Special Commissioner: DR JOHN F AVERY JONES CBE

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SECTION 20 TMA 1970 NOTICE – whether implied privilege for accountants’ advice – no – whether Inspector’s opinion about the relevance of the material was reasonable – yes

THE SPECIAL COMMISSIONERS

APPLICATION BY THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS TO SERVE A SECTION 20(3) TMA 1970 NOTICE ON A PLC AND A SECTION 20(1) NOTICE ON ITS SUBSIDIARY COMPANY

Special Commissioner: DR JOHN F AVERY JONES CBE

Sitting in private in London on 13 November 2007

An Officer of HMRC, Special Civil Investigations, for HM Revenue and Customs

ANONYMNISED DECISION

HMRC apply for a Notice under s 20 TMA 1970 directed to a plc (“the Parent Company”) and a limited company (“the Subsidiary”). Before the hearing I had a written application consisting of 14 pages with a number of attachments from an officer of HMRC within Special Civil Investigations (“the Officer”) who appeared before me and dealt with my questions. The Parent Company sent me representations consisting of 20 pages with 9 Appendices on 10 November 2007 and a further letter on 12 November 2007 essentially claiming that the same privilege should be given to advice given by accountants as is given to advice from lawyers. The Revenue also submitted an 8 page reply to the Parent Company’s representations on this point.
Section 20 of the Taxes Management Act 1970 provides:

(1) Subject to this section, an inspector may by notice in writing require [a person—

(a) 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—

(i) any tax liability to which the person is or may be subject, or

(ii) the amount of any such liability, or

(b) to furnish to him such particulars as the inspector may reasonably require as being relevant to, or to the amount of, any such liability.]

…

(3) Subject to this section, an inspector may, for the purpose of enquiring into the tax liability of any person (“the taxpayer”), by notice in writing require any other person to deliver to the inspector or, if the person to whom the notice is given so elects, to make available for inspection by a named officer of the Board, such documents as are in his possession or power and as (in the inspector's reasonable opinion) contain, or may contain, information relevant to any tax liability to which the taxpayer is or may be, or may have been, subject, or to the amount of any such liability; and the persons who may be required to deliver or make available a document under this subsection include the Director of Savings.

Section 20B contains the following restrictions:

(8) A notice under section 20(3) or (8A) or section 20A(1) does not oblige a barrister, advocate or a solicitor to deliver or make available, without his client's consent, any document with respect to which a claim to professional privilege could be maintained.

(9) Subject to subsections (11) and (12) below, a notice under section 20(3) or (8A)—

(a) does not oblige a person who has been appointed as an auditor for the purposes of any enactment to deliver or make available documents which are his property and were created by him or on his behalf for or in connection with the performance of his functions under that enactment, and

(b) does not oblige a tax adviser to deliver or make available documents which are his property and consist of relevant communications.

(10) In subsection (9) above “relevant communications” means communications between the tax adviser and—

(a) a person in relation to whose tax affairs he has been appointed, or

(b) any other tax adviser of such a person,

the purpose of which is the giving or obtaining of advice about any of those tax affairs; and in subsection (9) above and this subsection “tax adviser” means a person appointed to give advice about the tax affairs of another person (whether appointed directly by that other person or by another tax adviser of his).

Section 20BA (which is not relevant here but I quote because of the exception for legal professional privilege in Sch 1AA below) provides:

(1) The appropriate judicial authority may make an order under this section if satisfied on information on oath given by an authorised officer of the Board—

(a) that there is reasonable ground for suspecting that an offence involving serious fraud in connection with, or in relation to, tax is being, has been or is about to be committed, and

(b) that documents which may be required as evidence for the purposes of any proceedings in respect of such an offence are or may be in the power or possession of any person.

Schedule 1AA provides:

5—(1) Section 20BA does not apply to items subject to legal privilege.

