HC01C04795
Neutral Citation Number: [2003] EWHC 1869 (Ch)
IN THE HIGH COURT OF JUSTICE	
CHANCERY DIVISION

31 July 2003
Before:

ROBERT ENGLEHART QC
(sitting as a Deputy Judge of the Chancery Division)
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BETWEEN:-

MICHAEL SLATTERY
Claimant

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MOORE STEPHENS
(a firm)
Defendant
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Andrew P.D. Walker (instructed by Speechly Bircham) for the Claimant
James Aldridge (instructed by Barlow Lyde & Gilbert) for the Defendant
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JUDGMENT

INTRODUCTION

1.	This is a claim for professional negligence. The Defendant firm, Moore Stephens, is a well known firm of Chartered Accountants. The Claimant, Mr. Slattery, is Irish by birth and an Irish and Canadian national. He works for Citibank NA., the international bank which has its headquarters in New York.  After a fairly lengthy leave of absence from the bank Mr. Slattery came to this country in July 1995 for the purpose of taking up employment as Citibank’s Head of Equity and Emerging Markets Derivatives. Whilst he was based in London, and was on the payroll of the London branch of Citibank, this job required him to travel frequently on business. He in fact took up this post with effect from 8 November 1995.

2.	Prior to coming to this country Mr. Slattery had been a client of Moore Stephens LLP in New York which had handled his American tax affairs. Mr. Feibel of the New York firm, which the Defendants before me were keen to stress is a separate partnership from the U.K. firm, introduced Mr. Slattery to Mr. Pickles of Moore Stephens here. Thereafter, Moore Stephens prepared Mr. Slattery’s U.K. tax returns for the tax years 1995/96, 1996/97 and 1997/98. Initially, Mr. Pickles was the tax partner responsible for Mr. Slattery’s affairs, but later that role was taken over by another tax partner, Mr. Gautrey. The detailed work on Mr. Slattery’s tax affairs, carried out under the supervision of the responsible partner, was performed by Mr. Durman, a chartered tax adviser and associate member of the Chartered Institute of Taxation, who was employed by Moore Stephens as a tax manager.

3.	In essence Mr. Slattery’s complaint in this action concerns the way in which Moore Stephens drew up his U.K. tax returns and the quality of the tax advice which Moore Stephens gave to him in the light of his tax status here; his contention is that if he had been given the correct advice he could, and would by a quite simple organisation of the way he was paid, readily have saved a not inconsiderable amount of U.K. tax. Moore Stephens did prepare his tax returns on the basis that he was able to make the tax savings in question, and in consequence Mr. Slattery received refunds of tax which had been deducted by Citibank under the PAYE system. However, it then came to light that in fact Mr. Slattery had not been entitled to any refunds and he had to repay the Inland Revenue with interest.

THE TAX FRAMEWORK

4.	In order to understand the context of this dispute it is necessary to bear in mind certain features of U.K. tax legislation as they apply to persons who are resident but not domiciled in this country. Such persons may be considered as either (1) ordinarily resident or (2) resident, but not ordinarily resident, in the United Kingdom. In fact, Mr. Slattery was after his arrival here accepted by the Inland Revenue - albeit provisionally, but nothing turns on that - as being resident but not ordinarily resident. As such he was liable to pay U.K. tax on all his income derived from his work carried out in this country. However, for such of his work as was carried out abroad he would only be liable to U.K. tax on his income from that work on what is called the remittance basis. All income paid abroad but then brought into this country is remitted income. Moreover, all income actually paid in this country is treated as a deemed remittance even if, for example, it is immediately transferred out of the country. The respective tax treatment is reflected in Cases II and III of Schedule E of the Income and Corporation Taxes Act, 1988.

5.	These features of the tax structure were not in dispute before me. They would be well known to any reasonably competent tax adviser or accountant concerned with the tax affairs of someone domiciled abroad but coming here to work. It was not suggested otherwise. Whilst Citibank is an American bank its employees who work at, and are paid by, the London branch have to suffer a PAYE tax deduction at source. The salaries of employees such as Mr. Slattery were paid, net of tax, national insurance and other deductions, into whatever bank account the employee nominated. However, it appears that it is not unusual for the London branch of Citibank to be making payments of salary to foreign domiciled employees. For such persons Citibank is quite willing to accede to an employee’s request that his or her salary be paid into a bank account in the Channel Islands, say Jersey. Payment to a Channel Islands bank account does not constitute a deemed remittance for U.K. tax purposes. It will thus be advantageous for a resident but not ordinarily resident employee to the extent that he is being paid for activities carried out abroad.

