The Court of Appeal has held that a solicitor was negligent in failing to give a specific risk warning that a tax avoidance scheme might fail. The judgment, which overturned the first instance decision of the High Court, provides clarification of the nature of a solicitor's duty of care and the scope of risk warnings which should be given to clients. (Barker v Baxendale Walker Solicitors (a firm) & Ors [EWCA] Civ 2056).
Mr Barker set up a successful consultancy business in the early 1990s ("Team 121"). When Mr Barker and his fellow shareholders were considering selling the company in 1998 they sought tax planning advice to mitigate their exposure to Capital Gains Tax on the sale. Mr Barker was introduced to Paul Baxendale-Walker and his firm Baxendale Walker Solicitors (together "BWS") who recommended the establishment of an employee benefit trust ("EBT"). BWS advised that if the shares in Team 121 were transferred into an EBT before the company was sold, the shareholders would avoid both Capital Gains Tax and Inheritance Tax, provided that they were excluded from benefit and members of their families were excluded from benefit until after the death of the shareholder.
More than ten years after this advice was given and the structure established HMRC challenged the validity of the EBT scheme on the basis that members of Mr Barker's family could benefit from the trust after his death. This meant, HMRC argued, that that the relevant statutory exemption (s.28(4) Inheritance Tax Act 1984) did not apply and CGT was due on Mr Barker's disposal of his shares in Team 121. Mr Barker settled HMRC's claim for £11.29 million in tax and interest.
The First instance proceedings
Mr Barker issued proceedings against BWS in the High Court seeking damages of in excess of £15 million. He sought to recover the tax and interest ultimately paid to HMRC and the fees of approximately £2.5 million paid to BWS for their advice.
In his judgment, Mr Justice Roth found that BWS was negligent in having failed to give even a low level, general warning about the possibility of the advice being wrong or about the risk of a challenge by HMRC. However, that negligence had not caused Mr Barker any loss because a "general health warning" would not have deterred him from going ahead with the EBT scheme. The Judge found that Mr Barker would have been deterred by a specific, high-level warning from BWS that HMRC might reasonably take a different view of the applicability of s.28(4) IHTA. However, the Judge held that BWS's advice on s.28(4) was very likely to be correct and on that basis he had not been negligent in failing to warn about a potential contrary interpretation.
The Court of Appeal judgment
Mr Barker did not allege that BWS was negligent in taking the view he did of s.28(4). It was accepted for the purposes of the appeal that a reasonably competent solicitor could have done so. The question for the Court of Appeal was therefore whether a competent solicitor could reasonably have failed to warn Mr Barker that there was a significant risk the EBT might fail because HMRC might take a different view of it providing that Mr Barker's family could benefit from it after his death.
The Court's starting point was to look at the meaning of s.28(4). Giving the leading judgment Lady Justice Asplin concluded that, whilst it was neither necessary nor appropriate (in a case where HMRC were not represented) for the Court to make a finding on the meaning of this section, it was "very unlikely" that BWS's construction of s.28(4) was correct. In other words, in order to guarantee the fiscal effectiveness of the EBT, Mr Barker and his family should have been excluded from benefit for all time, not only until after his death.
There was detailed argument before the Court of Appeal about the test to be applied in determining whether or not a risk warning should have been given and Lady Justice Asplin's judgment contains an interesting review of the relevant authorities. In explaining her conclusions, Lady Justice Asplin set out the following principles which should apply in similar cases:
- The question of whether a solicitor is in breach of a duty to explain the risk that a court may come to a different view from him is highly fact sensitive;
- If the construction of the provision on which the solicitor is advising is clear, it is very likely that it will not be necessary to caveat the advice given and explain the risks involved;
- However, it is possible for a solicitor to be correct, or at least-non negligent, about the construction of a provision but negligent in failing to point out the risks involved;
- If an alternative construction of the provision has already been pointed out it is more likely that a solicitor will be under a duty to point out the relevant risks; and
- In determining whether a warning must be given, the issue is not one of percentages or of whether possible opposing constructions are "finely balanced" – the picture is more nuanced.
Lady Justice Asplin held that there could be no separation between advice to follow a particular course of action and any appropriate caveats as to risk. "They are one and the same. The lawyer as part of the legal advice he is providing, must evaluate the legal position and determine whether in all of the circumstances, he should advise his client that there is a significant risk that the view he has taken about the substantive matter in question may be wrong" (per Asplin LJ at ). In this case, having concluded that BWS was very likely wrong about s.28(4), the court held that BWS was negligent in failing to give a specific risk warning about the alternative construction of s.28(4) and that, if it proved correct, it would prove fatal to the fiscal effectiveness of the EBT.
"A lot of trouble..."
This was a professional negligence case about a solicitor advising on a tax avoidance structure but the principles will have wider application, both to solicitors advising in other areas and to other professionals, particularly barristers and tax advisors. The Court clearly had no desire to prevent professionals from getting off the fence and giving advice. However, the judgment is a salutary reminder that even if a professional's view about a statutory or contractual provision is correct they can still be negligent for failing to advise about the risks arising out of an alternative construction. Particular care must be taken when advising on complicated provisions such as s.28(4) which, as Lady Justice Asplin said, "was likely to cause 'a lot of trouble'".
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This publication is a general summary. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2017