Failing adequately to advise on tax issues or simply providing the wrong tax advice are fruitful sources of claims – particularly since HMRC tightened up on tax avoidance schemes.
The recent case, Barker v Baxendale Walker Solicitors ( EWHC 664 Ch) concerned failed Inheritance Tax mitigation scheme, and considered (i) what standard of care should apply; (ii) whether the standard of care was breached, and (iii) whether, in the circumstances, the solicitor should be liable.
Three key points arise from the case, relevant to all practitioners:
1. You may face a higher standard of care if you fail to seek specialist advice in complex matters
The court held that Baxendale Walker required to satisfy the standard of care of 'an experienced specialist tax solicitor'. Interestingly, their failure to seek counsel advice on the complex 'employee benefit trust' arrangements in question left the firm exposed to a higher duty of care than they might otherwise have been.
2. If you satisfy the standard of care you should not be liable for an error of judgement
Baxendale Walker was held not to have been negligent when advising their client that the tax scheme satisfied the requirements of the Inheritance Tax Act. The fact that several specialist tax consultants had provided similar advice, based on the same analysis of the legislation assisted the determination that the appropriate standard of care had been met. It was not an unreasonable conclusion for a tax specialist to reach, using due skill and care, and therefore, following the decision in Saif Ali v Sidney Mitchell, liability should not accrue.
3. You should always advise clients of potential risks
While the firm in question escaped liability in this instance, the Court did highlight the need for firms to provide a "general health warning" regarding the potential risks: in this case, that the tax avoidance scheme might be challenged by HMRC. Baxendale Walker had not done so, however the view of the Court was that this client would have proceeded notwithstanding any such advice, had it been given, so there was no cuasation. Other firms may not be so fortunate – and you should ensure that all material risk issues are flagged, prefereably in writing, to their client – even if not advising on the specifics of the risk in question.
Contact us to discuss how this case might apply to your business, or for more general risk management advice.