6.	For Citibank’s payroll purposes payment to a Channel Islands bank account poses no administrative difficulties at all. The banks are  within the U.K. banking system, including in particular the sort code system, and payment can be made and received in sterling just as with payment to any mainland bank account. Mr. Balmer, who now works for the London branch of Citibank as Payroll Solutions Manager, gave evidence before me by which he explained that there would be no difficulty in arranging for a Citibank employee who was paid by the London branch to have his salary paid into a Channel Islands bank account. This facility was available on request and was not at all unusual. At any given time some 10 to 50 Citibank employees in fact made use of this facility. In contrast, however, it was very unusual for someone employed at the London branch to be paid in New York. This could only he done by New York head office since the London branch payroll system could only cater for payment in sterling to a bank account here. Moreover, it was very rare indeed for Citibank head office to give an employee employed abroad so-called “international status”, which was the only circumstance in which it would be prepared to pay such an employee in New York Mr Balmer explained that this was for reasons of greater cost to the employer.

THE FACTUAL BACKGROUND

7.	Mr Slattery’s first contact with Moore Stephens, other than telephoning to arrange an appointment, was on 22 September 1995 when he met Mr Pickles in consequence of the introduction by Mr Feibel to which I have referred Perhaps unsurprisingly neither Mr Slattery nor Mr Pickles had much recollection of what was discussed other than by reference to what the documents, including Mr Pickles manuscript notes, show The object of the meeting was for Mr. Slattery, as a recent arrival in this country, to make the acquaintance of someone who might be willing to deal with his U.K. tax affairs. As Mr Pickles’ notes demonstrate, there was some consideration given at this initial meeting to possibilities for mitigating Mr Slattery’s tax position given his non-domiciled status and the fact that he would have to spend some time working abroad. In his oral evidence Mr. Pickles explained that Mr. Slattery wanted his affairs to be correctly structured so as to mitigate U.K. tax. Mr. Pickles concentrated on the possibility of Mr. Slattery being employed under dual contracts, one for his work in this country for which he would be paid here and one for his work abroad for which he would be paid abroad. Mr. Pickles explained that he concentrated on a dual contract structure and did not discuss the possibility of Mr. Slattery simply being paid out of the jurisdiction because he was concerned that Mr. Slattery might come to be regarded by the Inland Revenue as ordinarily resident rather than as resident but not ordinarily resident in this country. To effect a tax saving by simply being paid out of the jurisdiction for work carried out abroad Mr Slattery would need to have and retain the latter status.

8.	Whilst wishing to explore with Mr Slattery the possibility of dual contracts, Mr Pickles did have concerns about the United States tax position if Mr Slattery were to be employed and paid by a United States employer. He consulted Mr Feibel whose advice was to the effect that because of United States tax laws there would be no advantage to Mr Slattery in having a contract with a United States employer, and Mr Pickles so informed Mr Slattery by letter. It is to be observed that all Mr. Pickles’ deliberations appear to have been in the context of work carried out outside the United Kingdom being carried out for and paid by a United States employer. However, by 7 November 1995 when Mr. Pickles, probably with Mr. Durman also briefly attending, next saw Mr Slattery any possibility of dual contracts had effectively been ruled out. Not only was Mr. Pickles discounting any advantage in the light of Mr. Feibel’s advice but also Mr. Slattery had had it confirmed by Citibank that he would not be granted “international status” and that it would not be willing to employ Mr. Slattery under a dual contract structure.

9.	Mr. Slattery started his London based job with Citibank the day after the meeting of 7 November 1995, and following that meeting Mr. Pickles wrote on 17 November to him enclosing a formal letter of engagement dated 8 November 1995. He also enclosed various forms for submission to the Inland Revenue for Mr. Slattery to sign. Subsequently, on 16 May 1996 the Inland Revenue confirmed to Moore Stephens that Mr Slattery would be regarded as domiciled outside the United Kingdom and resident but not ordinarily resident in the United Kingdom from 29 July 1995.

10.	In his oral evidence Mr Pickles confirmed that, the possibility of dual contracts having been effectively ruled out, he never discussed with Mr Slattery the possibility of his arranging to be paid outside the United Kingdom. He accepted that the obvious location for Mr Slattery to be paid, after perhaps New York would be the Channel Islands because they are within the UK banking system and payment there could easily be made. He also very frankly agreed in cross-examination that, although he had not in fact done so, it would have been the correct thing to do at the time to have advised Mr Slattery as someone resident but not ordinarily resident to be paid offshore. He could not say why he had not done this.

11.	From about the end of November 1995 Mr. Pickles ceased to he involved with Mr. Slattery’s affairs apart from an occasion when he reviewed his 1995/96 tax return under an internal Moore Stephens procedure. The individual who dealt with Mr. Slattery and his tax affairs was Mr. Durman.  It was he who requested from Mr. Slattery the information required for completing his 1995/96 tax return. Amongst other information he requested a schedule of dates spent by Mr. Slattery working outside the United Kingdom for the expressed reason that this might have an effect upon the calculation of his U.K. tax liabilities. The schedule supplied showed 32 days worked abroad in the 1995/96 tax year since Mr. Slattery commenced employment on 8 November 1995. The Moore Stephens standard form provided to Mr. Slattery included one box, box 7, expressed in the following terms:

Confirmation that no income arising overseas has during the year ended 5th April 1996 been remitted to received in or otherwise paid to the United Kingdom, or details of such remittances or receipts. You should remember that the term “remittances” includes “constructive remittances”, for example repaying out of income abroad money borrowed abroad and brought to the United Kingdom.

