Tax law

Legal professional privilege

R v Special Commissioner and Another, ex parte Morgan Grenfell & Co Ltd [2002] STC 786

In this case, the House of Lords has held that a taxpayer cannot be required to produce legally privileged documents by a notice under section 20(1) of the Taxes Management Act 1970.

Legal professional privilege (LPP) protects communications between a lawyer and his client from being disclosed.

Oral or written communications between a lawyer and his client in his professional capacity are privileged.

Therefore, documents which exist for the purpose of a client seeking or a solicitor conveying advice are the subject of privilege.

Under section 20(1) of the 1970 Act, an inspector of taxes can by notice require a taxpayer to:

- Make available documents in the taxpayer's possession or power which, in the inspector's reasonable opinion, contain information relevant to the taxpayer's liability to tax, and;

- Furnish him with particulars which are relevant to a tax liability.

Under section 20(3), an inspector can require any other person (such as a lawyer) to deliver or make available for inspection documents in his possession or power which contain or may contain information relevant to any tax liability or the amount of any tax liability of a taxpayer.

Section 20(1) contains no express reference to LPP.

However, under section 20B(8), a lawyer cannot be obliged to surrender to an inspector documents in his possession or power which are the subject of LPP, unless the client consents to such action.

The inspector of taxes issued a notice under section 20(1), requiring production of a wide range of documents relating to advice that Morgan Grenfell had sought and received in connection with a tax avoidance scheme involving capital losses and into which the inspector was enquiring.

Morgan Grenfell issued judicial review proceedings to quash the notice on the grounds that it was ultra vires, because the true construction of section 20 did not entitle the inspector to require delivery of documents which were subject to LPP.

The Divisional Court and Court of Appeal rejected Morgan Grenfell's argument and dismissed the application, holding that the general terms of section 20(1) could not be qualified to exclude documents subject to LPP.

Morgan Grenfell appealed to the Lords.

Lord Hoffman delivered the leading judgment, confirming that LPP exists to protect the right of any person to obtain advice about the law effectively and 'without fear that [the advice] may afterwards be disclosed and used to his prejudice'.

Lord Hoffman observed that LPP is a fundamental human right established in common law and an intention by Parliament to override such a fundamental human right must be expressly stated or appear by necessary implication.

Section 20(1) contains no express reference to LPP, so the Lords had to determine whether the exclusion of it must necessarily be implied, as the Inland Revenue argued.

The omission of any reference to LPP did not imply that LPP was excluded.

Therefore, a taxpayer served with a section 20(1) notice was entitled to assert privilege over LPP materials and to refuse disclosure.

The reason for Parliament having chosen to clarify the position of LPP materials in the hands of lawyers - but not in the hands of their clients - in section 20B(8) was to address the doubt created by a previous Court of Appeal decision, Parry-Jones v Law Society [1969] 1 Ch 1.

In Morgan Grenfell, it was considered that it would be irrational for Parliament to have preserved LPP for documents in the hands of the lawyer but not for documents - which might well be copies or originals of the same documents - in the hands of the taxpayer.

LPP was a privilege for the benefit of the client, whoever had possession of the documents.

This decision has been widely viewed as a significant victory for the taxpayer.

If the Inland Revenue had been successful, few documents would have been capable of being withheld from the Revenue during an investigation or artificial methods would have been used to prevent disclosure (such as the use of liens for unpaid fees).

Defeat for the taxpayer could - subject to possible appeal to the European Court of Human Rights - have had the effect of making clients less forthcoming with their legal advisers in tax-related matters.

It should be noted that the Lords did not take the view that it was necessary to consider the right to privacy under article 8 of the European Convention on Human Rights to reach its conclusion.

Lord Hoffman noted that any legislation to achieve what the Revenue had sought to achieve in court would have to be closely studied to determine 'whether it is limited to cases in which the interference with LPP can be shown to have a legitimate aim which is necessary in a democratic society'.

The Lords expressed doubt that the collection of taxes could provide the necessary justification for curtailing the fundamental rights of the taxpayer expressed in the convention.

The question of whether accountants' advice on tax matters could be required to be made available under the 1970 Act remains a difficult one.

LPP will not attach to communications between accountants and their clients in the same way as it does between lawyers and their clients.

Ultimately, it may be that the courts will have to rule on whether the right to privacy enshrined in article 8 enables taxpayers to refuse to produce tax advice given to them by accountants to the tax authorities under a section 20(1) notice.

By Simon Hudd, Nicholson Graham & Jones, London