The Court of Appeal has ruled that a law firm was negligent in not giving its client any specific warning about the pitfalls of a tax avoidance scheme.
South-east firm Baxendale Walker Solicitors and its sole equity partner Paul Baxendale-Walker had offered specialist tax advice to business owner Iain Barker relating to a tax avoidance scheme designed to avoid both capital gains tax and inheritance tax through an offshore trust.
Company shares were to be gifted to the trust and a series of sub-trusts created, which would benefit members of Barker’s family after his death.
Barker argued that a reasonably careful firm, with the expertise it claimed to have, should have warned him of the risks associated with the scheme and the chance that his family members would be excluded from the benefits.
More than 10 years after the scheme was established and the advice given, HM Revenue and Customs challenged its validity and Barker entered a settlement under which he paid £11.29m in tax and interest: he then sought damages for negligence against Baxendale-Walker and his firm.
In the High Court, it was found that a ‘general health warning’ from advisers would not have deterred Barker from going ahead with the scheme. He might not have proceeded with the same structure, Mr Justice Roth concluded, but this was not a case in which any careful and competent solicitor would have given a specific warning.
On appeal, Barker said Roth had been wrong to conclude that the defendants did not act in breach of their duty through the detailed construction of the offshore agreement.
Sitting in the Court of Appeal in Barker v Baxendale Walker Solicitors & Ors, The Right Honourable Lady Justice Asplin said Baxendale-Walker’s construction of one section in particular dealing with exemptions was ‘very unlikely’ to be correct and gave rise to ambiguities.
The judge agreed that even where a legal adviser was correct about the construction of a provision, they were still under a duty to point out the risks involved and were negligent in not having done so.
‘There can be no separation between the advice and any appropriate caveats as to risk,’ added Asplin. ‘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.’