Tax and Legal Professional Privilege

Only rarely does a decision of the Special Commissioners reach the front page of the Financial Times. However, such public notoriety has been well deserved in the decision of the Presiding Special Commissioner in An Applicant -v- An Inspector of Taxes [SPC 189/99]. The decision has created a flurry of commentaries in professional journals, two of which have been submitted by the author, and considerable discussion in the taxation and legal communities.

The taxpayer in An Applicant was served with a "pre-cursor notice" under section 20B(1) Taxes Management Act 1970, which identified documents the Inland Revenue considered to be relevant to the taxpayer's liability. The Inland Revenue stated that the service of the pre-cursor notice was a preliminary step before a formal request to the Commissioners to grant a notice under section 20 TMA requiring the production of the documents identified in the pre-cursor notice. The Applicant's solicitors considered that the documents identified in the pre-cursor notice were subject to legal professional privilege and requested that any application by the Revenue for the issue of a section 20 notice should be made at an inter partes hearing. The Commissioner rejected this request, and also expressed his view that the documents cited in the pre-cursor notice, which would be subject to legal professional privilege, were not protected from disclosure on the service of a notice under section 20 TMA where such documents were in the possession or power of the Applicant as opposed to its lawyers.

The Commissioner's conclusion devolved from his construction of section 20(1) TMA and section 20B(8) TMA. A notice under Section 20(1) may, on its face, extend to legally privileged material. It covers all documents which contain, or may contain, information relevant to the determination of a tax liability. By contrast, protection of legally privileged documents from disclosure is provided by section 20B(8) TMA where the documents are held by barristers, solicitors and advocates who have been served with section 20 notices in their capacity as a third party. In the Commissioner's view it was clear from section 20B(8) that where the parliamentary draftsman intended to protect legal professional privilege, he did so expressly.

The Commissioner's comments have been criticised, as they lead to the surprising (and slightly absurd) position that whereas a taxpayer is able to dictate whether or not its lawyers hand over privilege documents to Inland Revenue, in circumstances in which the same documents have been sought from a taxpayer, it would have been obliged to supply them to the Inland Revenue.

On a close examination of the language of section 20B(8) TMA and English common law, an alternative conclusion can be achieved which differs from the Commissioner's view. The doctrine of legal professional privilege has been protected by English courts for hundreds of years. It is strongly arguable that the existence of legal privilege should be a term implied into all statutes having a quasi-statutory effect, being analogous to a constitutional right. The alternative conclusion to be drawn is that section 20 TMA 1970 regime is predicated upon an implicit assumption that legal professional privilege has not been abolished and that were it to be disapplied, clear words would be required in the legislation to make this disapplication clear.

Furthermore, section 20B(8) TMA states that a legal adviser is not obliged "without his client's consent" to deliver up documents in respect of which a claim for professional privilege could be maintained. The italicised words acknowledge that the privilege belongs to the client. It is the client who can choose to waive or withhold privilege. Under section 20B(8) TMA, the Revenue's power to compel the production of documents from legal advisers is subject to the client's ability to insist on the exercise of, or waiver of, privilege in respect of those documents. The question then arises why the Revenue's power to compel the production of documents with third party notices needs to be subject to the taxpayer's option to assert privilege in respect of documents held by his legal adviser if he has no power to assert privilege in respect of similar documents he holds himself. To have one right and not the other would be an absurdity.

Counter-arguments have been raised that a defence of legal privilege could not be raised in response to notices served under section 20 TMA 1970 as such a notice was outside the scope of the arenas in which legal privilege could be claimed. Such arguments are based on legal professional privilege being merely a rule of evidence, conferring on the beneficiary of the privilege a right, as a litigant during the course of legal proceedings, to withhold evidence from an opponent. Recent criminal cases have shown the courts are reluctant to support this view. These cases have determined that documents subject to legal privilege should be protected even where the person holding the document was not claiming to withhold evidence in litigation.

Following An Applicant, it is important to establish the limitations on the ability of the Revenue to request documents, whether privileged or not. The concern for a taxpayer is that compliance with a request for submission of documents may prove onerous and time consuming. Realistically, very few documents will prejudice the taxpayer's interest or contain information not available in documents already disclosed to the Revenue in the course of an enquiry. The exercise of deciding the relevance of documents to a tax liability, or arguing for their privileged status, may be motivated principally by the desire to prevent the taxpayer from being bombarded with requests for routine documentation rather than to shield documents which are damaging in nature.

To some extent there appears to be a hardening of the attitude by the Inland Revenue in respect of the provision of documents, potentially including legally privileged documents, under the Revenue's information gathering powers. An amendment to section 20 TMA proposed by opposition members of the Standing Committee on the Finance Bill 1999 to prevent disclosure by an individual taxpayer of information which was legally privileged was described by the Government representative on the Standing Committee as "tantamount to a charter for avoiders and evaders". Sadly, the debate did not consider the arguments set out above for why, in any event, such documentation is protected from disclosure. However, in the current environment, such arguments for non-disclosure of privileged documents may not cut much ice with the Inland Revenue. It behoves taxpayers, and their advisers to consider effective strategies to limit any potential Revenue attack on their privileged documents.

In this context it becomes critical to examine the documentary nature of the information which the Inland Revenue is able to request. The Revenue's information gathering powers compel the production of documents rather than just the relevant information contained in such documents. Careful structuring of documents to ensure that documents are separated into 'factual', 'advice' and 'analysis' parts, all of which are readily severable from each other, may assist a taxpayer to preserve privilege when served with a section 20 TMA notice.

Both the 'advice' and 'analysis' parts would arguably not provide relevant information determinative of a tax liability. Assuming these parts are not relevant information, it may be possible to sever such parts from the 'factual' parts of the document, or blank such parts out, always provided that the integrity of the remainder of the document is retained and that the resulting document does not become misleading. Revenue practice to date has been to accept such "redacted" documents where the recipient of the notice is able to satisfy the Revenue that the passages blanked out contain only information which is not relevant in the determination of a tax liability. The Government's view, as set out in the Standing Committee debates on the Finance Bill 1999, is that the Revenue will not in practice insist on gaining access to legal advice "provided that it does not form part of the relevant facts". In these circumstances, the Government accepts the deletion of legal advice would be possible and perfectly reasonable, provided such legal advice is not relevant information for the purposes of determining a tax liability.

It is clear from sub-sections (1), (2) and (3) of section 20 TMA that the Revenue may only request documents which "contain, or may contain information relevant to any tax liability to which the person is or may be subject, or..... the amount of that liability". Legally privileged documents requested by the Revenue will not usually be relevant to the determination of a tax liability. The Inland Revenue accept in their Investigation Handbook that legal advice should not, by itself, impact upon the question of whether a transaction crystallises a liability to tax. Only where a tax liability depends upon the taxpayer establishing his commercial bona fides, will the recommendations of professional advisers, including lawyers, be potentially relevant in circumstances where those recommendations have been adopted by a taxpayer.

It is unfortunate there is no precise statutory affirmation on the extent of legal professional privilege in the context of section 20 TMA which accords with the understanding of the right to legal professional privilege in common law. Pending the result of any appeal against the decision in An Applicant, and whatever the content of the future Tax Bulletin in which the Revenue have stated they will consider how the decision in An Applicant is to be applied, it is unlikely that the issues explored above will readily form the subject of a consensus of opinion between clients and their advisers and the Inland Revenue.

For further information please contact Adam Blakemore, 2 Park Lane, Leeds LS3 1ES, Tel: +44 113 284 7000.

This article was first published in the Autumn 1999 issue of Hammond Suddards' Tax Insight Newsletter.

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.