost its exemption from the consequences of being an associated company, and the resulting losses continued for every year that this state of affairs was allowed to continue. It continued in fact until the year ended 2005. This caused Electro to suffer additional tax over those 4 years of £12,627.35 in total. I will consider liability for this later. As regards the incorporation and annual costs of Hosta, I can dismiss the criticism of these shortly. The scheme to free Mr Dhillon of his potential liability to tax on the sale of Electro was one which was well known, accepted and popularly called an "envelope scheme". Indeed, when in due course Electro [or, more accurately, Hosta] was sold for £5.7 million in 2005, the successful effect of the scheme was to secure that not a single penny of the capital gain earned by Mr Dhillon on the disposal of his shares incurred a liability to CGT or tax of any other description. The saving was in an amount of about £800,000 at the date of the transaction. Had the incoming administration in 1998 not brought in 'taper relief' for CGT, the saving would have been in the region of £2.7 million. Use of Hosta was, as Mr Bramall concedes, best advice for the time. The costs incurred in effecting the tax saving were in my judgment trivial and would have been incurred in any event. Montilla was created so that it might hold the insurance bond investments which had to be held for a minimum period of 5 years. They had to be held in an entity which was entirely separate from the Trust in order to achieve the objective that any increase in value of the investment would be received tax free by the Trust. A limited company was chosen as the obvious 'separate entity'. Any other entity would incur charges of its own. A limited company would give the opportunity for the investments to be realised tax free, once the decision to liquidate the portfolio had been taken; at that point Montilla having sold the investments would dissolve, causing the cash assets to be distributed to the Trust as capital without any liability to tax. Montilla was liquidated in 2004. Ohm was created specifically to play a part in the "discounted loan note scheme". It was to receive £1.4 million in funds and issue the loan instrument to Mr Dhillon, so that the benefit of the loan note could be transferred by him to the Trust, leaving in his hands a deemed loss in the region of £1 million, which could then be set against the benefit of the £1 million FURBS which it was intended should be transferred to him. The scheme has been described as "extremely aggressive" and "cutting edge"; and counsel's advice was taken to ensure so far as possible that it might be immune from attack from the Revenue. The fact that a separate off-shore "Newco" would be used as the vehicle in the transaction was explained to highly experienced tax counsel. The experts would have expected him to comment if that was inappropriate. The experts are agreed that if the strategy was to work then it was necessary for some vehicle to be created to issue the appropriate loan note in order for the personal loss to be created in the hands of Mr Dhillon; that the tax advisers (who were Mr Siddiqui and Mr Ramsey of Foxborough) should have been aware of the additional costs of incorporating and maintaining Ohm and its status as a associated company and these factors should have been brought to the attention of Mr Dhillon. Ohm was liquidated in 2007. Mr Bramall's report sets out a number of his views on these issue, including the following: that the initial advice by Foxborough failed to point out the impact of introducing Ohm and Montilla under the common control of the Montilla Trust; that advice should have been given to Mr Dhillon with regard to the associated companies point and the flagging of this issue should clearly have indicated the potential downside to the corporation tax computations of Electro and the additional expense in incorporating and maintaining each; that had this been discussed with him, "I believe it may have been possible to provide alternative arrangements that would have had the same effect from a tax perspective in benefiting Major Dhillon but would have negated the associated companies issue and largely reduced the costs incurred in running the structure." As regards Ohm, he complains that no thought was given to alternative strategies such as Electro making a contribution not to the FURB but to Mr Dhillon's pre-existing approved pension fund in the UK; nor to issuing the loan note to "another entity such as a trust"; nor to whether, after issuing the loan note, it could have been assigned by Ohm immediately, allowing Ohm to be liquidated at an earlier date. The reason why I do not find Mr Bramall's opinion of much assistance is that his criticisms do not take the matter very far at all. He is not in fact suggesting that had any of these alternative strategies, which he proposes, been considered that there would have been obvious merit in any of them. He is merely criticising the fact that alternative strategies appeared to him on the face of it not to have been considered and that they might have merit. He is not suggesting, either, that the strategies in fact adopted, involving the incorporation and use of Hosta, Montilla and Ohm, were strategies which no reasonably competent tax adviser would have recommended. In their expert evidence, Mr Holgate and Mr Mannion defend the use of the associated companies in the role in which they were used. I accept their evidence. No sensible case was advanced for suggesting that the use of these companies was other than in the ordinary course; there was no basis for saying that no reasonably competent accountant and tax adviser should have advocated their use. However, it is the case that although some significant 'administrative' expenses of incorporating and maintaining the structure were mentioned in the Foxborough letter of 4 th December 1997, the full details were not set out and no mention was made of the effect on the small companies taxation regime. That was an unfortunate omission though I am not persuaded that the effect was to make the advice which was given materially inappropriate. The "source ceasing" complaint: Mr Dhillon uses Mr Bramall's opinion as the springboard for his own complaint: this is, that had be been properly (i) warned about the costs incidental to the associated companies issue and (ii) advised about the alternative possibility of investing in high interest off shore bank accounts using the "source ceasing" method, he would have chosen the latter investment strategy and avoided the costs and losses in following the strategy which he in fact followed, that is to say those involved in (i) above. "Source ceasing": Because Mr Dhillon had a foreign domicile, interest earned on capital invested abroad did not attract income tax until it was remitted into the UK. 