	Beside this box Mr Slattery wrote

Only amounts brought were to fund expenses after arrival.

And indeed Mr Slattery explained in evidence how he had initially brought to this country some £10,000, followed by a further £3,000 to £5,000, to finance his living expenses prior to starting to earn money here.

12.	By 18 October 1996 Moore Stephens had prepared Mr Slattery’s 1995/96 tax return, and with a letter of that date Mr Durman forwarded it to Mr Slattery for him to approve and sign. It will be necessary later in this judgment for me to refer in some detail to that letter and to a telephone conversation which preceded it, probably the previous day. That telephone conversation is a critical plank in Moore Stephens’ defence to this claim. For the present, however, I merely mention that the tax return prepared by Mr. Durman did in fact differentiate between Mr. Slattery’s Case II income (for earnings on employment here) and Case III income (for earnings in respect of time abroad). However, since all Mr. Slattery’s earnings were paid by Citibank in the United Kingdom the division between Case II and Case III income made no practical difference. There was a deemed remittance on all the Case III earnings, and accordingly the entirety of Mr. Slattery’s earnings were subject to U.K. tax. His total gross salary, before deduction of PAYE tax, during the tax year 1995/96 amounted to some £69,679.

13.	In June 1997 Mr Durman wrote to Mr Slattery to mention the introduction of the self assessment system and to ask for the information necessary to compile the 1996/97 tax return. The Moore Stephens standard form questionnaire again included a box with the same (apart from the change of date) wording as I have mentioned in paragraph 11 above; Mr Slattery answered “None”. There was some suggestion that the way this box was worded would include a reference to so-called deemed remittances, i.e. payments made in the United Kingdom for work carried out abroad.  This is to my mind to presume far too much knowledge of the U K tax system in the taxpayer. The ordinary person reading this box would in my view assume that it was referring to money received abroad, for example foreign dividend income, and then transferred to the United Kingdom. For this tax year Mr Slattery again supplied a schedule of days spent abroad on business. The schedule specified 87 days plus some foreign holidays. It is right to say that when Mr Slattery’s 1996/97 tax return was drawn up by Moore Stephens they do not seem to have used the actual figures on this schedule. Indeed, it remains a mystery how they arrived at the precise apportionment for time spent abroad which they did use. No-one, including both experts has been able to establish this and indeed both experts were in agreement that the Moore Stephens calculations were certainly wrong; they cannot be reconciled to the information supplied by Mr Slattery.

14.	The 1996/97 tax return compiled by Mr. Durman showed Mr. Slattery as having earned a very large amount during the tax year.  The total gross figure came to around £651,000 for the year. The reason why his earnings were so large was that on top of his already substantial basic salary Mr. Slattery was paid a bonus of about £463,000 on 28 February 1997. The tax return compiled by Mr. Durman calculated that of the total £651,000 rather over £320,000 was attributable to “foreign earnings not taxable in the UK”. Of course, PAYE tax deductions had, as Mr. Slattery’s form P60 showed, been made on all the earnings and accordingly Mr. Durman calculated that Mr. Slattery should receive a substantial refund of tax. The tax return gave a figure of £127,544. When forwarding the tax return to Mr. Slattery for approval and signature Mr. Durman wrote on 6 November 1997:

Based on this Return, I estimate that you are due a
repayment of~127,6O8.92 and I shall ask the Revenue to 
deal with this as soon as possible.

In the same letter Mr Durman asked Mr Slattery to satisfy himself that the return was correct and complete.

15.	The news that he was unexpectedly to receive £127,608 by way of a tax refund appears rather surprisingly to have produced no overt reaction from Mr. Slattery at all. He explained in evidence that his view at the time was that Mr. Durman “was a sharp guy who had come up with something to make a refund possible”; maybe the refund was the result of what he termed an “aggressive approach” by Mr Durman. But he said that this was a matter for his accountant on whom he relied without question. And on 27 November 1997 the Inland Revenue, following application by Moore Stephens, did in fact send Mr Slattery a tax refund of £127,554.12.  Of course, however, Mr Slattery would only in truth have been entitled to any refund of tax paid on earnings attributable to work done abroad if he had actually been paid abroad and had not remitted any of the

money back to the United Kingdom.  Mr.Durman had prepared the tax return and made the tax refund claim as if Mr. Slattery was being paid abroad (at least as far as earnings attributable to foreign work were concerned) whereas in fact Mr. Slattery was being paid all his earnings by Citibank in this country. Thus, all his earnings, including any part attributable to work done abroad, were subject to U.K. tax, and he was not in reality entitled to a refund of the PAYE tax deducted at source.

