In I Barker v Baxendale Walker Solicitors and P Baxendale Walker[2016] EWHC 664 (23 March 2016), the High Court found that a firm of solicitors which had recommended a tax avoidance scheme, that had failed, was not liable for professional negligence.
Mr Barker claimed professional negligence against his solicitor for advice on a tax avoidance scheme based on the establishment of an employee benefit trust (EBT) which he had entered into and which, if successful, would have avoided CGT and IHT. HMRC had challenged the scheme. Mr Barker, having been advised that HMRC was likely to succeed, had entered into a settlement involving the payment of a substantial amount on account of tax and interest.
Mr Barker claimed that he could have entered into another scheme, which would have been successful. He contended that he had been advised that the structure set up would satisfy the requirements for an EBT if his wife and children were excluded during his lifetime but that they could benefit after his death, whereas they had to be excluded completely (IHTA 1984 s 28). In any event, there had been a sufficient possibility of this alternative construction for his solicitor to warn him of the risks.
The court observed that ‘the relevant question was whether a reasonably competent specialist tax lawyer at the time, with particular expertise in tax avoidance schemes, applying proper skill and care, could have advised as these defendants did regarding the EBT scheme’. The fact that other tax advisers may take a different view or that the statutory interpretation was eventually found to be wrong by the tax tribunals did not establish negligence.
Although the court accepted that Mr Barker’s solicitor’s interpretation of the relevant provisions had been reasonable, it found that the solicitor had breached its duty of care by not giving his client a ‘general health warning’ about the inherent risks of implementing a tax avoidance scheme. However, the court also found that such a warning would not have deterred Mr Barker, since he had known that this was an aggressive scheme and his case was that he would have entered into another scheme had he known that the EBT scheme may not succeed. The breach had therefore not caused the loss incurred. Finally, the court rejected the contention that Mr Barker’s solicitor should have given him a ‘high level warning’ on the significant risk of the EBT scheme. A solicitor whose interpretation was likely to be correct could not be in breach of duty for failing to warn his client that he might be wrong.
Why it matters: The solicitors had argued that the standard applicable was less than that for a tax QC. The court found, however, that as they had given advice on the EBT scheme without the help of a tax QC, there was no difference and they had to be held to a high standard. They had therefore breached their duty of care but their breach was not the cause of the loss.
In I Barker v Baxendale Walker Solicitors and P Baxendale Walker[2016] EWHC 664 (23 March 2016), the High Court found that a firm of solicitors which had recommended a tax avoidance scheme, that had failed, was not liable for professional negligence.
Mr Barker claimed professional negligence against his solicitor for advice on a tax avoidance scheme based on the establishment of an employee benefit trust (EBT) which he had entered into and which, if successful, would have avoided CGT and IHT. HMRC had challenged the scheme. Mr Barker, having been advised that HMRC was likely to succeed, had entered into a settlement involving the payment of a substantial amount on account of tax and interest.
Mr Barker claimed that he could have entered into another scheme, which would have been successful. He contended that he had been advised that the structure set up would satisfy the requirements for an EBT if his wife and children were excluded during his lifetime but that they could benefit after his death, whereas they had to be excluded completely (IHTA 1984 s 28). In any event, there had been a sufficient possibility of this alternative construction for his solicitor to warn him of the risks.
The court observed that ‘the relevant question was whether a reasonably competent specialist tax lawyer at the time, with particular expertise in tax avoidance schemes, applying proper skill and care, could have advised as these defendants did regarding the EBT scheme’. The fact that other tax advisers may take a different view or that the statutory interpretation was eventually found to be wrong by the tax tribunals did not establish negligence.
Although the court accepted that Mr Barker’s solicitor’s interpretation of the relevant provisions had been reasonable, it found that the solicitor had breached its duty of care by not giving his client a ‘general health warning’ about the inherent risks of implementing a tax avoidance scheme. However, the court also found that such a warning would not have deterred Mr Barker, since he had known that this was an aggressive scheme and his case was that he would have entered into another scheme had he known that the EBT scheme may not succeed. The breach had therefore not caused the loss incurred. Finally, the court rejected the contention that Mr Barker’s solicitor should have given him a ‘high level warning’ on the significant risk of the EBT scheme. A solicitor whose interpretation was likely to be correct could not be in breach of duty for failing to warn his client that he might be wrong.
Why it matters: The solicitors had argued that the standard applicable was less than that for a tax QC. The court found, however, that as they had given advice on the EBT scheme without the help of a tax QC, there was no difference and they had to be held to a high standard. They had therefore breached their duty of care but their breach was not the cause of the loss.
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