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Negligent advice given to the University of Keele over its controversial Profit Related Pay scheme has landed top a...
Negligent advice given to the University of Keele over its controversial Profit Related Pay scheme has landed top accountancy firm Price Waterhouse with a £1.6m damages bill.

The university hoped the scheme would save around £800,000-a-year in tax, but the firm's 'mistake' in interpreting the law meant it had to be cancelled at enormous cost, London's High Court heard.

Awarding Keele compensation for the consequences of Price Waterhouse's negligent advice in relation to the scheme operated in 1996/1997, Mr Justice Hart said: 'The loss of the chance to obtain the anticipated savings was, in my judgement, a direct result of Price Waterhouse's negligence.'

The PRP scheme had been hotly opposed by the Association of University Teachers who the judge said objected to it 'on ethical egalitarian grounds,' believing it favoured the higher paid.

The association took the view that PRP, which had become extremely popular due to the substantial tax savings that could be achieved, was 'simply a tax fiddle'.

Mr Justice Hart said many leading accountancy firms had seen universities as fertile ground for expansion by the introduction of PRP schemes. There had been much 'aggressive marketing' and competition between the firms had been 'intense'.

PW's involvement with Keele began with a 'cold call' in September 1995 and it beat off competition from rival firm, KPMG, to administer the university's PRP scheme.

But, largely as a result of the association's opposition, the judge said the expected enthusiasm of university employees for PRP did not materialise and 'the ground did not prove as fertile a source of profit as the promoters of PRP had hoped.'

Despite the intensive 'marketing' of the scheme to Keele's 1,400 staff, the university struggled to persuade 80% of its employees to sign up to the scheme - the percentage required by law to make the scheme a reality.

Eventually, the judge said PW was able t o advise Keele that the 80% figure had been achieved and the scheme was operated for the financial year ended 31 July 1997 'with apparent success'.

The judge said PW's mistake lay in the interpretation it placed on part of the 1995 Finance Act which required that 80% of employees had to subscribe to a PRP scheme for it to be implemented.

PW took the view - wrongly - that 'short service employees' who had worked for the university for under three years could be excluded when calculating whether the 80% target had been achieved.

The judge said: 'The essence of the mistake was to suppose that it was possible to exclude from the 80% test identified sub-groups of short service employees in such a manner as to make the 80% easier to meet.

'And, in particular, to suppose that a possible sub-group could be defined solely by reference to the desire of its members to be part of the scheme.'

The judge said 'nemesis arrived' for Keele's PRP scheme when KPMG in December 1998 refused to give a clear certification in relation to the scheme accounts for 1997/98.

PW's negotiations with the taxman were unsuccessful and Keele eventually decided to cancel the 1998/99 scheme and the Inland Revenue later took steps to cancel the two earlier schemes.

Mr Justice Hart said PW had admitted that, in one respect, the advice it gave in relation to the PRP scheme introduced in 1996/97 'was wrong, and negligently so'.

However, the firm did not admit other allegations of negligence levelled against it by the university and denied that Keele had suffered any loss as a result of the negligent advice given.

But, deciding in the university's favour on that last crucial issue, the judge accepted the university had lost the chance of making substantial tax savings as 'a direct result of PW's negligence'.

The anticipated savings of '£800,000 or so' from a successful PRP scheme 'would have represented a substantial inflow of much needed funds' for the university, the j udge observed.

But, instead, the cancellation of the scheme meant the university lost out on savings which the judge said amounted to £1,249,856. On top of that, Keele was left facing a tax bill of more than £100,000 and professional fees for extricating itself from the scheme.

Mr Justice Fenwick told the judge his ruling meant PW would now have to pay the university £1,670,163.06 in compensation.

The issues of interest which must be paid on that sum and who will have to pay the legal costs of the case will be decided at a future date.

Mr Mark Cannon, for Price Waterhouse, said the firm would be seeking leave to appeal against the judge's ruling.


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