'Source ceasing' was a simple device which enabled interest earned abroad to be, in effect, turned into capital so that it could be remitted to the UK free of tax. The device involved the interest being credited to a different account from the capital. To "cease the source" it would have been necessary for both accounts to be closed towards the end of a tax year and for the funds to be decanted into a new non-interest bearing account on a temporary basis until the new tax year when all the funds are transferred into a new interest bearing account – which would then be "fiscally clean". Mr Dhillon's complaint involves two propositions: one is that he did not know about the fact that there was a device whereby interest could be repatriated free of tax. The other is that, had he known, he would have chosen that course. I do not accept his evidence on either count. First of all, the contemporaneous record of Mr Dhillon's "objectives" was contained in the report prepared by Mr Jones on 14 th November 1997, which formed the basis on which the investment strategy was prepared which was later put into effect. I have already set this out in some detail in paragraphs 11 to 14 of this judgment. I noted in paragraph 15 above that Mr Dhillon did not at the time indicate any disagreement with the contents of this report. I conclude that Mr Dhillon clearly indicated to Mr Jones that one of his objectives was "to obtain secure capital growth" and that "investment returns [were] to be in excess of that available from holding cash", though "a balance of the portfolio [was] to be easily accessible in case it is needed at short notice". In my judgment, this correctly recorded Mr Dhillon's view at that time. Mr Dhillon responds to this by saying that what he meant was merely that he needed a return greater than the 4.2% less tax which he was receiving from his deposits in UK banks and building societies. I do not accept that. Deposits at that rate were what he had been achieving prior to 24 th September 1997, at which point he transferred £2.5 million into an offshore Bond. By November 1997 the returns that he had the expectation of enjoying from cash had substantially changed. In any event, it was or should have been immediately apparent from the section headed "Recommendations" that a return of between 7% and 7.8% would have been available for the whole of his investments had he wanted a return greater than 4.2% less tax but wished to retain the flexibility and security of cash. It seems to me that the recommendations which were presented to him will have been prepared for, and accepted by Mr Dhillon, on the basis that he wanted to achieve a better return even than that produced by cash in an off-shore account, although he still wished that the level of risk to which his capital was subjected would be small. Had he wished it, he could very easily have stated that he wanted the whole of his funds, not just the first half million pounds, to be invested at the rates which were said to be available from off-shore accounts. Of even greater significance is the reference [to which I draw attention in paragraph 13 above] to the fact that he was told that "There are mechanisms whereby the interest can be converted into capital and thus not subject to tax on repatriation. This is something which we can discuss in due course". There is no doubt that the "mechanisms" to which reference was there made, were nothing other than the "source ceasing", the subject of his concern in the consideration of this issue. Mr Dhillon insists that Mr Jones did not explain the matter properly to him and he did not understand him to be referring to a possible investment scheme in which the whole of his funds could be invested tax-free had he wished. I do not accept this is a valid criticism. In my judgment, the ability to make a return of 7-7.8% free of tax was explained sufficiently explicitly for a man of Mr Dhillon's undoubted shrewdness and intelligence to understand what was being meant. In my judgment Mr Dhillon was, at the time when he accepted this advice, in the mood to "go for" an investment return even better than the tax free return he was being offered on cash in off-shore deposit accounts. It was only when the returns turned out to be less than this that he became disgruntled and sought to complain. This began to occur during the downturn in the investment market which occurred during 1999 – 2003 and led to his writing a number of letters complaining angrily about the losses which he threatened to recover from Haines Watts. Mr Dhillon also reacted by realising his investment and liquidating the bonds and dissolving Montilla almost at the first available opportunity and the benefit he achieved over the period during which he held the bonds was only about 20%. As the defendants have pointed out, he realised his investment in February 2003 at a time when the FTSE 100 index stood at 3655; had he realised his investment five years later, it would have been at a time when the index stood at approximately 6500 and his return would have looked very different. In support of this conclusion I note how on a number of occasions Mr Dhillon pressed Mr Siddiqui and Haines Watts for precise details as to how he could take advantage of what he described to them accurately as "source ceasing", threatening