Tax adviser's failure to warn of potential for scheme failure was negligent, appeal court rules

Although it was not argued that tax specialist law firm Baxendale Walker’s construction of the relevant tax law was itself negligent, the appeal court found that there was a significant risk that their advice was wrong and in all the circumstances, a reasonably competent solicitor would have gone beyond simply stating his own view and set out the risks. In doing so, the appeal court overturned the High Court's ruling that no "careful or competent solicitor of appropriate expertise" would have provided the client, Iain Barker, with a sufficiently strong risk warning that he would not have entered into the scheme.

The Court of Appeal also took into account the potential charge to tax should the scheme fail, the fee "in the region of £2.4 million" charged by the tax adviser and the "very nature of the aggressive tax avoidance scheme", which was always likely to be open to challenge.

Giving the judgment of the court, Lady Justice Asplin said that it was "perfectly possible to be correct about the construction of a provision [of the tax legislation] or, at least, not negligent in that regard, but nevertheless to be under a duty to point out the risks involved and to have been negligent in not having done so".

"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," she said.

"When determining whether a reasonably competent adviser would have advised that there was a significant risk that a contrary view would be taken in relation to [the scheme], the relevant facts included the fact that this was a very aggressive tax avoidance scheme which was marketed to Mr Barker on the very basis that his family would be able to benefit from the property within the [employee benefit trust] at the date of his death free of capital gains tax and inheritance tax, an outcome which might appear on the fact of it to be too good to be true," she said.

"It would have been obvious to any reasonably competent solicitor practising in this area that there was a real risk that [HM Revenue and Customs] would take the post-death exclusion construction point at some stage and, if necessary, would pursue it through the tribunal and court system, especially as the EBT arrangement was founded on the ability of Mr Barker's family to benefit after his death which was its purpose and there was a considerable amount of tax at stake," she said.

Barker set up an EBT in 1998, after seeking tax planning advice to mitigate his exposure to capital gains tax on the sale of his shares in a company which he had co-founded. He was advised by Baxendale Walker's sole partner, Paul Baxendale-Walker, that the structure would allow Barker's wife, children and descendants to access benefits from the EBT free of both capital gains tax and inheritance tax after Barker's death. This advice was based on Baxendale-Walker's interpretation of a particular provision of the 1984 Inheritance Tax Act (IHTA).

Some years later, HMRC began investigating the EBT arrangement. Following its investigations, Barker agreed to settle with HMRC for just over £11m, following advice from his solicitors and accountant that its challenge to the arrangements was likely to succeed. Barker then began a claim in negligence against Baxendale-Walker and his firm.

In reaching his conclusion on the failure to warn, the High Court judge assessed whether the adviser was acting in accordance with a practice of competent respected professional opinion. He found that, given the debate around the IHTA provision, not every reasonably competent tax adviser of the same expertise would have provided Barker with a risk warning specific enough that he would not have entered into the scheme. Accordingly, Mr Barker's claim failed. The Court of Appeal was asked to consider recent case law which appears to move away from the Bolam test when professionals advise on risk. However, the appeal court found that for legal professionals there could be "no separation between the advice and any appropriate caveats as to risk" and overturned the original judgment in Mr Barker's favour.

The Court of Appeal's decision "reasserts the significance of the Bolam test in the context of legal advice", said professional negligence expert Danielle Williamson of Pinsent Masons, the law firm behind Out-Law.com. The 'Bolam test', named for the relevant case, is based on whether a professional adviser was acting in accordance with a practice of competent respected professional opinion.

"It had appeared that the courts were moving away from considering what the reasonable professional would, or should, do; and towards a requirement that when advising on the risks of following that advice, as opposed to the actual advice itself, the professional must put himself into the client's shoes and ask first, what advice on risk would the reasonable client expect and secondly, what advice on risk would this client expect," she said. "This would have created a two-tier standard of care where Bolam would apply to the provision of the advice and whether that advice was negligent, but a lawyer would be judged by a different, more subjective standard of care when advising the client on the risks of following that advice.."

"In the Court of Appeal, the judges recognise that in the context of legal advice there is no separation between the advice and any appropriate caveats as to risk," she said. "That said, it reversed the High Court's finding and held that the adviser had been negligent in failing to specifically warn that its statutory construction might be wrong. As ever, this case was fact specific and it was the clear that the Court of Appeal was influenced by the fact that this was 'a very aggressive tax avoidance scheme'."

"However, it now appears that, where the consequences of being wrong are significant, there is an increased duty to advise the client as to those consequences no matter how confident a legal adviser is in their advice," said Williamson.

Williamson said that the appeal court did not consider in detail a 2016 case on negligence in the context of financial advice, in which the judge appeared to move away from the Bolam test when assessing the adequacy of risk warnings. For this reason, financial advisers would "still need to be more aware of their client's attitude to risk as the extent to which the client should be warned about risks will not depend on the attitude of the individual adviser, but rather on the particular client", she said.