16.	In September 1998 Mr. Slattery forwarded to Mr. Durman the information for compiling his 1997/98 tax return, including a completed Moore Stephens standard form questionnaire as in previous years. Again, Mr. Slattery confirmed that no income ‘arising overseas’ had been ‘remitted’ to the United Kingdom. By letter of 14 September 1998 Mr. Slattery was asked to supply a schedule of days spent abroad “in order that I can determine whether there is any proportion of your earned income which should not be liable to UK taxation”. The schedule he supplied showed 118 business days plus 37 vacation days spent abroad. The tax return compiled by Mr. Durman again showed Mr. Slattery as having earned a very large amount during the tax year. The return gave his gross earnings as some £686,969, of which some £409,756 were attributed to “foreign earnings not taxable in the UK”. As with the previous year, a very sizeable bonus paid in February was the cause of Mr. Slattery’s earnings being so large. Also as with the previous year, no-one, including both experts, has been able to work out precisely how Moore Stephens arrived at the division between earnings attributable to work within the United Kingdom and those attributable to work abroad. However, on 23 November 1998 the Inland Revenue following a repayment claim submitted by Moore Stephens made a payment off 163,296.36 to Mr. Slattery even though, of course (but unbeknown to them), all his earnings were subject to full U.K. tax given that Citibank was paying him in this country.

17.	The calculations which had been given in Mr. Slattery’s 1997/98 tax return did, however, prompt the Inland Revenue to make subsequent inquiries. On 4 June 1999 the Inland Revenue wrote to both Mr. Slattery and Moore Stephens indicating that they were pursuing an inquiry into various matters including his “foreign earnings”. This led to a meeting between Mr. Slattery and Messrs. Durman and Gautrey for Moore Stephens on 14 June 1999. Various matters which had been raised by the Inland Revenue were discussed and then, apparently towards the end of the meeting, Mr. Slattery mentioned that his earnings had always been paid in the United Kingdom, that is into an ordinary current account with Citibank in London. This news caused consternation among the Moore Stephens representatives, for of course Mr. Durman had drawn up the tax returns for the previous two years on the assumption that (a) Mr. Slattery was being paid abroad and (b) no more of his earnings had been brought into this country than the amount attributable to his work here on which he would anyway be subject to U.K. tax. Mr. Slattery was also understandably displeased when it was explained to him that he would have to repay over £300,000 to the Inland revenue and was also likely to incur a penalty.

18.	There were in the papers before me what were obviously carefully drafted notes drawn up by Mr. Durman and apparently vetted by Mr. Gautrey. They were compiled on 15 June 1999 at a time when naturally consideration was being given within Moore Stephens as to where fault lay. Particularly notable is a memorandum of 15 June 1999 from Mr. Durman to Mr. Gautrey. It refers to a telephone conversation between Mr. Durman and Mr. Slattery which preceded a letter from Mr Durman of 18 October 1996. It mentions how  Slattery had said that he was expecting to receive a bonus and that he was working rather more outside this country than he had originally anticipated; he therefore wanted advice as to how he could mitigate U.K. tax. The memorandum goes on to say that Mr. Durman had specifically advised Mr. Slattery that there were two possibilities, firstly that of dual contracts as had been discussed with Mr. Pickles and secondly payment abroad provided that his earnings were not remitted to the United Kingdom “other than to meet his living expenses”.  According to the memorandum Mr. Slattery “stated that he would arrange for Citibank to pay his salary in New York”. It is, however, right to say that in relation to this telephone conversation Mr. Durman expressly recorded in the memorandum:

As it is some 2 years and 8 months since that telephone 
conversation my recollection of that conversation is based 
on the wording of the letter [of 18 October 1996].

Moreover Mr Durman refers to how Mr Slattery asked for his advice to be put in writing and how his letter of 18 October 1996 constituted the advice which he gave at the time. It is therefore critical when considering what may or may not have been said in this telephone conversation to bear in mind what that letter of 18 October does in fact say. I refer to it later in this judgment.

19.	Ultimately, matters did not turn out for Mr Slattery as badly as they could have. Not only did the Inland Revenue not impose any penalty upon him but also the Inland Revenue was prepared to accept that for some of 1997/98 Mr Slattery had not been a resident of the United Kingdom at all. In the event, Mr Slattery was required to pay the Inland Revenue £309,928.25 which included an interest element of  £50,l00.61.

20.	By this action Mr. Slattery now seeks to recover, from Moore Stephens by way of damages the amounts which he claims would have been saved if he had been advised by Moore Stephens to arrange for Citibank to pay his earnings into a Jersey bank account for the years 1995/96, 1996/97 and 1997/98 together with the interest liability which he incurred towards the Inland Revenue. There is a factual dispute as to what advice was actually given by Mr. Durman. But, it was not suggested other than that it would have been a straightforward matter for Mr. Slattery to have had Citibank pay his salary to a bank account in Jersey. This could easily have been arranged and was what in fact was done in the case of quite a number of Citibank employees.