them with litigation if they did not provide him with a step by step guide. It is, however, notable that despite his liberal complaints and threats, he did not allege against them in the years immediately following his investment decisions, that had they told him about "source ceasing" he would have chosen to invest his funds in this way rather than in the manner of Mr Jones' recommendations. Finally, on this aspect, I feel that it should be particularly noted that it is expressly accepted by the claimant that the investment advice given by Mr Jones was not negligent. It is, I surmise, probably in consequence of this, that Mr Jones did not give evidence during this trial and there was no expert evidence called from investment specialists. In my judgment, the complaint which Mr Dhillon makes is one which cannot succeed against Messrs Siddiqui and Ramsey who are not investment advisers but tax and accountancy advisers. The reason it cannot succeed is that it is not possible to establish that loss has been suffered merely by identifying what the specific costs were which had not been explicitly mentioned, as one might do in a case of simple misrepresentation; in the present case a loss cannot be demonstrated without comparing the total outcomes of the different investment strategies and showing that the one which Mr Dhillon followed sustained a loss as compared fairly with the other, which he contends he would have followed had he been properly advised. This is quite apart from the different test for establishing breach of duty for giving investment advice. But, as I have indicated, it is not alleged that the investment advice was negligently given. The defendants' additional response: The defendants accept that the associated companies do have an impact on the corporation tax payable by Electro but take a number of points including the "reflective loss" point, to which I should here refer. The point argued is that the loss of tax and the increased expenses were sustained by Electro itself (as indeed they were) not by Mr Dhillon; the loss sustained by Mr Dhillon therefore can only be loss reflected in a diminution in the value of his shareholding in Electro and the loss is not recoverable because recovery would infringe the rule against recovering reflective loss. In support of this submission they have referred me to Johnson v Gore Wood & Co [2002] 2AC 1 , Giles v Rhind [2003] Ch 618 and Gardner v Parker [2004] 2 BCLC 554 . I do not accept this submission. The reflective loss principle applies only where there is a duty which is owed to the company as well as the shareholder and for breach of which it is entitled to bring an action for damages in its own right. That is not the case here. Mr Lord QC has made it clear that he is not alleging that either set of defendants owed any relevant duty to the company. In my judgment, the action brought by Mr Dhillon is against Foxborough and Haines Watts for breach of a duty owed by them to him personally and not for a duty owed to Electro. The scope of that duty was to provide to Mr Dhillon appropriate advice to secure, by the ordering of either his personal finances or those of Electro (of which he was the sole beneficial owner) or of both of them, the best overall financial return that might reasonably be achieved from both of them taken together. It seems to me that this is outside the reflective loss principle. Were it to be otherwise, it would deny a client, who sought tax advice to secure the best outcome from the ordering of his personal and company's affairs together, of an important remedy for breach of duty by the professional, wherever the loss to the client was sustained not to his personal finances but through the medium of the limited company, whose assets it was the accountant's duty to order for the benefit of his client. The 1999 Dividend: The documentary evidence suggests that the decision by Mr Dhillon to pay a dividend was made on or around the 6 th May 1999. He says that on that date he received a visit from Messrs Siddiqui and Ramsey and that it was the former who gave the advice that a dividend could be declared and that the dividend when paid to Hosta should be left in Hosta for the time being until the funds were needed. He said that at the close of the meeting both men told him that they would arrange for the dividend to be entered in Electro's accounts for the year ended 28 th February 1999. The administrative arrangements were to be undertaken by Haines Watts who on 19 th May 1999 sent an amended draft account showing the dividend entry and, under cover of a letter dated 8 th June 1999, both the dividend warrant and draft minutes of a director's meeting dated 6 th May 1999 confirming the resolution to declare the dividend. There is a note in Mr Siddiqui's hand written to Mr Ramsey dated 7 th September 1999 confirming that Mr Dhillon raised with him the question whether the Hosta dividend was income in the hands of Hosta; to which Mr Siddiqui confirmed that it would be and noted that "there could be Section 739 implications. Pl(ease) discuss." There is no sign here that the existence of the dividend came as any surprise to Mr Siddiqui nor indeed that he found it in the least bit strange that the dividend itself should be 'parked' in Hosta. Surprisingly no action appears to have been taken on this query. The dividend seems to have been left where it was until some time in the year 2005 not only by Messrs Siddiqui and Ramsey but also by Mr Davidson who prepared all personal and company tax returns to the Inland Revenue (subject to signing off by Mr Ramsey until October 2001) and, after October 2001 took over responsibility for all accountancy services and such general taxation advice as Mr Dhillon continued to receive. The MHA defendants accept that Mr Dhillon would not have declared a dividend without positive advice but deny that it was they who gave the advice through either Mr Siddiqui or Mr Ramsey. They say that Mr Ramsey did, but Mr Siddiqui did not, attend on Mr Dhillon on the 6 th May: they deny that either gave the advice. I am fairly confident