A firm of tax advisers has successfully defended a professional negligence claim despite failing to advise its client about the risks of a tax-avoidance scheme.  The claim was defeated because the claimant did not show that he has suffered a loss as a result of the negligence.

Iain Barker, a successful software entrepreneur, asked specialist tax law firm, Baxendale-Walker Solicitors, for advice about avoiding Capital Gains and Inheritance Tax on his shareholding in his business.  Baxendale-Walker recommended that Barker set up Employee Benefit Trusts (EBT), which used complex sub-trusts and cash loans to avoid tax.

Some years later, HM Revenue and Customs challenged the EBT, demanding around £25m in unpaid tax.  After negotiation Mr Barker agreed a compromise payment of £11m with HMRC.  He went on to sue Baxendale-Walker to recover his loss, claiming its advice to establish the EBT had been negligent.

The judge decided that the advice had not been negligent, as at the time it was given “a reasonably competent specialist tax lawyer” would have offered the same professional advice about establishing an EBT.  However he found that Baxendale-Walker had been negligent for failing to warn its client about the risks involved in the scheme.  Unfortunately for Mr Barker, he had already accepted that he knew the tax advice was aggressive and had also considered using an alternative scheme proposed by Deloitte.  The judge concluded that this proved that Mr Barker would have gone ahead and set up the EBT, even if a risk warning had been given.  As a result he had suffered no loss and the claim failed.

“This case shows just how important it is for professionals to warn their clients about any risks they may face as a result of taking their advice,” said James Burgoyne, Director – Claims & Technical, Brunel Professional Risks.  “Claims may be brought many years after advice is given and what was accepted practice at the time may no longer prove to be right as the years go by.  In this case the adviser was only able to escape the claim as the defendant was unable to prove he had suffered a loss as a result of the adviser’s breach of duty.  It takes little extra effort for firms to provide appropriate caveats to advice, but it could prove a lifesaver if a claim of negligence is brought several years later.”

Reports on the case have been published by the Tax Journal, The Society of Trust and Estate Practitioners and by Law firm, Wright Hassall.