UK: Tax Investigations and Legal Professional Privilege

Last Updated: 30 June 2002
Article by Naomi Belcher

The House of Lords has reversed the controversial Court of Appeal decision in R (on the application of Morgan Grenfell & Co Ltd) v. Special Commissioner [2002] UKHL 21 in relation to legal professional privilege, "a fundamental human right" and affirmed its importance as a corollary to the right to legal advice.

Morgan Grenfell had promoted a tax planning arrangement under which it paid a significant premium in return for the grant to it of a long leasehold interest in a property owned by a client and leased it back to the client under a sub-lease, with a substantial tax saving. However, the Inland Revenue believed that the lease fell outside the scope of Morgan Grenfell’s trading activities and that the premium was a non-deductible capital payment. Morgan Grenfell refused to hand over to the inspector documents relating to advice obtained from counsel and solicitors, arguing that the documents were subject to legal professional privilege, but the inspector successfully applied for permission to issue a notice under s.20(1) of Taxes Management Act 1970 requiring disclosure of the documents.

Section 20(1) states that "an inspector may by notice in writing require a person (a) to deliver to him such documents as are in the person’s possession or power and as (in the inspector’s reasonable opinion) contain, or may contain, information relevant to… (i) any tax liability to which the person is or may be subject, or (ii) the amount of any such liability." In addition, s.20(3) makes provision for a power to require the production of documents from a third party.

Morgan Grenfell then issued judicial review proceedings to quash the notice on the grounds of ultra vires. Both the Divisional Court and the Court of Appeal rejected the argument that the 1970 Act did not entitle the inspector to require the delivery of documents subject to legal professional privilege and held that the general terms of section 20 "could not be qualified to exclude documents subject to legal professional privilege". Legal professional privilege protects from disclosure correspondence and documents produced by a lawyer for his client for the dominant purpose of providing or obtaining legal advice. The question for decision was whether the rights afforded to a tax adviser under section 20 were in addition to, or in substitution for, thoserights afforded by the doctrine of legal professional privilege.

The Court of Appeal

The Court of Appeal agreed with the Revenue’s argument that, if Parliament intended to preserve legal professional privilege in general, why did it specifically provide for its preservation in respect of documents in the possession or power of a lawyer but not of the taxpayer? It found that there was an "inescapable implication" that legal professional privilege was excluded except where it was expressly preserved, and that this one fundamental right had to be balanced with the public interest in the prompt, fair and complete collection of public revenue.

The House of Lords

In the House of Lords the Revenue pointed to a number of safeguards and restrictions to protect the taxpayer. Firstly, a form of judicial or administrative control exists as the consent of a special commissioner is required for the exercise of the power ( s.20(7)). Secondly, a limited form of litigation privilege in relation to tax appeals is created by s.20B(2), which is analogous to that enjoyed by parties to civil or criminal proceedings. (Lord Hoffman pointed out that litigation privilege does not cover the same ground as legal professional privilege, citing Lord Denning MR in Buttes Gas and Oil Co v. Hammer (No 3) [1981] QB 223, 243-244.) Thirdly, an inspector cannot give such notices to a barrister, advocate or solicitor; the Board must take this decision. Fourthly, a tax accountant cannot be required by such notice to deliver documents belonging to him that are the working papers relating to that client. Fifthly, documents in the possession of a lawyer cannot be required to be delivered under a notice without the client’s consent and they cannot be seized or removed under s.20C(1) ( s.20B(8), 20A(1)).

Giving judgment, Lord Hoffman noted that the first four safeguards were "concerned with questions so distinct from legal professional privilege that they provide no basis for any implication that it was intended to be excluded". He also added that the fifth restriction was "entirely consistent with the preservation" of legal professional privilege.

Lord Hoffman explained the 1970 Act provision by reference to Parry-Jones v. Law Society [1969] 1 Ch 1, in which the Court of Appeal held that the Law Society could require a solicitor to produce documents relating to his practice to an appointed investigator for the purpose of enforcing compliance with the Solicitors’ Accounts Rules. The clients’ legal professional privilege was not being infringed as the Law Society was not entitled to use disclosed information for any purpose other than the investigation, and such limited disclosure did not breach the client’s legal professional privilege or, to the extent that it technically did, it was authorised by statutory powers. Consequently, in the 1970 Act, Parliament was merely making clear "that even if the Court of Appeal was right in saying that the true basis for the client’s right to prevent his lawyer from disclosing documents concerned with obtaining legal advice to the tax authorities (or any other non-judicial authorities) was a duty of confidence rather than legal professional privilege, no such disclosure could be required under sections 20(3) or 20A(1) without the client’s consent."

The House of Lords concluded that the express safeguards in section 20 upon which the Revenue relied were insufficient to create a necessary implication that the general words of the statute were intended to override such a fundamental right as legal professional privilege. It was irrational to think Parliament intended to protect documents in the hands of a lawyer but not those (which may be copies or originals) in the hands of the taxpayer. This also reflects the approach of Advocate General Sir Gordon Slynn in A M & S Europe Ltd v. Commission of the European Communities (Case 155/79) [1983] QB 878, at 913:

"A fundamental human right"

The decision in Morgan Grenfell highlights the importance of legal professional privilege as "a fundamental human right long established in the common law", as well as part of the right to privacy guaranteed by Article 8 of the ECHR and part of European Community law ( A M & S Europe Ltd). Since their Lordships found that legal professional privilege had not been overridden by section 20(1) there was no need to consider whether the section was incompatible with the Human Rights Act.

The Practical Implications

The decision is clearly very welcome for taxpayers as it removes the anomalous situation whereby documents held by a taxpayer were not protected by legal professional privilege from disclosure under section 20, but were protected if held by a lawyer.

The impact of the decision more generally is that it will be very hard for any regulatory authority to argue that a statutory regime by necessary implication allows an investigator to override legal professional privilege. Indeed, the emphasis on the important fundamental right is such that it is hard to see any circumstances where anything short of express wording in a statute will be sufficient to override the privilege. Even in those cases there will be a real risk of such legislation being incompatible with the Human Rights Act.

Thus the House of Lords has confirmed that the limited rights conferred upon tax advisers by the words of section 20 are, for lawyers, supplemented by the rather more robust rights conferred by the doctrine of legal professional privilege. Tax lawyers everywhere are, perhaps, allowed a little smile.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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