THE ISSUES

21.	At the outset of the hearing before me it appeared that there was likely to be a major issue as to the scope of Moore Stephens’ retainer. It was in dispute whether Moore Stephens owed any duty at all to Mr. Slattery to advise him about payment offshore. However, as I have indicated, Mr. Pickles very fairly and frankly accepted in his evidence that it would have been the correct thing to have advised Mr. Slattery, about that.  In the light of this evidence and a resultant concession by Mr. Aldridge on behalf of Moore Stephens that they were under a duty to raise with Mr. Slattery as a matter for consideration the potential benefits of being paid offshore, points about the scope of Moore Stephens’ retainer rather fell away. The main focus shifted to the questions of breach of duty, causation and contributory negligence.

22.	Whilst each issue raised a number of sub-issues, the following were the principal issues which were argued before me:

(1)	Were Moore Stephens in breach of duty in not advising Mr. Slattery to ask Citibank to pay his earnings to a bank account in the Channel Islands and indeed in drawing up Mr. Slattery’s tax returns as they did?

(2)	Did Mr. Durman in fact advise Mr. Slattery on the telephone in October 1996 about the desirability of his being paid abroad and did Mr. Slattery in the same telephone conversation specifically inform him that he would arrange to be paid in New York?

(3)	If Moore Stephens were in breach of duty, did the breach cause Mr. Slattery any loss in each of the three tax years in question?

(4)	Was Mr. Slattery guilty of contributory negligence with regard to loss suffered by him in the tax years 1996/97 and 1997/98?

(5)	What loss did Mr. Slattery suffer by reason of any breach of duty on the part of Moore Stephens?

I propose to do as the parties did before me and consider all questions of liability separately by reference to each of the three tax years in issue. I shall then conclude by dealing with the question of the quantum of damage.

TAX YEAR 1995/96

23.	There  was, of course, no suggestion that at any time prior to October 1996 the possibility of Mr. Slattery taking advantage of his status as resident but not ordinarily resident by being paid abroad was ever mentioned by anyone at Moore Stephens. Mr. Pickles only raised the matter of dual contracts. Mr. Aldridge for Moore Stephens did not formally concede that there was a breach of duty in that on any showing the possibility of saving tax for 1995/96 by payment abroad was not mentioned. However, he advanced no argument to the contrary in his closing submissions. In my view, particularly given the evidence of Mr. Pickles and what he did raise with Mr. Slattery, the failure even to alert Mr. Slattery to the potential benefits of offshore payment in relation to 1995/96 was a lapse which ought not to have been made. In this respect Moore Stephens fell below the standard to be expected of a reasonably careful and competent tax accountant. However, it does not follow that, at least for 1995/96, Moore Stephens are liable in damages to Mr. Slattery. It is necessary to consider whether this breach of duty in fact caused Mr Slattery to suffer any loss in respect of 1995/96.

24.	Mr Slattery’s financial position in the months from the start of his employment to 5 April 1996 was very different from his financial position in subsequent years. In particular, he received no large bonus in 1995/96 during which tax year his net monthly salary was in the region of £8,800. The expert evidence was that the very most which Mr Slattery could possibly have saved in tax (by reference to days spent working abroad) in 1995/96 was £13,185. But in order to achieve this he would have had to have not only had his earnings paid abroad but also left £32,963 abroad without using it for living expenses. It was clear from the documents that at no time did Mr Slattery ever complain to Moore Stephens about not having made tax savings or received a tax refund for 1995/96. Furthermore, in his oral evidence before me Mr. Slattery made it plain that he was not bothered about 1995/96. He regarded the potential tax savings for himself in 1995/96 as insignificant. I have come to the conclusion that for 1995/96 Mr Slattery, even if he had had his Citibank earnings paid into a Channel Islands bank account, would have used his earnings on his living expenses in this country. Evidence was led before me designed to show that Mr. Slattery was a person of considerable capital wealth abroad such that he could have used foreign capital to fund his living expenses. It may be that he could have done this by realising some capital but I do not think that he would in fact have done so.  For Mr. Slattery the potential tax savings for 1995/96 were not significant enough for him to want to go to the trouble (and maybe expense) of the steps required for realising foreign investments. In the result I conclude that Moore Stephens’ omission to advise Mr. Slattery about the potential for saving tax if he were to be paid abroad and not remit to this country any of his earnings attributable to work carried out abroad did not in fact cause Mr. Slattery any loss in the 1995/96 tax year.

THE 1996/97 TAX YEAR

25.	The central factual issue between the parties was what was said in a telephone conversation between Mr. Durman of Moore Stephens and Mr. Slattery on (probably) 17 October 1996.

26.	Mr. Durman gave evidence as follows. He was telephoned by Mr. Slattery who was inquiring about the preparation of his tax return. Mr. Slattery mentioned that he was expecting to be paid a substantial bonus in early 1997 and wanted to know if there was anything which he could do to reduce his tax liability; he also said that he was working abroad more than he had originally anticipated. Mr. Durman pointed out that since he was being paid in the United Kingdom he was liable to tax on the full amount, but there were two ways in which his tax could be reduced. One way would be to have dual contracts, one for UK work and one for work abroad. The other way would be for his earnings to be paid into a bank account outside the United Kingdom. But in either case he would be taxed here on any money which either was remitted here or was attributable to work here. At this, according to Mr. Durman, Mr. Slattery said that Citibank would not be prepared to provide dual contracts but there would be no problem about having his salary paid into his New York bank account. He would arrange to have this done straightaway. Mr Slattery then asked Mr. Durman to record the options open to him in writing. Therefore Mr. Durman wrote to Mr. Slattery on 18 October 1996.