that none of the professional witnesses had any recollection who it was who had given the advice. Mr Siddiqui was confident that he did not, because it was poor advice and he would not allow himself to have given it and he relies upon the reconstruction of Mr Ramsey that the latter alone attended upon Mr Dhillon on 6 th May. In this instance, I am unable to conclude whether Mr Dhillon's recollection of events is correct or not. Although he says he recollects that both Messrs Siddiqui and Ramsey visited him on the 6 th May his diary refers only to the visit of Mr Ramsey. I think it probable that the advice was given either by Mr Ramsey on his own or by both Mr Siddiqui and him together, both acting at the time as partners of MHA. In fact it does not matter which of them gave the advice. Both of them ought to have known that the dividend when paid to Hosta should have been passed directly to the Trust if adverse tax consequences were to be avoided. Mr Siddiqui himself ought on 7 th September 1999, when Mr Dhillon raised the issue of the dividend with him, have taken steps to enquire into and correct the position. It is not to my mind good enough for Mr Siddiqui to say, as he did in evidence, that the reason why he did not advise that something be done about curing the problem was because he was not asked to specifically advise on it. On this I do not accept his evidence. However, it is also clear that Mr Davidson also failed to recognise the problem from the time when he prepared the first draft of Electro's tax returns in December 1999 until the problem came to light in 2004 and was brought by Mr Dhillon to the attention of the Inland Revenue during 2005. It is clear to me, and counsel for the defendants did not in the end disagree, that both sets of defendants were to blame for the loss which resulted. The loss suffered by Electro was additional tax for the period between 28 th February 2000 and 28 th February 2005 in the sum of £12,627.35, which it would not have had to pay had the mistake not been made in the first place and thereafter allowed to continue for 5 years. In my judgment an appropriate apportionment of liability between the MHA/Charterhouse defendants and the Haines Watts defendants, taking into account both the initial responsibility and the duration and therefore amount of the loss, is in the proportion of 35/65 respectively. The 2000 to 2004 Bonuses: I have explained in paragraph 36 above how and why the claim in relation to these bonuses arises. It needs to be noted that the Bonus declared for 2000 was declared on or about the 30 th November 2000 (the last date when a declaration of bonus for the 2000 financial year could be made), when Mr Siddiqui and Mr Ramsey were Mr Dhillon's personal tax advisers. The Bonuses for the following three years were declared when Haines Watts had taken over the function and Mr Davidson had taken over the tax advisory function. As regards the year 2000 bonus: Mr Dhillon says that he received the advice to pay himself the bonus from Mr Davidson of Haines Watts and that on 29 th November 2000, while speaking to Mr Ramsey about Electro's draft accounts he asked Mr Ramsey's opinion on Mr Davidson's suggestion and the latter endorsed it. He said that he would not have thought of paying himself a bonus had Messrs Ramsey and Davidson not advised him to do so. Mr Davidson denies that he gave any such advice and in my judgment he is very probably right about this. After all, Haines Watts and he personally had no responsibility for giving financial or taxation advice to Mr Dhillon at that time and I think that he would probably not have chosen to do so. Apart from which, the documentary evidence supports his account. Mr Ramsey accepts that he spoke with Mr Dhillon at the telephone on 29 th November 2000 about declaring a bonus. He made a file note of the conversation in the following terms: I spoke to Matt Dhillon and discussed whether he wished to pay corporation tax or vote a bonus. This followed lengthy discussion re other surrounding circumstances. He said he wished to vote the whole amount out to ensure no corporation tax was due. I pointed out that IT and NI would be due on the 14 th December on the bonus … Following from this conversation on the 30 th November 2000 Mr Ramsey sent an email to Mr Davidson stating "After much discussion matt has decided what to do for the 28/02/00 accounts. …. A bonus is being voted today for £381,800 which with (employ)ees NI means no CT to pay. Again no action is required, this is for information." In the result I conclude that Mr Ramsey did and Mr Davidson did not advise Mr Dhillon on taking the bonus for the year ended 2000. It is Mr Ramsey's recollection that Mr Dhillon wished to vote himself a bonus as he wanted the money to invest in property. Certainly there is some documentary evidence on either side of this date that he talked about investment in property but I do not believe it is necessary to reach a conclusion on this. As regards the 2001 to 2003 Bonuses: As I have recorded already, Haines Watts was reappointed as tax advisers to Mr Dhillon in place of Marlborough in October 2001. In November 2001 Mr Davidson recommended that Electro should pay a bonus for that year in the sum of £586,000 saying that it was the most tax efficient thing to do. For the following year, on Mr Davidson's advice given in April or May 2002 a bonus of £580,000 was paid for the year ended February 2002. Mr Dhillon says that at the beginning of 2003 he mentioned to Mr Davidson that he wanted to put Electro up for sale within the next twelve months and that a firm decision to put the company up for sale was imminent; that he told this also to the personnel from HW when they visited to carry out the audit in February 2003. He says that Mr Davidson recommended using Oasis Europe (formerly HW Corporate Finance) and he then began looking at and visited other sales agents, having meetings with them in order to assess their suitability for the purpose. On 11 February 2003 he says he met up with a person from Business Link. In March 2003 Mr Davidson recommended that Electro