Iain Paul Barker v Baxendale Walker Solicitors (A Firm)and Another
| Jurisdiction | England & Wales |
| Judge | Lady Justice Asplin,Lord Justice Henderson,Lord Justice Patten |
| Judgment Date | 08 December 2017 |
| Neutral Citation | [2017] EWCA Civ 2056 |
| Docket Number | Appeal No: A3/2016/2773 |
| Court | Court of Appeal (Civil Division) |
| Date | 08 December 2017 |
[2017] EWCA Civ 2056
THE RIGHT HON Lord Justice Patten
THE RIGHT HON Lord Justice Henderson
and
The Right Hon Lady Justice Asplin DBE
Appeal No: A3/2016/2773
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Claim No: HC-2013000389
Roth J
Royal Courts of Justice
Strand, London, WC2A 2LL
Michael Furness QC and Dakis Hagen QC (instructed by Farrer & Co LLP) for the Appellant
Jonathan Seitler QC, Emily CampbellandStephen Hackett (instructed by Griffin Law Ltd) for the Respondent
Hearing dates: 18 and 19 October 2017
This is a professional negligence case in relation to specialist tax advice relating to a tax avoidance scheme designed to avoid both Capital Gains Tax and Inheritance Tax. The scheme was based upon the establishment of an employee benefit trust (an "EBT") offshore, the transfer of company shares by way of gift to the EBT and the creation of a sub-trust, the beneficiaries of which included members of the transferor's family albeit that they were excluded from benefit until after the death of the transferor.
The issue is whether a reasonably careful practitioner with the degree of expertise claimed by the Respondents should have warned the Appellant, Mr Barker, before he transferred his shares in Team 121 Holdings Limited (the "Company") to the trustees of an EBT that there was a significant risk that the EBT would fail to deliver the hoped for tax advantages because it did not exclude as beneficiaries after his death, his family members, being persons connected with him in his capacity as a "participator" in the Company. I will refer to such a warning as a "specific warning" and to the relevant risk as "the post-death exclusion construction" in relation to section 28(4) Inheritance Tax Act 1984 (" IHTA").
More than a decade after the tax avoidance scheme had been established and the advice given, Her Majesty's Revenue and Customs ("HMRC") raised assessments on Mr Barker and challenged the validity of the EBT scheme on the basis of the post-death exclusion construction. Having been advised that the challenge would probably succeed, Mr Barker entered into a settlement with HMRC under which he paid approximately £11.29m by way of tax and interest. Mr Barker then took steps to seek to unravel the EBT scheme and sought damages in negligence against the Respondents.
In his judgment dated 23 March 2016 Roth J held that in the course of advising Mr Barker, the Respondents should have made 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, that if it were necessary to defend the arrangements in legal proceedings, there was a possibility that they would not be upheld and that in failing to do so they were in breach of their duty of care. However, he went on to find at [174] that such a "general health warning" would not have deterred Mr Barker from going ahead with the EBT scheme. The Judge accepted at [176], however, that had the specific warning been given, which he referred to as a "high level warning", Mr Barker would not have proceeded with the EBT structure. Nevertheless, at [178] Roth J concluded that it was not a case in which any careful and competent solicitor of appropriate expertise would have given the specific warning. Mr Barker contends that such a specific warning should have been given and that the Respondents were in breach of their duty of care in failing to do so.
The First Respondent, Baxendale Walker Solicitors, is a firm of solicitors which specialised in tax advice, in particular, regarding tax planning and avoidance schemes ("BWS"). It was not represented before Roth J and has not been represented on this appeal. Apparently, its business ceased a considerable time ago. The Second Respondent, Mr Baxendale-Walker, was its only equity partner. It is common ground that both the case at first instance and the appeal stand or fall against both Respondents although only Mr Baxendale-Walker has been represented before the Court.
Background
Mr Barker was the co-founder and majority shareholder of the Company. Mr Barker had set up the business in 1991 and it developed into a group of trading companies of which the Company was the parent. By 1998, the group had approximately 450 employees trading in several countries, although it remained UK based. At that stage, Mr Barker and his fellow shareholders decided to sell the Company. Since the group was considered to be worth £30–40 million, the tax consequences of such a sale were considerable and Mr Barker decided to seek tax planning advice to mitigate his exposure to Capital Gains Tax on the sale of his shares. He took advice from Deloitte & Touche ("Deloitte") who prepared a report in June/July 1998 recommending three options for him, one of which was to set up a private unit trust scheme which would defer the payment of Capital Gains Tax until either Mr Barker was no longer tax resident in the UK or the assets had fallen into his estate.
