Right to keep the lid on key documents

With the House of Lords upholding the principle of legal professional privilege, James Taylor and Steven Francis look at this vital form of protection for the taxpayer

On 16 May, the House of Lords handed down its much anticipated decision in R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax and another (see also page 35).

The case concerned a simple tax avoidance scheme marketed by Morgan Grenfell to create chargeable gains for clients who had available capital losses.

The Inland Revenue disagreed with the efficacy of the scheme.

Its inspector asked to see documents relating to the advice which the bank had obtained from leading counsel and solicitors about whether the scheme would work.

After a decision on preliminary issues in 1999 by the special commissioner, the inspector issued a notice under section 20 (1) of the Taxes Management Act 1970 in September of that year, seeking the disclosure of privileged documents.

Section 20 (1) provides that an inspector may by notice require a taxpayer to deliver up documents in his possession or power which may be relevant to the taxpayer's tax liability.

The Court of Appeal had ruled in March 2001 that in the context of other provisions in the Act, the absence of express protection of privilege in section 20 (1) meant that, by necessary implication, privilege could not be used to resist an application by the Revenue for documents in the taxpayer's possession 'or power'.

In other words, it would include those documents that the taxpayer had a right to require his legal advisers to produce to him.

In a unanimous judgment, the House of Lords overturned the Court of Appeal ruling.

The House of Lords confirmed that legal professional privilege was a 'fundamental right long established in common law'.

Lord Hoffman, who delivered the main judgment, went on to say that 'the cases establishing this principle are collected in the speech of the Lord Chief Justice, Lord Taylor of Gosforth, in R v Derby Magistrates Court, Ex p B [1996] AC 487.

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 (Campbell v United Kingdom (1992) 15 EHRR 137; Foxley v United Kingdom (2000) 31 EHRR 637); and held by the European Court of Justice to be part of community law - AM & S Europe Ltd v Commission of the European Communities (Case 155/79) [1983] QB 878'.

He readily dismissed the arguments put forward by the Revenue, save for that relating to the express preservation of privilege for documents in the hands of legal advisers in section 20B(8) and section 20 C(3).

The Revenue argued that if Parliament had intended to preserve privilege in general, it would not have made these express provisions.

Lord Hoffman went on to question why Parliament would want to preserve privilege for documents in the hands of the lawyer 'but not for documents (which may well be copies or originals of the same documents) in the hands of the taxpayer'.

He noted that the irrationality of such a scheme was commented on by Advocate General Sir Gordon Slynn in AM & S Europe Limited v Commission of the European Communities.

As to why Parliament should have dealt expressly with documents in the hands of the lawyer but not those in the hands of the client, Lord Hoffman considered that the explanation might lie in Parry-Jones v Law Society [1969] 1 Ch 1, a Court of Appeal decision in respect of which he noted that he had 'difficulty with the reasoning'.

In light of that case, he considered it explicable that Parliament, in its subsequent legislation, should wish to make it clear that even if the Court of Appeal was right that the basis of the taxpayer's right to prevent his lawyer disclosing documents to the tax authority was a duty of confidence to the taxpayer client and not privilege, the express provisions mean that no such disclosure could be required under the relevant sections without the client's consent.

In this context, there was no need for an express provision for documents in the taxpayer's hands because in that situation the duty of confidence played no part.

Lord Hoffman went on to say that any protection to which those documents were entitled had to be based on privilege which 'would be subject to the principle that privilege could only be removed by express language or necessary implication'.

The Revenue was relying on necessary implication and, in short, this was not made out.

Because of this finding, it was unnecessary to decide whether the removal of privilege was incompatible with the right to privacy under article 8 of the Human Rights Convention but Lord Hoffman did make the point, obiter, that the European Court of Human Rights has already said that legal professional privilege is a fundamental human right which can only be invaded in exceptional circumstances (Foxley v United Kingdom).

He doubted that the public interest in the collection of the revenue, an argument advanced by the Revenue, 'could provide the necessary justification'.

He went on to say that if legislation is passed, it will have to be seen whether it is limited to cases in which interference with privilege 'can be shown to have a legitimate aim which is necessary in a democratic society', thus setting down a marker which may be of assistance in respect of future challenges to privilege.

For now, legal professional privilege is confirmed as providing protection to the taxpayer from producing privileged material in his possession or power, when faced with a section 20(1) notice.

As such, unanimous support from the House of Lords provides much welcome relief for the future of a privilege under attack and not just by the Revenue.

James Taylor and Steven Francis are part of DLA's regulatory group in the law firm's London office