should pay him a bonus of £600,000 for the year ended 2003 which was paid on or about 31 st March 2003. On 12 th June 2003 he met again with Mr Wilcox-Jones from Oasis and eventually entrusted to Oasis the task of finding a purchaser. It was in early 2004 that Oasis put Mr Dhillon in touch with two separate potential buyers and in May 2005 that contracts for the sale were exchanged. Mr Davidson denies that he learned that Mr Dhillon told him about his intentions to sell during the early part of 2003 prior to the decision being made to take a bonus for the year. I have concluded on balance that the evidence of Mr Davidson is preferable. It seems to me to be likely that Mr Davidson would have recommended to Mr Dhillon that he go to Oasis as soon as the prospective sale was mentioned to him and it is likely that he would have gone to Oasis within a short time of that recommendation. Mr Dhillon approached Oasis on the 12 th June 2003 and I conclude that he probably mentioned the prospective sale shortly before then. That is not inconsistent with Mr Dhillon beginning to warm to the idea of putting the business up for sale in the earlier months of 2003 and putting out 'feelers' towards other marketing companies before letting Mr Davidson know what was in his mind. No bonus was voted for the year ending February 2004 because Mr Davidson recommended leaving the money in Electro in order to increase its eventual value, and in turn the value of Hosta, prior to the sale of its shares. This advice was confirmed in an email sent from Mr Davidson to Mr Ford dated 30 th January 2004 which Mr Dhillon saw for the first time when it was forwarded to him on 28 th October 2004. The email of 30 th January 2004 so far as material reads: The trustees selling the shares in Hosta would of course expect to receive the value of its Electo shares plus the value of any other assets in Hosta (ie cash)). The cash currently in Hosta would therefore increase the (non-taxable) gain realised by the trust which in turn can be paid tax-free to Matt in the UK provided he remains non-UK domiciled. The general thinking therefore would be to maximise the net asset value as that effectively will come through tax-free (assuming a £ for £ uplift in the sale price). We may want, potentially, therefore not to pay out the Electro profits by way of bonus this year – although we would be liable to corporation tax on the retained profits (@30%) getting the remaining 70% out tax free would be preferable to taking a PAYE/NIC bonus with an overall 48% tax cost. Mr Dhillon argues that the logic which caused a bonus not to be declared for the year ended 2004 applied with equal force to the years 2000 to 2003. He says that had he been advised of the potential benefit of a saving overall of 18% by retaining the funds within Electro until it was sold, he would not have declared a bonus during each of those years. The defendants argue that they are not in breach of duty and dispute causation. They deny that in any event, had the profit been retained within Electro, Mr Dhillon would have been able to recover it pound for pound and contend that, if they were in breach of duty, they should be held liable only on a loss of a chance basis. Before dealing with this difficult issue it is important to consider the nature and scope of the duty owed by the accountants to Mr Dhillon. The Scope of the Duty: The starting point of any enquiry into whether a professional is liable in damages for breach of duty to his client is to determine the scope of the professional's duty and for this it is necessary first to consider the terms of the retainer or contract of engagement between them. As a matter of good practice, a contract of engagement should be in writing but often it is not, as is the case here. It therefore falls to the court to determine if it can on all the available evidence what are the terms of the contract and the scope of the professional's duty. There is of course a term implied into the contract that the accountants will exercise all reasonable skill and care in the performance of their engagement. What is reasonable will depend on all the relevant circumstances. In the case of the Foxborough engagement letters, many of the circumstances which the parties agreed were relevant to the scope of their engagement were set out expressly within the body of the letters. In the case of the Haines Watts engagements, the relevant circumstances are to be determined by the court in the light of its judgment as to what the parties had in their contemplation. The relevant circumstances will usually take into account the personal characteristics and specific instructions of the client. These will include the fact that Mr Dhillon was an experienced businessman and had by the year 2000 already spent some 20 years being involved in the management of his own business and its tax affairs; that he was non-UK domiciled, that he owned Electro and that he had expressed an ambition to sell it by the time he was 50 years of age. Indeed Haines Watts had earned substantial fees giving advice as to how the sale could be effected without incurring tax on the disposal and hoped to earn further fees through Oasis when it came to be sold. Ambitions to sell are not decisions fixed in stone and are commonly not achieved but are not for that reason to be ignored, particularly not where, as here, the success of Electro was such that there was a realistic prospect that Mr Dhillon could retire a millionaire on the sale of his business at the age of 50. It was also understood to be the desire of Mr Dhillon to minimise his liabilities to tax, including by taking advantage where he could of his non-UK domiciliary status. Where a relationship between an accountant and his client is continuing and of long standing, material information recorded in the files of the professionals' files may also be relevant. In this connection I note and have regard to a memorandum entitled " Major Dhillon: Procedures for Implementing Investment Strategy ", prepared by Mr Drysch of Haines Watts in about December 1997, which recorded the steps