House of Lords rule no right to privileged documents for the Inland Revenue

United Kingdom
R -v- Special Commissioner and Anor, Ex P Morgan Grenfell & Co [2002] UKHL 21

In corporate transactions, legal and tax advice involving difficult and sensitive issues will often be obtained by a company. In these circumstances, will the company’s communications with its lawyers be protected from disclosure to other parties by privilege? Not according to the Inland Revenue, until 16 May when the House of Lords unanimously ruled that the Inland Revenue had no general right to obtain the privileged communications of taxpayers under present legislation.

The question came to the House of Lords following the issue of a notice in September 1999 (“Notice) by an inspector of the Inland Revenue. The Notice required Morgan Grenfell (“MG) to deliver to the inspector a wide range of documents relating to advice MG had sought in relation to a tax avoidance scheme which had been devised by MG for clients with available capital losses.

The Inland Revenue relied on its statutory rights to obtain documents from MG including advice from Leading Counsel and solicitors with regard to the operation of the scheme. Section 20(1) of the Taxes Management Act 1970 (“TMA) provides that an inspector may require a taxpayer:

“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 any tax liability to which the person is or may be subject, or the amount of any such liability…

MG objected to the production of those documents, initially on a number of grounds, including the fact that they were protected by legal professional privilege (“LPP). In Judicial Review proceedings brought by MG, the Divisional Court rejected its arguments. MG appealed to the Court of Appeal on the matter of LPP. The Court of Appeal held that, taken as a whole, the provisions of section 20 of the TMA carried the “inescapable implication that LPP was excluded, except where expressly preserved. As section 20(1) did not expressly preserve LPP, it was excluded.

MG appealed to the House of Lords on the construction of the TMA. A number of issues arose for consideration in the House of Lords. However, first, it was recognised by all parties that LPP was a fundamental human right long established in law; that is, the right of a person to speak openly to his lawyer in pursuit of skilled legal advice, secure in the knowledge that, afterwards, such discussions and advice will not be disclosed and used to his prejudice. Second, it was agreed that when the Courts are asked to interpret legislation, they would do so in a way that does not override fundamental human rights unless the legislation overrides those rights either expressly or by “necessary implication.

As section 20(1) does not expressly exclude LPP, the question for the House of Lords was whether its exclusion could be necessarily implied.

The Inland Revenue relied on the fact that the TMA had provided safeguards and restrictions for the protection of the taxpayer. First, the taxpayer must be given “a reasonable opportunity by means of a “precursor notice to deliver up the documents voluntarily, failing which, the inspector may only proceed to issue a Notice with the consent of a special commissioner who must be satisfied that the inspector is justified in doing so “in all the circumstances. Even then, the inspector may only require documents which, in his “reasonable opinion, are relevant. The inspector must also serve with it his reasons for giving the Notice. In fact, as any company which has been faced with a Notice will know, those “safeguards and restrictions do not provide a company with any real protection. Indeed, the House of Lords found that these “safeguards and restrictions were no more than “provisions for judicial or administrative control intended to prevent the abuse of a statutory power which had nothing to do with whether or not the right of LPP was intended to be excluded.

The Inland Revenue also relied on the fact that, in certain parts of the TMA, taxpayers’ rights to LPP are specifically preserved. For example, if served with a notice under section 20(3) of the TMA, a lawyer cannot deliver privileged documents without his client’s consent. The Inland Revenue argued that, as Parliament had expressly preserved the right to LPP in that section, it necessarily followed that no such qualification of section 20(1) was intended. Lord Hoffmann did not accept the Inland Revenue’s arguments:

“If the client’s consent is required when the documents are in the hands of the lawyer, why should it not be required when they are in the hands of the client himself? It seems to me strange to say that the lawyer could not produce the documents without the client’s consent, but leave it to be inferred that a client served with a [Notice] would be obliged to give his consent.

Compelling arguments were made by both parties before the House of Lords. Indeed, Mr Brennan QC (for the Inland Revenue) rightly identified the need to balance the rights of individuals with the public interest in the collection of public revenue. However, the House of Lords held that LPP does not involve the balancing of such interests:

“It is absolute and is based not merely upon the general right to privacy but also upon the right of access to justice.

In the event, Lord Hoffmann held that the provisions relied on by the Inland Revenue did not create any necessary implication that LPP was intended to be excluded from section 20(1). The rest of the House agreed with him. Accordingly, the court found in favour of MG in upholding their entitlement to claim LPP.

While the decision will be of relief to companies and corporate lawyers alike, Lord Hoffmann noted that it remained open to Parliament to provide such overriding powers to the Inland Revenue. However, he also warned that in doing so, it must enact those powers in unambiguous terms. Those powers must also be consistent with Article 8 of the European Convention on Human Rights, in that a person’s right to respect for private life and correspondence can only be invaded in exceptional circumstances. In the light of the case, it remains to be seen what exceptional circumstances might exist to allow Parliament to provide those powers to the Inland Revenue. In corporate transactions, for the time being, a company will be able to rely on LPP in normal circumstances. However, companies and lawyers will need to keep a close eye on proposed fiscal legislation for any moves to extend the Inland Revenue’s existing powers.

For further information please contact Susan Barty on +44(0)20 7367 2542 or at [email protected] or contact Guy Pendell on +44(0)20 7367 2404 or at [email protected].