This is my advice. By the way, it might be wrong!
05 March 2018
When do solicitors have to warn their client that the advice they are giving may turn out to be incorrect? The Court of Appeal has recently considered this issue.
In Barker v Baxendale-Walker Solicitors and another  EWCA Civ 2056, the claimant, Mr Barker, was the majority shareholder in Team 121 Holdings, the parent company of a group worth £30m-£40m. He and his fellow shareholders decided to sell the company, and Mr Barker sought tax planning advice on the consequences of a sale.
Mr Barker was advised by Baxendale-Walker Solicitors, a specialist tax planning firm, to set up an Employee Benefit Trust (EBT) as a tax efficient vehicle for providing the proceeds of sale to his family and others. Mr Barker acted on the advice, but HMRC challenged the arrangements. Tax Counsel advised Mr Barker that HMRC had strong arguments in its favour. Mr Barker therefore settled HMRC’s claim for around £11m and issued legal proceedings in negligence against Baxendale-Walker.
A duty to warn?
HMRC had raised an objection to Mr Barker’s tax planning, on the basis of its interpretation of s. 28(4) of the Inheritance Tax Act 1984. The essential point was whether Mr Barker’s family could receive benefits from the EBT structure free of tax after Mr Barker’s death, despite their being persons “connected” with him. As well as Baxendale-Walker, other lawyers, including Counsel, had considered the EBT scheme before its implementation, but none of them suggested there could be a problem arising from the interpretation of s. 28(4).
At first instance, Mr Justice Roth considered that Baxendale-Walker’s interpretation of s. 28(4) was probably correct, and that they had no duty other than to provide a general warning of the possibility of a challenge by HMRC to the EBT scheme, given that it was a tax avoidance scheme. However, they had no duty to warn specifically of the possibility that the EBT would fail to deliver the hoped for tax advantages because of an alternative interpretation of s. 28(4). Mr Justice Roth held a general warning would not have deterred Mr Barker from going ahead with the EBT scheme.
The Court of Appeal decision
On appeal the Court of Appeal disagreed on the key issue of what type of warning should have been given. In its discussion as to when a solicitor had a duty to explain the risk that the court may come to a conclusion different from their own advice, the court said the following principles were likely to apply:
- The question of whether there was a breach of such a duty would be highly fact sensitive;
- If the interpretation of the provision was clear, it was likely that it would not be necessary to caveat the advice given;
- However, it was possible to be correct about the interpretation of a provision but still under a duty to point out the risks involved and to have been negligent in not having done so:
- It would be more likely for there to be a duty to point out the risks if litigation was already on foot, or if a point against the solicitor’s interpretation had already been taken;
- The issue was not one of percentages but was more nuanced than that.
To assess whether there was a significant risk, the factual circumstances, including the nature of the EBT arrangement, the amount at stake and the risk of challenge, had to be taken into account. Here the relevant facts included that this was an aggressive tax avoidance scheme, and at stake was the avoidance of a substantial amount of tax. The Court of Appeal considered that it would have been obvious to any reasonably competent solicitor practising in this area that there was a real risk that HMRC would take a point concerning s. 28(4) and, if necessary, pursue it, given the amounts at stake. The solicitors should have given a specific warning, relating to the alternative interpretation of s.28(4), that there was a significant risk that the tax avoidance scheme would fail.
The Court of Appeal’s guidance in this case will be influential when assessing whether solicitors should have warned that their advice may prove to be incorrect. The Court of Appeal emphasised the need to conduct an analysis of the rival arguments on both sides of the interpretation issue, and it would be good practice for solicitors advising on difficult areas of the law to carry out such an analysis. The question of a duty to warn, although an obvious consideration in tax cases, is of general application in the law: earlier cases have discussed restrictive property covenants and commercial non-compete provisions. Although solicitors know that their clients want clear advice, they should take note that when advising on difficult issues, they may be better serving their clients by pointing out that a contrary view might prevail.
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