(2) For this purpose “items subject to legal privilege” means—

(a) communications between a professional legal adviser and his client or any person representing his client made in connection with the giving of legal advice to the client;

(b) communications between a professional legal adviser and his client or any person representing his client or between such an adviser or his client or any such representative and any other person made in connection with or in contemplation of legal proceedings and for the purposes of such proceedings; and

(i) in connection with the giving of legal advice; or

(ii) in connection with or in contemplation of legal proceedings and for the purposes of such proceedings,

when they are in the possession of a person who is entitled to possession of them.

(3) Items held with the intention of furthering a criminal purpose are not subject to legal privilege.

Putting on one side for a moment the legal professional privilege (“LPP”) issue, I have formed the initial view on the Officer’s application that I should consent to the Notice. In coming to that view I have considered the Parent Company’s representations that the documents sought are not relevant and I will return to this point later in this decision. This decision deals primarily with the privilege point and whether my initial view should be changed in the light of it.
On the privilege issue the Parent Company contends in outline:

(1) The only documents not disclosed are those documents forming part of a chain of correspondence the dominant purpose of which was the obtaining of legal advice.

(2) The rationale for protecting documents recording the giving and receiving of legal advice was set out clearly in Akzo Nobel [2007] All ER (D) 97 as follows:

“[121] Similarly, it must be pointed out that LPP meets the need to ensure that every person must be able, without constraint, to consult a lawyer whose profession entails the giving of independent legal advice to all those in need of it.”

(3) The Report of the Keith Committee recognised the contrast between the position of lawyers and other professionals giving tax advice in the law as it then was. Section 20B(9) was enacted as a result of a recommendation of the Committee to recognise that a great deal of tax advice was given by accountants and other advisers who should be put on the same footing as lawyers.

(4) Tax Bulletins 46 and 62 say “References to legal advice in this article should therefore be read as covering all tax advice whether or not it is given by lawyers.” This has been withdrawn without any explanation.

(5) The decision of the House of Lords in R v A Special Commissioner ex p. Morgan Grenfell & Co Ltd 74 TC 511 supports the Parent Company’s claim. At [38] Lord Hoffmann disagreed with the Revenue’s argument that it was important for them to have access to legal advice in cases where liability turns on the purpose for which a transactions was entered into, saying that the court must infer the purpose from the facts. The issues here are precisely parallel to the issues considered in Morgan Grenfell.

(6) The House of Lords in Morgan Grenfell did not consider s 20B(9) to (11).

(7) A purposive approach to Morgan Grenfell requires that privilege should be given to accountants’ advice.

(8) As Advocate General Sir Gordon Slynn said in AM&S Europe Ltd v EC Commission: “If one considers the real purpose of the protection…I can see no justifiable distinction between such documents in the hands of the lawyer and in the hands of the client.” The conclusion in Morgan Grenfell should be applied to advice from accountants.

(9) Foxley v UK [2000] ECHR 224 dealt with professional secrecy relating to a trustee in bankruptcy.

(10) The Parent Company expressly does not argue that LPP extends to accountants. However, a privilege may apply to advice about the law.

The Revenue contend in outline (following the same numbering as the Parent Company’s contentions above):

(1) Whether it is “legal advice” is the issue.

(2) It is also stated in Akzo Nobel that LPP is closely linked to the lawyer’s role as collaborating in the administration of justice by the courts.

(3) The Report of the Keith Committee and Hansard extracts quoted by the Parent Company are not admissible aids to construction of the legislation.

(4) The Tax Bulletins were withdrawn as they were overtaken by the House of Lords decision in Morgan Grenfell which overruled the basis on which the Bulletins (which were consistent with the views of the courts below) were based.