which needed to be taken for the transfer of the shares in Electro on a future sale of the company and recorded " Payment of Dividends should therefore be avoided and instead the company sold with retained profits which would be treated as capital and hence be tax-free for Dhillon." It is however not recorded at what date in the future Mr Drysch contemplated that a sale was likely to take place. I note that a letter from Mr Siddiqui to Mr Dhillon dated 5 th February 2001 refers again to the planned retirement at 50 years of age. On the other hand, it was also likely that the parties contemplated and intended that the accountants would perform their duties in accordance with the usual standards and conventions adopted by their profession as a whole and would exercise individual judgments as to what was appropriate in accordance with those standards and taking into account considerations which would be taken into account by ordinary careful accountants and tax advisers. Apart from calculating the figures, one of the functions of accountants is to provide the client with proper information from which he might make certain decisions as to which of one or more courses he should take. The decision will often depend on the outcome the client wishes to secure and the amount of risk he is prepared to take in achieving it. It is for the accountant to advise what are the prospects for achieving the outcome and what are the risks along the route. But the decision which route to take is for the client as it is he who will take the benefit or suffer the loss at the end of the day. Whether the accountant does or does not elect to inform the client that there is a choice will often depend on what the profession does or does not accept to be the appropriate options in the circumstances and what, in the light of "how your client" considerations, he has concluded is realistic for consideration by his client. The experts who have given evidence before me and Messrs Siddiqui, Ramsey and Davidson have given evidence as to the circumstances which, they contend, militate against giving to a client such as Mr Dhillon advice to retain cash within a company. These include the following considerations: that cash retained within a company is exposed to the vicissitudes of the ill health or death of the proprietor, insolvency of the business, or the collapse (or slow demise) of its trade owing to competition or simply the proprietor's own change of circumstances or of mind; that changes in the tax regime may affect the value of cash retained within a business or the ease with which it can be extracted; and there is a perception that purchasers of a company do not generally like large amounts of cash to be accumulated within companies; so many matters will affect the price at which a business can be sold in the future that cash retained in a business might not be worth its value pound for pound. I accept that all of these matters are relevant considerations. However, the question is whether the client's interest in selling the business, in circumstances in which he can take the proceeds tax-free, is a relevant consideration which also affects the decision which he has to take and therefore the information he needs to be given. Mr Bramall has expressed the opinion that in respect of all four bonus years it was a relevant consideration. He says that "attention should have been given to the ultimate objective … to maximise the tax free cash to Mr Dhillon on the disposal of the business" and that a failure to give attention to this at the time when consideration was being given to the declaration of bonuses was "below the reasonable standard that would be expected of a Chartered Accountant and Tax Adviser". As he made clear during cross-examination his belief was that "it was negligent not to consider all the factors when advising on the bonus". He was expressly not saying that it was negligent of the accountants not to advise Mr Dhillon to retain the cash in the company. Mr Holgate, who considered only the 2000 bonus claim, says that he can understand money being left in a company when a sale is "on the cards" and likely to ensue within a relatively short term, but that allowing money simply to build up without an obvious exit strategy does not seem reasonable. He is therefore not surprised that Mr Dhillon and his accountants were considering how to extract as much as they could from Electro each year and would regard that as normal practice. To this Mr Dhillon makes the point that he did have an exit strategy and this was to extract the value of the business and the assets including the case within it tax-free on a sale within a comparatively short time. In his report Mr Mannion expressed the view that Haines Watts fell below the standard of a reasonably competent accountant in failing to caveat their advice on the 2001, 2002 and 2003 bonuses by reference to the CGT envelope planning and that the advice of a reasonably competent accountant and tax adviser should have been as follows: The CGT planning (envelope scheme) was designed to achieve a tax-free capital gain. The CGT planning was long-term and dependent on many factors outside MD's control. There were no guarantees that the net assets left in the company would be paid out £ for £ on a sale. If the company became insolvent for any reason, MD's interest in the company would be worthless. In the meantime MD should consider extracting funds by way of dividends or bonuses, although both of those alternatives would involve tax liabilities. It would then be for the client to decide what to do. In my judgment both Mr Bramall and Mr Mannion are correct to opine that it was within the scope of the duty of the accountants to advise Mr Dhillon that the retention of the profits within Electro could possibly benefit him to the extent of an 18 per cent saving of tax in due course, were he to succeed in selling Electro at an enhanced price which returned the retained cash to him pound for pound tax-free. It was not however the duty of the accountants to advise him positively not to declare a bonus and to retain