Should your professional adviser have given you a specific warning about the risk involved in your tax scheme? Barker v Baxendale Walker Solicitors [2017] Part 2

The first instance decision of Barker v Baxendale Walker offered some protection to professional advisers accused of negligence.  That decision has been successfully appealed resulting in changes to the way certain professionals should give advice and the scope of negligence claims.

Case summary – an adviser’s duty to warn

The Court of Appeal decided that a specialist tax adviser owed his client a duty to warn that there was a significant risk that the recommended tax avoidance scheme would fail to achieve the client’s objectives, resulting in adverse financial implications.

As a general principle, a professional adviser must evaluate their professional position and determine whether, in all the circumstances, they should advise their client that there is a significant risk that their advice in question may be wrong. This duty of care will be highly fact sensitive.

Mr Barker’s Employee Benefit Trust (EBT)

Mr Barker, on the advice of his specialist tax solicitor, set up an offshore EBT and transferred his company shares by way of a gift into the EBT.  Crucially the EBT did not exclude his family members as beneficiaries after his death.  This was labelled the “post-death exclusion construction” throughout the case.  This detail eventually led to the tax avoidance scheme falling foul of inheritance tax (IHT) rules relating to requirements to be met for IHT exemption for a gift to an EBT (section 28(4) Inheritance Tax Act 1984 (IHTA)). HMRC raised assessments and challenged the validity of the EBT scheme.

Claim in negligence against professional adviser

At the time of sale in 1998, Mr Barker’s company was worth £30-40 million. In April 2013, more than a decade after the tax scheme was originally established, Mr Barker settled his tax liability with HMRC for just under £11.3 million.

That same month, Mr Barker issued a claim in professional negligence against Baxendale Walker Solicitors, the specialist tax solicitors who advised him to set up the EBT in 1998 and were paid in excess of £2 million for doing so.

What the High Court decided

At first instance, the Judge decided that the post-death exclusion construction favoured by HMRC was “not obvious or likely” and “very doubtful” although he did state the approach had been “arguable” at the time.  The critical question for the Judge was: what advice and/or warning should have been given to Mr Barker.

The Judge accepted that any competent and careful adviser should have given a general health warning (which was not given), but the high level risk warning Mr Barker argued should have been provided was not necessary in these circumstances.  

In this context a general health warning was construed to include information that:

  • HMRC may challenge the tax avoidance scheme;
  • If that were the case, court proceedings may be required to defend that challenge; and
  • HMRC’s challenge may be upheld.

By contrast the high level warning would have included advice that:

  • “there was (at the very least) a risk that an EBT which did not relevantly exclude from benefit persons connected with a participator after his death would not attract the desired fiscal advantage”

As no high level risk warning was required, and for other causation reasons, the Judge found in favour of the adviser and dismissed Mr Barker’s claim.

What the Court of Appeal decided

Mr Barker appealed.  He argued that not only should the tax advisers have given him a general health warning but the specific high level warning should also have been provided. Mr Barker argued that had he been given this high level warning, he would not have proceeded with the EBT.

The Court of Appeal decided Mr Barker was right. The Court of Appeal determined that:

  • the High Court had erred in its interpretation of section 28(4) IHTA;
  • the Judge’s view on this had coloured his approach to the risk involved; and
  • consequently this impacted his decision on whether it was appropriate to give the high level warning.

Following full consideration of the interpretation of the relevant statutory provisions, the Court of Appeal concluded that there was a significant risk that the tax adviser’s advice was wrong and in all the circumstances a reasonably competent adviser would have gone beyond his own view and set out the risks. The Court of Appeal reached the decision that, because of this, there had been professional negligence and Mr Barker was successful with his claim.

Should you have received a high level warning?

In interpreting legislation and legal documents, a professional adviser owes a duty of care to give a specific warning if there is a real scope for dispute and a significant risk that the interpretation of legislation and legal documents could be incorrect.

If you were advised on a tax avoidance scheme which later failed, and you were not specifically warned by your professional adviser that the scheme might fail and what risks were associated with the scheme, there may be grounds for a claim in professional negligence.

About the author

Nathan Talbott Partner

Nathan is a member of our Tax and Financial Services Litigation team dealing with disputes relating to investments, tax schemes, pensions and HMRC enquiries and negotiations. He has acted on “both sides” in this regard, advising corporates and individuals as well as financial institutions.