Law firm was negligent after failing to issue tax avoidance scheme warning

The Court of Appeal has ruled that a law firm was negligent after it failed to warn a client of the significant risks posed by a tax avoidance scheme.

Client, Iain Barker, was left with an £11.3 million tax bill following a successful challenge by HM Revenue & Customs (HMRC).

As a result, Mr Barker issued proceedings against Baxendale Walker Solicitors along with its founder, Paul Baxendale-Walker.

Initially, a judge concluded that the legal advice given was “probably correct”. The case was subsequently taken to the Court of Appeal which has now ruled that although the law firm was not negligent in its interpretation of tax law, the client should have been warned of the risk and the likelihood of an HMRC challenge.

The tax avoidance scheme involved the sale of shares in Mr Barker’s company. A scheme, known as an Employee Benefits and Shares Trust (EBT), was set up offshore. Company shares were then ‘gifted’ to the EBT. A sub-trust was also created with beneficiaries including members of the Barker family, although they would not have been able to benefit until Mr Barker’s death.

Court of Appeal judge, Lady Justice Asplin, stated in her ruling: “The lawyer as part of the legal advice he is providing, must evaluate the legal position and determine whether, in all of the circumstances, he should advise his client that there is a significant risk that the view he has taken about the substantive matter in question may be wrong.

“It would have been obvious to any reasonably competent solicitor practising in this area that there was a real risk that HMRC would take the post-death exclusion construction point at some stage and if necessary, would pursue it through the tribunal and court system,” she said.

Baxendale Walker Solicitors has since closed down and Mr Baxendale Walker was struck off as a solicitor in 2007. Last year he was fined after being found guilty of impersonating an official from HMRC in dealings with the Solicitors Regulation Authority.