the funds within Electro until its sale. That is because there was no certainty that retaining the funds in Electro would be beneficial to Mr Dhillon in the result. Whether it turned out to be beneficial to him depended on future events and certain risk factors, which could not properly be evaluated in advance with certainty; and it was their duty to explain these factors to him, if only briefly. In my judgment the accountants were entitled also, if they chose, to advise that it was their opinion that it would be better for him to take the bonus, if that was their view; or on the other hand to advise the contrary. Whether they advised one way or the other would depend on their subjective evaluation of the risk factors and the degree of optimism or pessimism which they held about them, might depend on "how your client" considerations and would be a matter of judgment on which there might be a wide and legitimate difference of opinion between different accountants. But the important point is that it was ultimately for Mr Dhillon to take the decision what to do since it was he who would be taking the risks in the light of the advice which he had been given for it was he who was going to be reaping either the benefit or the loss from events as they unfolded in the fullness of time. To my approval of Mr Mannion's opinion I wish to add only one qualification. It seems to me that just as the duty, which I have explained above becomes the more compelling the closer the advice is to the anticipated date of disposal, so also the less compelling it might be the further one is from the date of any prospective sale. For example, it is not alleged by Mr Dhillon that he should have been advised to retain all cash in Electro during 1999. There was then 6 years to go before he intended to dispose of Electro; had profits then been retained the build-up of cash would have been truly large and the exposure to the risk factors would have been for a longer period. I can conceive that many reasonably competent accountants might not have given thought to mention the consideration which Mr Bramall and Mr Mannion speak about in contemplation of a possible sale in 2005 as the overall risk/benefit ratio might reasonably be judged to be one which the client would not consider taking. I am of the view, in similar fashion that it was not negligent of Mr Ramsey in the year 2000 not to mention the possible benefit from retention of funds within Electro instead of taking them as a bonus. That is because it was or should have been known to him that a prospective sale of the business was not on the cards for another 5 years and the risk/benefit ratio was so adverse to the money being retained for that time that it was not necessary to mention the possibility at that stage. However, in the case of the bonuses from 2001 onwards, it was or should have been known to Mr Davidson that the possible sale of Electro was becoming more proximate. In my judgment, in the case of each of the 2001 to 2003 bonus payments, there was a breach by Mr Davidson of his duty, in failing to remind Mr Dhillon of the possibility that he might benefit by retaining the funds within Electro. It is to be noted that Mr Davidson was not negligent to tell Mr Dhillon that he thought it would be better for him to take the funds as a bonus. He was negligent for not giving him full advice: full and proper advice would have been to advise him of the potential benefits, warn him of the potential risks and advise that whether one course turned out better than the other could not presently be known. What would Mr Dhillon have done? This brings me to the question: what would Mr Dhillon have done had he been given proper advice. Mr Dhillon says that had he been given proper advice he would have chosen not to declare a bonus in each year but would instead have left the money building up within Electro with a view to taking it out free of tax on its sale. He had, he says, after all no need of the money: he had modest spending habits and no spending commitments; he denies that he wished to invest in property. Had he left the money in Electro, Electro would have paid tax on the retained funds of 30%; if the funds were to be returned to him tax-free on a sale of Electro, the net saving would be of the order of 18% of the bonus paid in each year. In my judgment Mr Dhillon was a man who was naturally acquisitive and, apart from a period when he became involved in "cutting edge" tax planning, was naturally cautious. Following the period in early 2000 when he saw the value of his investments unexpectedly decline with the substantial fall in the stock and property markets between 2000 and 2003, he became even more cautious prompting a decision to cash-in fairly early the investment bonds at what were fairly modest levels. It is to be noted that the date when he began complaining with increasing concern about the disappointing returns from his various investments was June 1999; the point when he cashed in his investment bonds was in 2003. Evidence was not given as to where the funds were then invested but I would not be surprised to discover that they were directed to deposit accounts held off-shore. My feeling is that Mr Davidson made what was a very shrewd assessment of Mr Dhillon when he stated that "He liked having his money 'in his own pot', not in the company, and that's what drove it [that is to say, that is what drove his decisions to vote himself bonuses] ". This very much reflected my assessment of him. This reflected two aspects of Mr Dhillon, his acquisitiveness and his increasing refusal to take risk. My judgment of Mr Dhillon was indeed that he found greater satisfaction in seeing his assets securely lodged in bank accounts under his own control and earning high rates of interest, especially if they were tax-free, than locked within the balance sheet of Electro, pending release at some uncertain future time at an uncertain rate in an uncertain world. I do not believe for a moment that he would have refused to take a bonus in 2000, 2001 and 2002 on the basis that he might at some time in 2004 or 2005 or