27.	As for the evidence of Mr. Slattery he agreed that he had spoken with Mr. Durman on the telephone but said that the only tax saving topic which was discussed was dual contracts, something which he knew would not be acceptable to Citibank as he had previously told Mr. Pickles. He said that he does not recall Mr. Durman having given him any advice about payment in New York; had this been discussed he would have told Mr. Durman that this was not possible since Citibank had already refused to give him “international status”. As for saying that he would arrange for Citibank to pay him in New York, this is inconceivable since he knew perfectly well that Citibank would not do so.

28.	Given this conflict of evidence it is important to bear in mind what Mr. Durman actually wrote in his letter of 18 October 1996, shortly after the telephone conversation in question. It is important to do so not only because it is a contemporaneous written communication but also because in his memorandum of 15 June 1999 Mr. Durman recorded that, given the lapse of time, his recollection of the telephone conversation was based on the wording of the letter. In the letter of 18 June 1996 Mr. Durman referred to the telephone conversation and wrote:

We discussed on the telephone certain changes that could be made to your contractual arrangements with Citibank NA New York to take advantage of the residence ruling received from the Inspector of Taxes. As things stand, the payment of your salary in the United Kingdom denies you any tax relief for the periods spent working outside the United Kingdom. The portion of your salary which would otherwise be exempt from UK tax by reason of the overseas duties is caught within the UK tax net by reason of being regarded as a deemed remittance.

However, the problem mentioned in the previous paragraph can be overcome. You mentioned on the telephone that the pattern of your working requires you to work outside the United Kingdom more frequently than was originally anticipated. Accordingly, if the payment of your salary was switched from London to New York it would be possible for you to claim exemption from UK tax for the proportion of your earnings relating to overseas duties. Alternatively, another solution would be for you to have split contracts one for duties within the United Kingdom and the other for duties elsewhere in the world…..    

From our conversation, I appreciate that Citibank may not be inclined to consider these alternative contractual arrangements but if you require any further information or clarification, please do not hesitate to contact me.

It is to be observed that this letter makes no mention of the additional requirement that salary paid abroad must not be brought to the United Kingdom, for example to fund living expenses here. Furthermore, the letter does not refer to the possibility of payment anywhere other than in New York, e.g. the Channel Islands. It was Mr. Slattery’s evidence that both on the telephone and when he read this letter he discounted the idea of Citibank paying him in New York since he knew that the bank would not be willing to do so. On my reading of the letter, although I appreciate that it refers to “contractual arrangements”, this would be consistent with what the letter appears most naturally to be saying.

29.	In his closing submissions Mr. Aldridge put forward no less than 10 different possibilities as to precisely what might have been said in this telephone conversation. I have carefully considered each of these possibilities but am reluctant to overburden this judgment by detailed analysis of each of them separately. It is sufficient for me to record that I am not satisfied that in this telephone conversation Mr. Slattery said anything to the effect that it would be  easy for Citibank to pay him in New York and that he would arrange for this to be done. If he had said anything like this, I regard it as inconceivable that Mr. Durman would not have confirmed or at least mentioned it in the follow up letter, particularly as that letter was reviewed by the partner Mr. Gautrey before being sent out.   I regard it as much more likely - and consistent with the penultimate paragraph of the letter - that so far from saying that he actually would arrange for payment in New York Mr. Slattery expressed great doubt that it would be possible. I should say, however, that whilst I am unable to accept Mr. Durman’s evidence about the telephone conversation I do not suggest that he was deliberately not telling the truth. In my view he has, persuaded himself that there must have been some conversation along the lines he described as the justification for the basis on which he came to draw up the later tax returns.

30.	In coming to this conclusion I bear in mind the point which Mr. Aldridge strongly urged upon me, that is that Mr. Durman’ s evidence is wholly consistent with the way in which he did thereafter draw up Mr. Slattery’s subsequent tax returns. Certainly, it would seem that Mr. Durman mistakenly assumed when compiling the 1996/97 and 1997/98 tax returns that Mr. Slattery was being paid abroad. Why this happened is not clear. Perhaps, as suggested by Mr. Walker the assumption arose from there having been a division between Case II and Case III income on the previous year’s tax return or from the fact that Mr. Slattery did in fact supply a schedule of dates spent abroad. But in any event I do not think that Mr. Durman’s subsequent consistent conduct itself proves the point any more than does the fact of Mr. Slattery not having arranged to be paid abroad in itself prove that he did not say that he would do so.

