The engagement letter is an important document in the professional relationship between an accountant and their client. It clearly defines the scope of services to be provided, outlines the responsibilities of both parties and helps manage expectations about the nature and extent of professional advice.

Maintaining clear and up to date engagement terms is not only a requirement of the ACCA Rulebook but can also have a significant practical impact. This was demonstrated in the case of Mehjoo v Harben Barker, where the court examined the scope of the accountant’s duties and placed considerable weight on the wording of the engagement letter when determining whether the firm had an obligation to recommend specialist tax advice.

The case involved a Midlands-based accountancy firm, Harben Barker, and their client, Hossein Mehjoo, a businessman who sold shares in his fashion company and incurred a capital gains tax liability of approximately £850,000. The claim centred on the argument that, because Mr Mehjoo retained his Iranian domicile of origin for UK tax purposes, he could potentially have used a complex tax planning arrangement known as a Bearer Warrant Scheme (BWS). Such a scheme, if implemented, might have allowed him to avoid the capital gains tax liability altogether.

The claim against the accountants was based on the allegation that a reasonably competent accountant should have identified the possibility that Mr Mehjoo had non-domicile status and should therefore have advised him to seek specialist tax advice from advisers experienced in dealing with non-domicile tax planning.

Initially, the High Court found in favour of the taxpayer, concluding that the firm had been negligent for failing to raise the possibility of seeking specialist advice. However, this decision was later overturned by the Court of Appeal.

The Court of Appeal carefully examined the scope of the engagement between the accountant and the client. The engagement letter contained wording stating that the firm would be willing to provide more extensive tax and personal financial planning services if requested. However, the court interpreted this wording as an offer of additional services rather than an obligation to proactively advise on advanced tax planning strategies.

The judges concluded that the accountants were acting as general practitioners, providing routine services such as preparing annual tax returns and advising on reliefs relevant to those returns. The engagement did not impose a duty on the firm to identify or recommend complex tax planning opportunities unless the client specifically requested broader tax planning services.

The court also considered the wider context of the professional relationship. It found that the client had engaged the firm primarily for standard accounting and compliance work, and that the firm had never been instructed to provide specialist tax planning advice. As a result, the accountants were not under a professional obligation to suggest highly specialised tax schemes or refer the client to a specialist adviser.

For many practitioners, the ruling was seen as reassuring. It confirms that accountants who operate as general practitioners are not automatically responsible for identifying every possible specialist tax planning opportunity for their clients. Instead, the duty of care is closely linked to the scope of the engagement agreed with the client.

The case highlights an important practical lesson for accountants: the engagement letter plays a critical role in defining responsibilities. Where the scope of work is clearly limited to compliance services, the risk of negligence claims arising from specialist tax planning issues is significantly reduced.

Professional bodies have increasingly emphasised the importance of clear engagement terms – under ACCA rules engagement letters are mandatory. In this context, it is worth noting that an updated engagement letter template has recently been released by the ACCA and is now available on the ACCA website.