Introduction

The case of Hugh McMahon against Grant Thornton UK LLP ([2020] ScotCS CSOH_50) was adjudicated in the Outer House of the Scottish Court of Session on May 26, 2020. This commercial action revolved around allegations of contractual breach and negligence by Grant Thornton, a leading UK chartered accountancy firm, in advising McMahon on capital gains tax (CGT) mitigation strategies related to the sale of his shares in Lomond Motors Limited.

McMahon contended that Grant Thornton failed to inform him of potential tax-saving strategies, specifically transferring shares to his wife to avail of Entrepreneurs' Relief, which could have significantly reduced his CGT liability upon selling his shares to Lookers Motor Group Limited.

Summary of the Judgment

The Scottish Court of Session meticulously examined the contractual terms between McMahon and Grant Thornton, focusing on the scope of services promised under the retainer agreement. The crux of McMahon's argument was that Grant Thornton had a duty to proactively inform him of tax planning opportunities that could mitigate his tax liabilities. However, the court concluded that the retainer was primarily for tax compliance services, not for active tax planning or advisory services unless specifically requested.

The court found that while Grant Thornton did discuss Entrepreneurs' Relief in general terms during year-end meetings, it did not provide specific advice on transferring shares to McMahon's wife. Furthermore, even if there had been a breach in failing to advise, the court determined that McMahon had not suffered a direct loss as a result, as his decision-making was influenced by the context and timing of the proposed sale.

Consequently, the court ruled in favor of Grant Thornton, absolving them of liability for the alleged breaches.

Analysis

Precedents Cited

The judgment extensively referenced several key precedents to delineate the boundaries of professional duty in tax advisory services:

• Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp (1979) - Emphasizing that a professional's duty is confined to the terms of the retainer.
• Mehjoo v Harben Barker (A Firm) (2014) - Highlighting that tax planning advice is distinct from tax compliance services and requires explicit engagement.
• Credit Lyonnais SA v Russell Jones & Walker (2003) - Stating that advisory duties must align with the specific instructions of the retainer.
• Minkin v Landsberg (trading as Barnet Family Law) (2016) - Reinforcing that a professional's obligations are based on the retainer unless a clear, additional duty is assumed.

Legal Reasoning

The court's legal reasoning hinged on a careful interpretation of the retainer agreement between McMahon and Grant Thornton. The retainer explicitly outlined services related to tax compliance, such as preparing tax returns, computing self-assessments, and liaising with HM Revenue & Customs (HMRC). The "Ad Hoc Advisory Services" section indicated that additional tax planning services would require separate engagements.

The court concluded that the duty to inform McMahon of tax planning strategies, like transferring shares to his wife for Entrepreneurs' Relief, was not reasonably incidental to the tax compliance services. This conclusion was further supported by witness testimonies and the lack of explicit instructions within the retainer to provide proactive tax planning advice.

Additionally, the court addressed causation and damages, determining that even if there had been a breach, McMahon did not suffer a direct loss attributable to it, as his decision to proceed with the sale was made independently of the alleged omission.

Impact

This judgment has profound implications for the delineation of duties undertaken by chartered accountancy firms in the UK:

• Clarification of Retainer Scope: Firms must clearly define and adhere to the scope of services outlined in retainer agreements. Proactive advisory duties are not assumed unless explicitly stated.
• Risk of Liability: Accountants may not be held liable for omissions outside the agreed scope, thereby limiting potential legal exposure.
• Client Awareness: Clients must actively engage and request specific advisory services to ensure comprehensive tax planning.

Future cases involving professional negligence or breach of contract in tax advisory services will reference this judgment to assess the limits of professional duty based on contractual terms.

Complex Concepts Simplified

Conclusion

The Grant Thornton UK LLP v McMahon [2020] CSOH_50 judgment underscores the critical importance of clearly defined retainer agreements in professional services. It establishes that chartered accountancy firms are not inherently responsible for proactive tax planning beyond the services explicitly contracted unless additional terms are agreed upon.

For clients, this highlights the necessity of clearly communicating and requesting comprehensive advisory services to ensure all potential tax-saving opportunities are explored. For professional firms, it emphasizes the need to articulate the scope of services meticulously to avoid unintended liabilities.

Overall, this judgment serves as a pivotal reference point in Scottish contract and negligence law, particularly within the realm of professional advisory services, reinforcing the contract-based nature of professional duties and the limitations thereof.