31.	Given that I have not accepted Mr. Durman’s evidence about the telephone conversation, I have to conclude that Moore Stephens fell below the standard to be expected of a reasonably careful and competent accountant in their dealings with Mr. Slattery. He asked for advice as to how he could mitigate his U.K. tax liability but neither Mr. Pickles nor Mr. Durman ever suggested what on the evidence should have been the obvious solution in his position as someone resident but not ordinarily resident in the United Kingdom who often worked abroad, i.e. the opening of a Channel Islands bank account into which his earnings could be paid. No-one mentioned payment in the Channel Islands or anywhere else other than New York. Furthermore, when it came to compiling Mr. Slattery’s 1996/97 (and 1997/98) tax return Mr. Durman simply assumed that Mr. Slattery was being paid abroad. He never asked Mr. Slattery to confirm whether or not this assumption was in fact correct nor, on the question of remittance, did he even check with Mr. Slattery how he was funding his living expenses in this country.

32.	I therefore find that Moore Stephens are liable to Mr. Slattery in respect of the 1996/97 tax year. It was not contended before me but that if Moore Stephens were in breach of duty the breach caused Mr. Slattery loss. His earnings in the year, given the large bonus paid in February 1997, were well in excess of what he needed to fund his living expenses in the United Kingdom. He did not need to have in this country that part of his earnings which would he considered as attributable to work abroad. If he had been advised to investigate the possibility of payment of his salary to a Channel Islands bank account this could easily have been arranged. There was a suggestion of possible contributory negligence in relation to the 1996/97 tax return. But I do not consider that any of the pleaded suggestions (including the one added by amendment at the beginning of the trial) are made out. Whilst the letter of 18 October 1996 only mentioned New York, Mr. Slattery, particularly as a stranger to this country, could not be expected to know about or even suspect the particular status of the Channel Islands so as himself to explore matters further when New York payment was ruled out. I can see no basis for saying that he was negligent in not raising the matter of offshore payment in the Channel Islands with his colleagues, the Citibank payroll department or KPMG, Citibank’s accountants at the time whom other employees of Citibank consulted.

THE 1997/98 TAX YEAR

33.	I can be very brief indeed about most of the issues which arise in relation to the 1997/98 tax year since with one notable exception my findings about 1996/97 apply equally to 1997/98. There was no suggestion that after the letter of 18 October 1996 anything more was said about payment of earnings outside the United Kingdom. Moore Stephens, acting by Mr. Durman, simply did in preparing Mr. Slattery’s 1997/98 tax return as they had done the previous year. It follows that, subject to the point to which I now turn, Moore Stephens would be liable to Mr. Slattery in respect of the 1997/98 tax year for the same reasons as they were liable in respect of the previous tax year.

34.	After receiving the letter of 18 October 1996 and his 1995/96 tax return, Mr. Slattery was under the impression that he was liable to U.K. tax on all his earnings and that there was no step available to him for mitigating this liability. Nevertheless, as I mentioned earlier in this judgment, he received from Moore Stephens the letter of 6 November 1997 by which they gave him the wholly unexpected news that he would by their calculations be receiving a tax refund of in excess of £127,000.  Had Mr. Slattery queried the correctness of this indeed asked for an explanation as to how this came about it there is little doubt but that the assumption that he was being paid abroad would have been revealed to have been mistaken. In short, what happened when the mistaken assumption was revealed in June 1999 would have happened in November 1997 and, just as in June 1999 Mr Slattery learned that he could be paid in Jersey, so he would have learned this in November 1997. Although it would have been too late for anything to be done about 1996/97, there would still have been time to regularise matters for 1997/98 by Mr Slattery opening a bank account in Jersey into which the rest of his earnings for that year could be paid. And the very large bonus was not in fact paid until the end of February 1998.

35.	In fact, Mr Slattery did not communicate at all with Moore Stephens about this unexpected news that he could expect to receive, as he did, this large tax refund. He made no attempt to ascertain whether or not he was in truth entitled to the money. Whilst no doubt Mr Slattery would be entitled to look in the first instance to his accountants calculating his tax liabilities properly, I agree with Mr Aldridge that a taxpayer has some responsibility himself for checking that the calculations on his tax return are correct. And, of course Moore Stephens specifically asked Mr Slattery in their letter of 6 November 1997 to satisfy himself that his return for 1996/97 was correct.

36.	Mr. Aldridge submitted that Mr. Slattery’s failure to take up the matter of this large tax refund with Moore Stephens was reckless behaviour such that I should find that it was the sole cause of his loss for 1997/98. I was referred to Barings plc and Anor v Coopers & Lybrand and Ors [2003] EWHC 1319 in which Evans-Lombe J gave a helpful survey of the legal principles where in professional negligence cases the issue is whether a claimant’s own fault is so great that, notwithstanding a defendant’s negligence, he is regarded as being the author of his own misfortune. Alternatively, Mr. Aldridge contended that there was on any showing a high degree of contributory negligence on the part of Mr. Slattery. A reduction of 90% in the damages was suggested.

