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KEY POINTS
- The preservation of legal professional privilege is in the public interest.
- Taxpayer’s success in the Morgan Grenfell case.
- Legal advice from non-lawyers is not covered.
- HMRC overstepping the mark in Compliance Handbook advice.
- Legal professional privilege is a fundamental human right.
Legal professional privilege is a fundamental common law right that entitles a client, subject to a number of very limited exceptions, to withhold certain material from disclosure to third parties, including HMRC.
Over the years, as taxpayers have relied on their right to withhold material from HMRC’s scrutiny, legal professional privilege has developed into something of a battleground with increasing number of challenges by HMRC.
This article considers some of those recent attacks, both in the courts and now on a new front as changes to HMRC’s practice suggest a penalty threat to those taxpayers who choose to rely on their legal right.
Before considering the more recent skirmishes in the legal privilege battle, it is worth setting out the two limbs to legal professional privilege:
- Legal advice privilege – this applies to confidential communications between a lawyer and his client for the dominant purpose of seeking or giving legal advice.
- Litigation privilege – this applies to confidential communications between a lawyer and his client and between either of them and a third party, which come into existence for the dominant purpose of being used in connection with actual or pending litigation.
The purpose of legal professional privilege is to enable a client to have open and frank discussions with his lawyer without fear that such discussions and any advice re
ceived might be disclosed to third parties to his prejudice.
Without such a protection, a client might be reticent about making full disclosure to his lawyer with the result that the client would not receive the most appropriate legal advice in the circumstances of his case, which in turn would not be in the public interest.
Win for the lawyers
One of the more recent battles between taxpayers and HMRC was fought out in R v Special Commissioners and another ex parte Morgan Grenfell & Co Ltd [2002] STC 786.
The facts in this case were straightforward. A simple tax avoidance scheme had been marketed by Morgan Grenfell, and the Revenue served it with a notice issued pursuant to TMA 1970, s 20.
The Revenue requested, among other things, the instructions to and advice from Morgan Grenfell’s legal advisers in relation to the scheme. Before the House of Lords, Morgan Grenfell contended that this documentation was protected from disclosure by legal professional privilege.
In allowing Morgan Grenfell’s appeal, the House of Lords determined that a s 20(1) notice could not override legal professional privilege in documents held by Morgan Grenfell as the taxpayer.
The House of Lords confirmed that legal professional privilege is a substantive fundamental right and not merely a procedural right. Lord Hoffman expressed the position as follows:
‘First, legal professional privilege is a fundamental human right long established in common law. It is a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may be afterwards disclosed and used to his prejudice… it has been held by the European Court of Human Rights to be part of the right of privacy guaranteed by Article 8 of the Convention… and held by the European Court of Justice to be a part of Community law…’
Perhaps not surprisingly, HMRC do not view the Morgan Grenfell decision with any degree of enthusiasm. It was a significant setback to HMRC in their attempts to target transactions which they perceived to represent unacceptable tax avoidance.
Advice from non-lawyers
HMRC have had more success recently in the important case of R (on the application of Prudential plc and another) v Special Commissioner of Income Tax and another [2010] STC 161.
Two companies in the Prudential group provided information to HMRC as part of an investigation into an alleged tax avoidance scheme. The Revenue issued information notices pursuant to TMA 1970, s 20.
Prudential appealed against the notices on the grounds that the information sought was irrelevant to the investigation and subject to legal professional privilege, notwithstanding that the advice had been provided by an accountant rather than a lawyer.
The Special Commissioners upheld the notices and the Prudential applied to the High Court for judicial review of that decision. The issue before the High Court was whether legal professional privilege covers legal advice provided by non-lawyers.
Given the large number of accountants who provide advice on tax law, this has long been a contentious issue and the outcome of the case was eagerly awaited.
The High Court held that legal advice privilege does not apply to legal advice given by non-lawyers and should not be extended to do so. Whether it is desirable for legal professional privilege to be extended to non-lawyers is a matter for Parliament to decide. It is understood that this decision has been appealed to the Court of Appeal.
Special procedure
Perhaps as a consequence of concerns raised by HMRC that the courts might extend legal professional privilege to apply to tax advice given by non-legally qualified tax advisers, a specific procedure for settling such disputes has been introduced.
The Information Notice: Resolution of Disputes as to Privileged Communications Regulations 2009 SI 2009/1916, sets out a procedure where HMRC give an information notice to a taxpayer who wishes to resist disclosure on the ground that the documentation requested attracts legal professional privilege.
