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Published 29 June 2015
A failure to challenge the tax authorities may be a failure to mitigate.
The recent High Court decision in Symrise AG v Baker & McKenzie (a firm)  illustrates the importance of the claimant's duty to mitigate losses even where a professional has given negligent tax advice.
Baker & McKenzie's corporate group tax advisers ("the Firm") had advised on a tax reduction plan involving the merger of two companies and the creation of the claimant company, Symrise, in 2003. In Mexico, in reliance on advice from the Firm's local office on an intercompany “debt pushdown” loan agreement, debt of almost €125m was pushed down into the Mexican business in the belief that tax relief could be claimed on the interest payments.
The Mexican tax authorities challenged the tax relief claimed; it classified the loan payments as dividends and, therefore, liable to tax. The claimant appealed but subsequently capitulated, withdrew its appeal and paid tax of £11.2m in full.
The claimant then pursued a negligence claim against the Firm alleging that it failed to warn that the inter-company loan agreement implementing the pushdown might be challenged by the tax authorities. The claimant argued that, had it known the risk, changes could have been made to re-characterise the loan payments.
The High Court held that the Firm negligently failed to warn the claimant that the arrangement might be challenged by the tax authorities. Burton J also found that the Firm’s “breach of retainer/negligence was an effective and concurrent cause” of the tax investigation which led to the deal with the authorities.
However, on the issue of loss, the claimant’s claim failed. Burton J followed the four factors identified in the judgment of Siemens v Supershield  to determine whether the claimant's payment to the tax authorities was "in all the circumstances within the range of reasonable responses" open to the claimant, taking into account:
Burton J concluded that, had the claimant stood up to the challenge, based on legal opinions from a number of sources, the claimant would have succeeded in having the tax demand quashed. The decision taken by the claimant to settle its dispute with the Mexican tax authorities, and not to go on fighting, was not “within the reasonable range of responses”. He added “if the senior management of Symrise wanted out for their own group reasons, all well and good, but not by dint of making an unreasonable decision, and not at the expense [of the Firm].”
The High Court therefore dismissed the claim.
Although this case does not create new law, it is an excellent reminder of the taxpayer's duty to mitigate and which may prove relevant in future cases given HMRC's increasing determination to challenge tax avoidance schemes. This case demonstrates that even if the professional adviser is found to be negligent, the taxpayer is still under a duty to take reasonable steps to mitigate any liability and it cannot expect to be compensated by its adviser if it fails to do so. Whilst the onus is on the adviser to prove that the taxpayer failed to take reasonable steps to mitigate, the taxpayer will need solid grounds to conclude that the merits of challenging the tax authority are sufficiently poor to justify settling with HMRC. In our experience, for many such cases, the potential defendant firm will continue to be involved in the process of negotiating with HMRC and the claimant tax payer will in all likelihood follow the defendant firm's advice on any settlement with HMRC. However, where an independent firm takes over dealings with HMRC, the issue of whether the settlement falls within "the range of reasonable responses" (per Siemens v Supershield ), may provide an additional ground of defence.
A final (obvious) word: accountants will be careful not to put pressure on the taxpayer to challenge the tax authorities without proper consideration of the merits; the costs of unsuccessfully disputing the challenge by the tax authorities will form part of the claim against the adviser.