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Professional Advice and the Duty to Warn Clients – Guideline Ruling

In a decision that will be required reading for all professional advisers, the Court of Appeal has ruled that a specialist tax firm was negligent in failing to give a client a clear and specific warning that an aggressive tax avoidance scheme might not be accepted by HM Revenue and Customs (HMRC) or ultimately prove effective.

On the firm’s advice, the client, a successful businessman, entered into the complex scheme which involved the establishment of an offshore employee benefit trust and was designed to avoid both Capital Gains Tax and Inheritance Tax. The scheme was in place for more than a decade before HMRC questioned its validity and raised tax assessments against the client. Having been advised that the scheme was likely to be ruled ineffective, the client reached a settlement with HMRC by which he agreed to pay £11.29 million in tax and interest.

After he launched proceedings against the firm, a judge found that it had breached its duty of care in failing to give him a general health warning to the effect that there was a possibility that the scheme would be challenged by HMRC and that its validity might not be upheld. In dismissing his claim, however, the judge found that he would have entered into the scheme even had such a warning been given. The firm was not obliged to give him a high-level warning that would have deterred him from entering into the scheme.

In upholding the client’s appeal against that ruling, the Court noted that the scheme was an aggressive one and that the firm had charged the client in the region of £2.4 million for its services. Given the amount of tax at stake, there was a significant risk that HMRC would take a contrary view as to the effectiveness of the scheme and, in failing to give a clear and specific warning to that effect, the firm had clearly been negligent. Had he received such a warning, the client would have abandoned his involvement in the scheme. The amount of his compensation remained to be assessed.