Professionals providing advice should act on a recent Court of Appeal decision of Barker v Baxendale Walker . This highlights that when professionals advise on issues which may be subject to statutory interpretation, such as when advising on tax avoidance schemes, they may be under a duty to warn their clients that their opinion could be wrong or interpreted differently.
In 1998, the Claimant entered into a tax avoidance scheme on advice from the Defendants. The scheme involved the establishment of an Employee Benefit Trust ("EBT"), transfer of assets into the EBT, and creation of a sub-trust to benefit the Claimant's family after his death.
The Defendants advised the EBT should provide - while the Claimant and his wife were living – that neither they nor their children should be entitled to distributions. After both of their deaths, however, the children and remoter issue could receive benefits (free of CGT and IHT). That advice was premised on a specific construction of s.28(4) Inheritance Tax Act 1984 ("s.28(4)").
HMRC challenged the scheme because the EBT permitted the Claimant's family to benefit after his death. HMRC contended that the proper construction of s.28(4) prohibited the Claimant's family from benefitting at all. In 2013, the Claimant settled with HMRC at £11.29M and pursued the Defendants.
The claim failed at trial. The trial judge decided the Defendants' construction of s.28(4) was correct. On the subject of warnings, he found that a general health warning on the possibility of HMRC challenging the tax scheme would not have deterred the Claimant, and there was no duty to give a focused warning of the risk that the Defendant's construction may be wrong.
The Claimant appealed the specific warning point. He argued he should have been given a specific warning of the significant risk that the Defendants' construction of s.28(4) was wrong.
The Court of Appeal disagreed with the judge, found that the Defendants' construction was wrong, and that on the facts the Defendants owed a duty to warn of the real risk that HMRC would disagree with their construction of s.28(4). This was an aggressive tax avoidance scheme, where the potential tax saving was very large, and the advisers were charging a significant fee (c. £2.4M). It was irrelevant that various professionals considered the EBT between 1999 and 2010, but did not raise any issue on the construction point. Those professionals were an unrepresentative body of professionals who considered the EBT at different times, for different purposes.
Two points of general interest arise from the leading judgment of Arden LJ.
When does a duty to warn arise?
The judgment usefully set out principles guiding when a duty to warn will arise. Whilst these are directed at solicitors, they are relevant to accountants and tax advisers who consider and advise on the construction of documents and legislation.
The main principles are:
- Whether a professional is subject to a duty to warn his/her client that there is a risk that the Court may come to a different interpretation is fact sensitive;
- If the statutory provision is clear or has been well-tested previously, the duty to warn that his/her advice may be interpreted differently by the Court is less likely to arise. However, it is possible to be correct about the construction of a provision and still be under a duty to point out the risks involved;
- Unsurprisingly, there is more likely to be a duty to warn of risks if there is already litigation or the point has already been taken; and
- The issue is not one of percentages or whether opposing possible constructions are "finely balanced", but is more nuanced.
In short, when giving such advice, practitioners should carefully consider the potential alternative arguments to their advice and the warnings their clients need in their specific circumstances.
Freestanding duty to warn of material risks?
A second point of note from the judgment is Arden LJ's refusal to find that there was a separate freestanding duty to warn of material risks, assessed by reference to the significance of the risk to the client.
The well known Bolam test requires the Court – when assessing a professional's liability – to use as a yardstick the practice of the reasonably competent practitioner, in the relevant field, with the defendant's claimed expertise.
In Montgomery the Supreme Court departed from Bolam. It found – when considering the doctor/patient relationship – that in addition to a duty to diagnose and treat (breach of which would be assessed according to Bolam), the doctor had a separate duty to warn the patient of any material risks in the recommended treatment. A risk is material if a reasonable person in the patient's position would likely attach significance to it, or if the doctor is (or should reasonably be) aware that the particular patient would likely attach significance to it. Montgomery departed from Bolam as the duty to warn was not determined by reference to reasonably competent peers, but rather by reference to the patient.
Montgomery's remit was extended in O'Hare , a claim against a financial adviser who advised on investments. Kerr J commented that the reasoning in Montgomery was not irrelevant outside the medical context, and that "A duty to explain in terms not dissimilar to the Montgomery formulation is found in the COBS rules…I would find the content of those rules very difficult to square with the application of a conventional Bolam approach…"
In this case, Arden LJ declined to find that there was a separate Montgomery duty to warn as legal advice was the very service being provided. That must include consideration of the risks involved and advising appropriately in light of those risks. Arden LJ avoided being drawn into the extension of Montgomery outside the medical sphere, commenting it was unnecessary for her to consider whether the Bolam test should apply to financial advisers in circumstances such as O'Hare.
This leaves the door open for Claimants to argue that the Montgomery duty to warn still applies to professionals giving non-legal advice. Uncertainty in the law usually means risk for professionals. Accountants and tax advisers can seek to avoid the “Montgomery” trap by undertaking fact finding so they understand their client's attitude to risk, tailoring their advice accordingly, and ensuring proper records of advice are retained.