In September 1998, Mr Barker met with Mr Nigel Hollinshead of Taxation Practical Services Ltd which had provided tax advice to the Company, its directors and employees for some years. It was Mr Hollinshead who suggested the possibility of an EBT and arranged an introduction to BWS on the basis that they specialised in this area. Mr Barker and a number of his fellow shareholders met with Mr Auden of BWS on 30 September 1998 and they were advised to adopt an EBT structure.
Although the precise terms of the legislation, and section 28(4) IHTA in particular, are central to the issues on this appeal and I shall turn to them in detail below, it is important to note at this stage that in general terms, an EBT is a trust for the benefit of employees of a company or body which attracts generous tax concessions. The trustees of the EBT must hold more than 50% of the shares in the company in question and the settled property must not be applied otherwise than for the benefit of employees of the company and their families and dependants and the class of beneficiaries must include all or most of the persons employed or holding office with the company.
Mr Barker met with Mr Baxendale-Walker at BWS's offices in October 1998 and thereafter, Mr Barker was provided with a memorandum dated 16 October 1998. Under the heading "Summary", at paragraph 3.1 it stated that Mr Barker's objective was for the proceeds of sale of his shares to be enjoyed free of Capital Gains Tax and Inheritance Tax and at paragraph 3.6 stated that in the Respondents' opinion the objective could be met by the use of "a type of Employee Benefits and Shares Trust (known as an "EBT") as a tax efficient vehicle for providing the proceeds of sale of the Shares to the Taxpayer [Mr Barker] and his family and others." It contained the recommendation to set up an EBT with offshore trustees and to execute a deed of gift transferring the beneficial interest in Mr Barker's shares to the trustees of the EBT. It was expressly stated that as Mr Barker and his wife were controlling shareholders in the Company, the Deed establishing the EBT should provide that neither of them nor (during their lives) their children and remoter descendants should be entitled to receive outright distributions of income or capital from the EBT. It went on, however, to state that after the death of Mr Barker and his wife, their children and remoter issue could receive benefits outright from the EBT free both of Capital Gains Tax and Inheritance Tax.
On 6 October 1998, the Company created the EBT, the trustee of which was a Jersey company, Matheson Trust Co (Jersey) Ltd ("Matheson"). On 15 October 1998, Mr Barker executed a deed declaring that he held his shares in the Company on trust for the EBT. That deed contained a clause the purpose of which was to re-vest the shares in Mr Barker if HMRC determined that the EBT failed to meet the criteria of section 28 IHTA or section 239 TCGA. Thereafter, on 23 March 1999, Matheson declared a sub-trust, the beneficiaries of which were stated to be the widow, children and remoter issue of Mr Barker, his mother and sisters, living after his death. The Company was then sold on 28 June 1999 in a part shares part cash transaction to Logica Group Plc. The portion of the consideration for the sale referable to Mr Barker's shares was notionally ring-fenced in the sub-trust.
After the transfer, a question arose as to whether Mr Barker should disclose the gift of his shares to the EBT in his tax return and Wragge & Co were instructed to consider Mr Barker's compliance obligations as a result of the transfer and the EBT arrangement. On 29 July 1999, Wragge & Co wrote to Mr Barker setting out a number of lines of argument on the basis of which the transfer might be declared ineffective. These included the question of whether the conditions of section 28 IHTA had been met, but did not mention the post-death exclusion construction.
By 2002, Mr Barker had become disenchanted with Matheson, the Jersey trustee of the EBT, and was put in touch with Mr Andrew Brown, a chartered accountant who ran an independent tax consultancy and had experience in advising on offshore structures, including EBTs. By an email of 15 May 2002 from Mr Barker, Mr Brown was asked to advise on numerous topics including how Mr Barker might benefit from the EBT without violating its terms. Mr Brown responded in a letter of 10 June 2002 followed up by further advice in a letter of 24 June. He stated that he had no problems with the terms of the EBT itself and believed that it satisfied the conditions of the relevant tax legislation, including section 28 but went on to raise various other...
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