later take the same money but with a saving of tax, provided that the adverse risks which Mr Davidson would have been under a duty to explain to him had not materialised. He might have done in 2003 if Mr Davidson had enthusiastically recommended it, but I am not persuaded on a balance of probabilities that he would have done so, particularly having regard to the fact that the decision to take a bonus was taken broadly at the same time as he chose not to continue the risk of continuing to invest in insurance bonds. The evidence of Mr Ford: For completeness I should say something about the evidence which I heard from Mr Ford. He gave me a detailed account of the marketing of Electro and negotiations for its sale. He has since left Oasis and his recollection has been assisted by certain emails and documents provided by Oasis to which I was referred during the course of the evidence. He was asked to give evidence specifically in relation to Mr Dhillon's contention that, had he not extracted any bonuses from Electro between 2000 and 2003, he would have received that extra cash tax-free on the sale of Electro as part of the total consideration for the business. The narrative of events is as follows: after initial contact in around May 2003, Mr Dhillon instructed Oasis to start looking for potential purchasers in August 2003. While Electro was a consistently profitable business it was very dependent on its owner and had limited management accounting information other than year-end audited accounts. Progress was slow and by 21 st July 2004 there were only two offers on the table: one from a company called Watts (who ended up the ultimate purchasers) in the sum of £2.4 million upfront with probably £500 – 700,000 on "earnout". By the end of September 2004 Watts had 'crystalised' their cash-exclusive valuation of the business at a figure of £3.2 million. At that date there was surplus cash of about £1.5 million in Electro/Hosta and it was the intention of Oasis that the deal would be so structured that Watts would also pay full value for the surplus cash. Watts for its part was suspicious about the off-shore structure of the business and had made it clear that their preference was to value Electro on a cash and debt-free basis and to purchase it without the surplus cash; because of this Mr Ford enquired by email dated 23 rd September 2004 what might be the scope of extracting the cash by dividend, even if this meant Mr Dhillon bearing some tax liability on the sums extracted. Of course, it was the latter's preference that he should not have to extract cash in this way. After a pause, negotiations were recommenced in early November: by now Watts were prepared to value the business at £3.5 million and were now prepared to allow Mr Dhillon to extract £2 million of the 'excess' group balance sheet cash by adding it to the capital value rather than requiring it to be extracted prior to the transaction. Electro was of course continuing to trade and generate profit. By now Mr Ford was thinking that the 'excess' cash would exceed £2 million and so sought to suggest a "pound for pound" adjustment mechanism but this was flatly refused. Watts were however prepared to cap the maximum consideration for the deal at £5.7 million and, says Mr Ford "it is fair to say that as a separate point they were blunt that they 'did not expect games' on the issue of working capital. The implication of this for Mr Dhillon was that he might have to consider extracting any additional cash (i.e. that portion for which he was not going to receive value from Watts) prior to completion and this would have had tax implications for him". It appeared to be a big sticking point. A meeting was held between all parties, attended by Mr Dhillon, at Haines Watts' offices in Slough at which the terms ultimately agreed were finalised. Electro agreed to pay £20,000 towards the extra costs that the purchasers were likely to incur because of the complexity of the off-shore structure of Hosta/Electro. For their part, Watts, persuaded by Management Accounts from which they could see that excess cash was being generated by way of ongoing trading profits at the rate of £50,000 per month, relented and finally agreed a pound for pound adjustment mechanism. In the result, the transaction completed in the sum of £5.7 million (£500,000 of which was on retention until July 2008, and appears in the end to have proceeded on the basis of a pound for pound mechanism, the mechanism was initially hotly contested and in the end conceded only in the light of ongoing profits. The relevant question is what Watts would have done had there been an additional £1.7 million in retained surplus cash within Electro. In my judgment it is probable that they would have made some payment to reflect the additional cash: however, I think that there is both a chance that they might not have done so or that they might have discounted their price below parity. In my judgment it is proper to reflect this with a discount which varies in accordance with the size of the additional retained cash that might have been available. An appropriate discount for the first £500,000 of additional cash would be a discount of 15%; for the next £500,000 a discount of 20% and for the balance of £700,000 a discount of 30% would in my view be appropriate to reflect the factors I have set out in the preceding paragraph. However, in the light of my findings on the bonus issue, the claim for damages in respect of the bonus claims cannot succeed. It follows therefore that the only claim on which Mr Dhillon succeeds is the claim for negligence against both sets of defendants in respect of their negligent advice and handling of the 1999 dividend and there will be judgment in his favour against each of the third to seventh defendants in the sum of £12,627.35, plus interest pursuant to section 35A of the Supreme Court Act to be calculated. Bernard Livesey QC Deputy Judge of the High Court th August 2008 Note 1 Pursuant to section 13(4) of the Income and Corporation Taxes Act 1988 and SP 5/94. 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