Tax Case - Question of Legal Professional Privilege

There is no fundamental right to withhold papers which are subject to legal professional privilege, ruled the Court of Appeal in R (on the application of Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax

A merchant bank operated a tax-related scheme which the Revenue suspected involved capital rather than trading transactions. The Revenue served a notice under section 20B(1), but the bank claimed that certain documents required were subject to legal professional privilege. At judicial review, the Appeal Court held that if Parliament had intended such papers to be protected then it would have made it clear in the legislation. The application was dismissed.

Background

Morgan Grenfell, the merchant bank, devised and operated a tax-related scheme which enabled clients to secure extremely low-cost term funding through a tax arbitrage based on property. The client granted a long lease in a property that it already owned to Morgan Grenfell, which granted back a sublease. The client received from the bank a lump sum, in payment for the lease, as a capital receipt. Morgan Grenfell said that the lump sum qualified for tax relief against its trading income.

However, the Inspector of Taxes suspected that the transactions were capital rather than trading transactions, and served a section 20B(1), Taxes Management Act 1970 notice on the bank. This notice stated that if certain documents were not produced by a specific date, the Inspector would consider applying to a Special Commissioner under section 20(7) for permission to issue a section 20(1) notice. There was never any suggestion that the bank was engaged in tax evasion, or even tax avoidance.

Morgan Grenfell considered that some of the documents required were protected from disclosure by legal professional privilege, and requested an inter partes hearing if the Inspector should make the section 20(7) application to the Special Commissioner. The Special Commissioner decided that the bank had no right to attend the meeting at which the Inspector sought consent to issue the section 20(1) notice, and that he had no discretion to allow the bank to attend.

The Inspector proceeded to apply for the section 20(1) notice, to which the Special Commissioner consented.

Morgan Grenfell applied for a judicial review, but the Divisional Court dismissed the application. So the bank appealed arguing that section 20(1) did not authorise an Inspector to issue a notice requiring disclosure of documents subject to legal professional privilege, and that the Special Commissioner had discretion to allow inter partes representations to be made.

(Michael Beloff QC and Giles Goodfellow for the taxpayer company; Timothy Brennan and Ingrid Simler for the Crown.)

The Court of Appeal judgment

Mr Justice Blackburne delivered the judgment. He said that, in agreement with the Divisional Court, the provisions of Taxes Management Act 1970 taken as a whole demonstrated that the rule of legal professional privilege was excluded from it, unless it was expressly incorporated. He explained the reasons for this conclusion.

The legislation embodied an investigatory power conferred by Parliament to counter abuses of the tax system as part of the Revenue's core function. It could not be assumed that there was only one fundamental right at stake, i.e., a person's right not to have to disclose documents which were subject to legal professional privilege. The public interest also had to be considered. Furthermore, Article 8(2) of the Convention for the Protection of Human Rights and Fundamental Freedoms 1950 recognised that in certain circumstances for the economic well-being of the country, the right to respect for private life and correspondence could be abrogated.

The judge also noted that the legislation was very detailed. The operation of section 20(1) demonstrated this. For instance, an Inspector could only serve the notice if he was so authorised by the Board of Inland Revenue. A section 20(1) notice could not be served on a barrister or solicitor or advocate, only the Board could do this. Furthermore, the taxpayer had to be given the chance to provide the papers under a precursor notice (section 20B(1)), and the Inspector had to have reasonable grounds to believe that the documents would contain relevant information. Thus it would be surprising if Parliament had intended that documents protected by legal professional privilege be excluded from such notices, that it had not said so.

Counsel for the applicant also submitted that legal professional privilege as a domestic legal right of the individual was reinforced by Article 8 of the convention of the construction of legislation, and on the acts of public authorities by sections 3 and 6, Human Rights Act 1998. However, Mr Justice Blackburne said that legal professional privilege was unqualified by any considerations of public or private welfare, and that the Court in its attempts to interpret the legislation could not be neutral. It started from the principle of legality which, in this instance, meant upholding legal professional privilege, unless Parliament clearly said otherwise. This proviso brought the court back to the implication of the structure and wording of the section of the act under consideration. The Court held that Parliament had intended that legal professional privilege should yield to the statutory disclosure régime, thus the principle of legality required the Court to give effect to it.

Finally, Mr Justice Blackburne commented on the right of the adviser, or taxpayer, at risk of compulsory disclosure of confidential documents to have the opportunity to speak at the application before the Special Commissioner. Counsel for the applicant said that while the disclosure procedure was not decisive of liability to tax, it was the first step towards that, and effectively gave the Revenue the right to invade a person's privacy and 'disrupt a relationship of professional confidentiality'. Given that the Court permitted such notices to be issued, then the Special Commissioner should at least have the power to hear oral submissions from the taxpayer.

The judge reminded the Court that the Special Commissioner had accepted written submissions, but had decided that he had no power to hear oral submissions. The Revenue argued that to allow oral submissions would compromise the investigation. The judge continued that there was little point in having a right to be heard, if the full facts were not known. Either the Inspector had to show his hand, or the taxpayer make submissions 'in the dark'. The former action would be destructive of the procedure, while the latter would create a 'sustained pressure for disclosure'. The purpose of the procedure was to put the Special Commissioner in charge of the Inspector's intrusive powers, and to require the Inspector to tell the Commissioner everything about the case, both favourable and unfavourable. The Commissioner was right to conclude he had no power to hear oral submissions from the taxpayer.

The applicant's appeal was dismissed.

Decision for the Crown

(Reported at [2001] STC 497.)

Commentary by Allison Plager

The Revenue's use of its various powers under section 20, Taxes Management Act 1970 seems to be increasing, and their use will almost inevitably be contentious. The Court of Appeal went to considerable lengths to show that the section is detailed, and that where applicable the Revenue's powers are subject to the scrutiny of the Special Commissioner. The main bone of contention in the instant case was that certain papers required to be disclosed were subject to legal professional privilege, and as such were sensitive. However, as the judge says in his judgment, there is considerable detail in the section, and if Parliament had intended that papers subject to legal professional privilege should be exempt as it were, then it had every opportunity to say so.

The human rights aspect was also raised, but the Revenue's 'get out of jail free' card was played, in that if it is necessary for the public good to see certain privileged papers, then this overrides effectively the right to privacy.

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