Tax evasion is illegal, tax avoidance is not; but the release of the Paradise Papers at the end of 2017 renewed public and media interest in how many businesses, celebrities and high-net-worth individuals use complex structures to reduce the tax they pay. As the Government crackdown on such tax avoidance schemes gathers pace, some are questioning the tax advice they received from their accountants, lawyers or tax advisers.
In a recent case in the Court of Appeal, a firm of solicitors was found to have been negligent by failing to warn a client of the significant risk that a tax avoidance scheme could be challenged by HMRC.
Barker v Baxendale Walker Solicitors and another  EWCA Civ 2056, involved a professional negligence case in relation to specialist tax advice relating to an Employee Benefit Trust (EBT) tax avoidance scheme designed to avoid both capital gains tax and inheritance tax.
An EBT is a trust established either in the UK or offshore to hold cash and other assets, such as shares, to provide benefit to company employees and their families. They attract generous tax concessions and have been on HMRC’s radar for some time now. In RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland  UKSC 45, the Supreme Court agreed with HMRC that loans made to employees under the club’s EBT loan scheme were in fact remuneration and so subject to tax and NIC.
In Barker v Baxendale Walker, the claimant, Mr Barker, was the co-founder and majority shareholder in a company. In 1998, he decided to sell the company and sought tax advice from the now-defunct law firm. The firm recommended an EBT as a tax-efficient vehicle to mitigate his exposure to tax on the sale of his shares and to inheritance tax. The EBT was set up and the company was sold.
In 2005, HMRC opened an investigation into the EBT and the sale of the company. It concluded that the inheritance tax exemption the EBT was set up to exploit did not apply based on the construction of a post-death exclusion. Mr Barker subsequently settled with HMRC for circa £11.3 million.
He then sued Baxendale Walker for professional negligence in relation to their tax advice on the failed scheme.
At first instance, the High Court dismissed the claim on the basis that HMRC’s construction of the exclusion was not obvious or likely, though it was arguable. It did not consider that any careful or competent solicitor of appropriate expertise would have given a specific warning about the risk of a post-death construction by HMRC. Nevertheless, it was held that the firm should have made it 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. Mr Barker appealed.
The Court of Appeal allowed the appeal and overturned the decision of the High Court. It said the firm should have given Mr Barker a specific warning that there was a significant risk that the EBT scheme might fail to deliver the hoped for tax advantages because of a post-death exclusion construction.
The case acts as a stark reminder to tax advisers of the need to strike the right balance between giving confident advice and giving sufficient warning of risks. It also highlights the remedies available to companies and individuals facing HMRC investigations and unexpected tax liabilities as a result of inadequate tax advice.
Rob Ripley and Mike Wilson are Partners in the Dispute Resolution team at Bridge McFarland solicitors. Both are members of the Professional Negligence Lawyers Association (PNLA) and have particular experience in claims relating to Employee Benefit Trusts and negligent tax advice.