Under paragraph 5 of the regulations the taxpayer, third party or other person acting on his behalf, must specify in a list each document required under the information notice which is in dispute with a description of the nature and contents of that document.
The list must then be served on HMRC within a stipulated time period. HMRC must then notify the person who served the list of any documents that they consider are not privileged.
The taxpayer, third party or other person may then make an application to the First-tier Tribunal to consider and resolve the dispute.
HMRC’s concern appears to be that taxpayers who do not wish to disclose documents in response to an information notice will, through the device of involving a lawyer (or perhaps, depending upon the final outcome of the Prudential case, non-legally qualified tax advisers) at any or all stages of the transaction, withhold documentation from HMRC on the ground that it attracts legal professional privilege.
The department expressed similar concerns when lawyers, supported by the Law Society, argued that legal professional privilege prevented them from disclosing not only the advice they had given to their clients but also any facts communicated to them in privileged circumstances in the context of the disclosure of tax avoidance schemes regime, when it was first introduced in 2004.
Although HMRC reluctantly accepted that this was indeed the correct position, the legislation was subsequently amended so that the obligation to disclose in such circumstances was transferred from the lawyer to the client.
Reduced penalties
The latest front opening in HMRC’s battle against legal professional privilege can be found in a recent update to the Compliance Handbook for inspectors.
The relevant section is CH230210. It begins by stating that:
‘Before you give an information notice you may find it useful to discuss with the person the potential for privileged material to be required and how this will be dealt with… You can only see privileged material if the person chooses to waive their privilege and let you see it.
‘Where you are seeking documents or information that may include privileged items, the notice should contain paragraphs along the following lines.
“You do not have to produce documents or provide information for which you can successfully claim legal professional privilege but you can choose to waive privilege. It may assist progress of the tax position check if you do ...”
‘You should include the concept of waiver in your letter so that the person has a fuller explanation of their rights. You should not treat a refusal to provide privileged information as a lack of co-operation. However, the voluntary provision of such information could earn credit to be set against poor co-operation in another aspect of your compliance check. Where penalties are likely, you could encourage waiver by telling the person that it could increase the quality of disclosure reduction and lead to a lower penalty.’ [Emphasis added.]
The authors have serious misgivings about this wording, in particular whether giving such encouragement in respect of penalties could be in breach of the privilege against self incrimination protected under Article 6 of the European Convention.
Where penalties are likely, HMRC officers are being advised, in effect, to invite taxpayers to waive their fundamental legal right to rely upon legal professional privilege to resist disclosure, by informing the person concerned that the amount of any penalties which HMRC may consider to be chargeable at the end of an enquiry could be greater as a consequence of non-production of such material. It is inappropriate and potentially unlawful for HMRC to encourage waiver in this manner.
Human rights
The right to silence and the right not to incriminate oneself are fundamental human rights, recognised in Article 6 of the European Convention.
While tax proceedings are considered by the European Court of Human Rights to be neither civil nor criminal (see Ferrazzini v Italy [2002] 34 EHRR 45), penalties proceedings can be criminal (see King v Walden [2001] STC 822).
Therefore, when imposing penalties on defaulting taxpayers, HMRC are obliged to comply with the requirements laid down in Article 6 for criminal proceedings.
The new penalties regime is designed to influence taxpayer behaviour, but it should not be used by HMRC to encourage the provision of material which could be withheld on the grounds that it attracts legal professional privilege.
Informing taxpayers that their penalty may be lower if they waive their privilege is in effect offering them an inducement to incriminate themselves.
In Saunders v UK [1997] 23 EHRR 313 the European Court of Human Rights held that there had been an infringement of the privilege against self incrimination when Mr Saunders was obliged to respond to questions in a Department of Trade and Industry investigation and his answers were subsequently used in criminal proceedings.
While an officer following HMRC’s new practice cannot compel a taxpayer to waive privilege, the inducement of reduced penalties if privilege is waived could infringe Article 6.
Questionable tactics
Taxpayers should be able to exercise their fundamental legal rights without fear that in so doing, their actions could influence the level of any penalties which might be subsequently imposed.
This Compliance Manual update, which apparently ignores Article 6, seems to be little more than a crude attempt by HMRC to achieve by the back door what it has, thus far, been unable to achieve through the courts.
Adam Craggs is a partner and Jane Bailey is a senior associate in the tax disputes resolution team at Reynolds Porter Chamberlain LLP. They can be contacted by email or tel: 020 3060 6421 and 020 3060 6343 respectively.
