The recent decision of Barker v Baxendale Walker Solicitors  EWHC 664 (Ch) provides useful authority for professionals and their insurers - professionals providing incorrect advice may nevertheless escape a finding of liability. The Court held that liability will not be established in circumstances where the same incorrect advice would have been provided by other practitioners.
The Claimant was looking to sell his successful Management Consultancy Group, worth in the region of £30-40m. Not surprisingly, he was concerned to limit shareholders' substantial tax liabilities.
In 1998, the Defendant solicitor advised that the establishment of an employee benefit trust (EBT) under S. 28 of the Inheritance Tax Act 1984 (IHTA) would avoid both Capital Gains and Inheritance Tax.
The group entered into the scheme by establishing a discretionary trust for the benefit of the group's employees on the basis that a shareholder's family could only benefit from the scheme after the shareholder's death. The Claimant participated in the scheme by entering into a deed of gift of his shares in favour of the trust.
Several years later, HMRC challenged the scheme on the basis that the criteria for an EBT were not satisfied if family members could benefit from the trust after the Claimant's death - family members had to be excluded completely from any benefit.
On advice that this challenge was likely to succeed, the Claimant entered into an £11m settlement with HMRC.
The Claimant subsequently brought a negligence claim against the Defendant solicitor to recover his losses, alleging negligent advice and, in the alternative, that the Defendant should have warned the Claimant of the risks of the EBT if their advice proved to be incorrect.
What was the applicable standard of care?
The Court had no doubt that the Defendant solicitor owed the Claimant a duty to exercise the skill and care reasonably to be expected of an experienced specialist tax solicitor. The question was whether reasonable practitioners professing the expertise of the Defendant could properly have given advice in the same terms that the Defendant did.
The Court referred to Lord Diplock's observations in Saif Ali v Sidney Mitchell that a professional should not be liable for damage arising from an error of judgment unless the error was one that no reasonably well informed and competent member of that profession could have made.
Interestingly, in Barker the Defendant argued that the standard applicable should be less than that for a tax QC. However, given that the Defendant was content to give advice on the EBT scheme without seeking to rely on the advice of counsel, the Court considered that the higher standard should still apply.
Was the duty of care breached?
The Court held that the Defendant was not negligent in advising that the scheme satisfied the conditions of S. 28 IHTA or in failing to warn the Claimant that there was a risk that it would not be effective to avoid his tax liability unless his family were excluded from benefits even after his death. Crucially, several experienced tax specialists had independently interpreted S. 28 in the same way as the Defendant without apparently considering that there was a likely alternative construction. Accordingly, it could not be said that the Defendant had fallen below the required standard, even though its advice was ultimately incorrect.
The Court did however consider that any competent tax solicitor putting forward such a scheme should have given a "general health warning" that a tax avoidance scheme ran the risk of being challenged by HMRC and might not be upheld in any subsequent litigation. On this basis, the Defendant was held to have breached its duty of care. However, this breach had not caused any loss as the Court concluded that the Claimant would not have been deterred from entering into the scheme had such a general warning been given.
The Defendant solicitor therefore escaped a finding of liability.
The key question in Barker was whether a reasonably competent professional with a particular expertise, applying proper skill and care, would have advised as this Defendant did. In this case the professional, who had failed to advise correctly, still escaped liability because other reasonably competent professionals of equivalent expertise would have taken the same view. A helpful decision for professionals of all disciplines.