37.	For Mr. Slattery Mr. Walker pointed out that this was not a case where it could be said that a claimant’s own negligence had itself led directly to loss; rather, the allegation was that Mr Slattery failed to give Moore Stephens the opportunity to undo their own negligence. He referred me to the observations of Lord Hobhouse in Reeves v Commissioner of Police [2000] 1 AC 360 at 393B in drawing attention to the distinction between cases where a break in the chain of causation arises from a third party’s conduct and those where it is said to have arisen from the claimant’s own conduct. Mr Walker emphasised that Mr Slattery had not given any inaccurate information, there was no factual error in the tax returns Moore Stephens had not themselves raised any queries and the primary responsibility for the tax calculations lay with Moore Stephens as the tax accountants. He referred me to the Australian case of Walkers v Hungerfords (1987) 19 ATR 745 at 747. Mr. Slattery’s failure to take up with Moore Stephens the matter of the tax refund could not be categorised as so reckless as to break the chain of causation. And whilst he was not saying that on the present facts there could not be a reduction for contributory negligence, if there were to be any such reduction it should be very small; some guidance might be gained from the 20% reduction in another Australian case, Pech v Tilgals  (1994) 28 ATR 197.

38.	It is only in fairly extreme cases that the courts have historically been prepared to find that, a defendant having been negligent, the chain of causation has been broken by a claimant’s  own conduct. Cases where a break in the chain is attributable to an external event or the act of a third party are perhaps more common. On the present facts I do not consider that Mr. Slattery’s fault in not taking the matter of his refund up with Moore Stephens ought to be categorised as reckless behaviour of such a degree as to obliterate entirely the consequences of Moore Stephens’ breach of duty. Nevertheless, I do consider that he was seriously at fault in not raising with Moore Stephens what must have looked odd to him at the time given his own understanding of his U.K. tax position. I conclude that there was contributory negligence on Mr. Slattery’s part. The correct level of deduction from damages for contributory negligence is necessarily not the result of an exact exercise. It is a matter of judgment and degree. In the circumstances of the present case it is my view that Mr. Slattery himself was equally at fault and I consider that a reduction of 50% from the damages in respect of 1997/98 is appropriate.

DAMAGES

39.	Subject to one short point, there was no dispute between the parties on the assessment of damages in the event of liability being established. It was agreed that essentially damages should be assessed by reference to the tax savings which Mr. Slattery could (and would) have made if he had been advised to investigate having his earnings paid into a bank account in the Channel Islands. In addition, it was common ground that in principle the interest which Mr. Slattery had to pay the Inland Revenue on repayment of the tax refunds would be recoverable as damages; no doubt, the fact that for a period Mr. Slattery had the benefit of the refunds will be material to any interest calculation under section 35A of the Supreme Court Act, 1981. The difference between the parties arose as a result of the experts on both sides being in agreement both as to the correct calculation and that the calculations which Moore Stephens actually made for 1996/97 and 1997/98 were wrong. Mr. Aldridge submitted that one should take the true calculations and figures as agreed by both experts. Mr. Walker on the other hand said that one should look at what actually happened and proceed on the basis of the tax refunds which the Inland Revenue did in fact originally give to Mr. Slattery.

40.	Given that we know in the light of the experts’ agreement what the correct figures are, it would in my view be artificial to proceed on the basis of calculations which it is now acknowledged were in fact wrong. I appreciate that the Inland Revenue did not actually query, and may well never have queried, the erroneous Moore Stephens’ calculations. But I do not consider it to be the correct approach to assess damages by reference to what a claimant might, or indeed probably would have, got away with.  If, as here, the true position is known, then one should act upon it.

41.	The figures and calculations set out in Appendix 9 to the Report of Mr. Owen are agreed. Accordingly, on the basis of the findings set out in this judgment Mr. Slattery is entitled to recover as follows:

1995/96

I have held that the breach of duty caused no actual loss for this tax year. If I were wrong on that, the maximum figure for tax which could have been saved, and hence for damages, would on the agreed figures have been £13,185.15. 

1996/97

It is agreed that the correct tax saving would have been £106,955.04, rather than the refund which the Inland Revenue did originally give of £127,554.12. In addition, of the total interest paid by Mr Slattery to the Inland Revenue amounting to £50,100.61 the sum of £16,946.67 related to this tax year. It follows that the damages recoverable for this tax year are £123,901.71.

1997/98

The correct tax saving would have been £145,616.79 (rather than the refund of £163,902.56). But from this must be deducted £32,389.20 representing the tax saving which the Inland Revenue did eventually allow when accepting that Mr. Slattery was non-resident for part of the year. To the resultant balance of £113,227.59 must be added £33,153.94, the interest which was paid and was attributable to this tax year. However, by reason of my finding of contributory negligence on the part of Mr. Slattery the total of £146,38l,53 must be divided by half. Accordingly, the figure for damages recoverable in respect of this tax year is £73,190.77.

42.	In the result, I award Mr. Slattery damages in the sum of £123,901.71 plus £73,190.77, that is £197,092.48. I will, of course, hear the parties on any ancillary matters consequential upon my judgment.