Court of Appeal finds firm negligent for failing to warn over risk of tax avoidance scheme


HMRC: Real risk taxman would take point

A firm of solicitors should have warned a client of the significant risk that a tax avoidance scheme would not withstand a challenge from HM Revenue & Customs (HMRC), the Court of Appeal has ruled.

The client, Iain Barker, ended up having to pay £11.3m to settle with HMRC and the same month issued proceedings against Baxendale Walker Solicitors and its founder, Paul Baxendale-Walker.

The firm is long-defunct firm and Mr Baxendale-Walker has been a frequent litigant after being struck off as a solicitor in 2007.

Though the firm was not negligent in its interpretation of a piece of tax law, the appeal court held it was in failing to warn about the risk that it was wrong and likelihood of an HMRC challenge.

Lord Justice Patten said that a “careful and competent assessment of the rival arguments on construction (which was never undertaken) would in my view have disclosed that there was at the very least a significant possibility” that the firm’s interpretation was wrong.

The scheme was put together to deal with the sale of the shares in Mr Barker’s company. It was based upon establishing an employee benefits and shares trust (known as an EBT) offshore, the transfer of company shares by way of gift to the EBT and the creation of a sub-trust, the beneficiaries of which included members of Mr Barker’s family, albeit that they were excluded from benefit until after he died.

More than a decade after the scheme was established, HMRC raised assessments on Mr Barker and challenged the validity of the EBT scheme on the basis of what was called in court the post-death exclusion construction.

Having been advised that the challenge would probably succeed, Mr Barker agreed to pay HMRC £11.3m in tax and interest.

At first instance in March 2016, Mr Justice Roth held that the defendants should have made clear that, since the transfer of the shares to the EBT was a tax avoidance scheme, there was a possibility that it would be challenged by HMRC.

However, he found that a “general health warning” would not have deterred Mr Barker from going ahead with the EBT scheme, but accepted that had a specific warning been given, Mr Barker would not have proceeded.

Nevertheless, Roth J concluded that it was not a case in which any careful and competent solicitor of appropriate expertise would have given the specific warning. This was based on the judge’s conclusion that the advice given was probably correct.

Giving the main ruling, Lady Justice Asplin said: “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.”

This was a “very aggressive tax avoidance scheme” where the potential charge to tax was very large and Baxendale Walker’s fee was £2.4m.

“It would have been obvious to any reasonably competent solicitor practising in this area that there was a real risk that HMRC would take the post-death exclusion construction point at some stage and if necessary, would pursue it through the tribunal and court system,” she said.

Asplin LJ concluded that the trial judge was wrong about the construction of section 28(4) of the Inheritance Tax Act 1984 – the provision at the heart of the case – and that “his view of the construction coloured his approach to the risks involved and whether it was appropriate therefore, to give the specific warning”.

She found there was a significant risk that the scheme would not work. “In all those circumstances, despite the fact that it is not alleged that the respondents’ view of the construction of section 28 was itself negligent, they should have given the specific warning.

“There was a significant risk that their advice was wrong and in all the circumstances, a reasonably competent solicitor would have gone beyond his own view and set out the risks.”

Asplin LJ added: “Roth J was wrong to conclude that, where the solicitor’s interpretation of the particular provision is likely to be correct, it is difficult to see that they would also be in breach of a duty to warn unless the arguments were finely balanced.

“Although the question of whether there is real scope for dispute or a significant risk turns in substantial part upon the strength of the arguments for and against the particular construction, it also depends upon all of the relevant circumstances.”

After being struck off, Mr Baxendale-Walker went on to run an adult film company and Loaded magazine, and last year was fined after being found guilty of impersonating an official from HMRC in dealings with the Solicitors Regulation Authority.




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