Professional advisers have a duty to warn their clients where there is a significant risk that their advice may fail to achieve their client’s objectives.  A specialist tax adviser was found to have been negligent when the tax avoidance structure he recommended failed, costing his client over £11 million in tax and interest.

Businessman Iain Barker wanted to avoid paying capital gains tax on the sale of shares in his company.  He also wanted to protect his family from the impact of inheritance tax after his death.  His tax adviser, Baxendale Walker, advised that he set up and transfer his shares into an offshore employee benefits trust (EBT).  The trust was structured into a series of sub trusts, designed to benefit Mr Barker’s family after his death.

Baxendale Walker did not warn Mr Barker that there were risks that their interpretation of the law might be challenged and there were risks that the arrangement might fail.

More than ten years after the EBT was set up, HM Revenue and Customs successfully challenged the structure.  Mr Barker agreed to pay £11.2 million in unpaid taxes and interest.  He immediately started proceedings against his tax adviser for negligence.

In the High Court the judge dismissed the claim of negligence.  He concluded that while Baxendale Walker was negligent for failing to provide a general warning, Mr Barker would have gone ahead with the EBT in any event.  The claim therefore failed on the grounds of causation because Mr Barker had not suffered any loss because of the tax adviser’s negligence.

Mr Barker appealed and won his claim.  The judge concluded that the high court judge had been wrong, and that Baxendale Walker should have issued a specific high-level warning about the risks involved in the scheme.

This case shows how important it is for advisers to warn their clients if there are risks involved in following their advice,” said James Burgoyne, Director – Claims & Technical, Brunel Professions. “This is particularly important where the advice is based on a specific interpretation of legislation and where there is an alternative interpretation. Every case will depend on the specific facts, so advisers should consider carefully what warnings they provide to their clients.”

Reports on the decision have been published by the Law Society Gazette, and by law firms Wright Hassall and Clyde & Co.

This decision parallels a growing body of case law concerned with an elaboration of the duty to warn as part of the duty of reasonable skill and care applicable to any professional.

The “test of materiality” focuses on the reasonable expectations of the client and in the case of Montgomery v Lanarkshire Health Board (a clinical negligence case) the court was concerned “… whether, in the circumstances of the particular case, a reasonable person in the patient’s position would be likely to attach a significant risk, or the doctor is or should be aware that the particular patient would be likely to attach significance to it.”

A “duty to warn” and/or “duty to advise” are not radically new ideas, but there has been a shift in emphasis in considering what the professional needs to do in discharging these duties. The shift is from considering the professional’s actions in terms of their industry practice, to looking at them by what their client would reasonably consider as significant.

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