(5) Morgan Grenfell was solely about LPP and did not consider an extension to it. The contrast between LPP and other confidential communications was made by Lord Scott of Foscote, with whom three of their Lordships expressly agreed, in Three Rivers District Council v Bank of England (No.6) [2005] AC 610 at [28]:

“In relation to all other confidential communications, whether between doctor and patient, accountant and client, husband and wife, parent and child, priest and penitent the common law recognises the confidentiality of the communication, will protect the confidentiality up to a point, but declines to allow the communication the absolute protection allowed to communications between lawyer and client giving or seeking legal advice.” [my italics]

See also the Employment Appeal Tribunal declining to extend LPP beyond advice given by a professionally qualified lawyer in Ryan v New Victoria Hospital [1993] ICR 201. Lord Hoffmann was not at [38] in Morgan Grenfell saying that purpose must always be inferred from the facts, but that if LPP was not overridden by s 20 the Revenue would have to do its best with what was available. This does not mean that advice cannot be relevant to the tax liability. The issue here is not the precise parallel of the issue in Morgan Grenfell; the difference is fundamental.

(6) The conclusion in Morgan Grenfell depended on the character of LPP as a fundamental human right (see [7] second sentence, [35] last sentence). It is not based on a general right of privacy, but on the right of access to justice. No such fundamental right attaches to accountancy advice. Parliament amended s 20 in 2000 by inserting s 20BA and Sch 1AA by preserving from a production order items subject to LPP and limiting the protection to advice from lawyers (and not accountants), which would not have been logical if there was already a protection for accountants’ advice.

(7) The Parent Company’s purposive approach assumes what it is trying to prove. There is an express qualification in s 20B(9) and an implied qualification for LPP, but there are no other qualifications.

(8) The possible illogicality if s 20 had preserved LPP for documents in the hands of lawyers but not in the hands of clients was explained in Morgan Grenfell as being on account of Parry Jones v The Law Society. The decision justified the solicitor giving confidential information to the Society’s accountant in connection with an investigation into compliance with its accounting rules, not on the basis that the client’s LLP had been overridden by the Society’s rules, but that the clients’ LPP was not being infringed because the Society could use the information only for the purpose of its investigation. No such illogicality arises in respect of accountants unless there is a previously-unrecognised fundamental human right attaching to all advice that has nothing to do with the law.

(9) Foxley was not concerned with professional secrecy of a trustee in bankruptcy. The trustee had received, read and copied correspondence between the bankrupt and his legal advisers. The court held at [44] that this was not in keeping with the principles of confidentiality and professional privilege attaching to relations between a lawyer and his client.

(10) The Parent Company’s argument is illogical in accepting that the advice does not fall within LPP, but contending that there is a regime protecting from disclosure advice from accountants that is identical to LPP.

(11) Generally, the request is to enable HMRC to understand the relevant transactions, to see why they were entered into and to see whether the relevant statutory provisions, construed purposively, apply to the transactions as they actually were, viewed realistically.

The Parent Company is essentially asking me to read s 20 as containing an implied privilege for accountants’ advice in circumstances in which it is accepted that LPP does not apply. Section 20 is confusing on what is privileged and one’s understanding of it was changed by the decision of the unanimous House of Lords in Morgan Grenfell reversing the equally unanimous Court of Appeal and Divisional Court and the Presiding Special Commissioner, which demonstrates that the decision was unexpected. The House of Lords decided that there was an implied saving for LPP, which therefore applied to documents in the hands of the client.
Originally s 20(8) provided that the section did not oblige a barrister or solicitor to deliver without the client’s consent any documents on which a claim to LPP could be maintained. This was generally thought to imply that LPP was not protected in the hands of the client, whose privilege it is. The Keith Committee (of which should declare an interest as a member) considered at paragraph 26.2.2 that the purpose of such provision was to save a legal adviser from being put in the position of having to breach the obligation of confidence incumbent upon him. (I should say that I fully accept the Revenue’s contention that the Committee’s report is not a permissible aid to the construction of the section and I am using it to give the background to the general understanding of the section before Morgan Grenfell.) The House of Lords in Morgan Grenfell agreed that it was explicable that Parliament might want to do this, although they took a different view of the reasoning in Parry-Jones v The Law Society [1969] 1 Ch 1, in which the Court of Appeal had upheld a requirement for a solicitor to disclose privileged documents to the Law Society’s investigating accountant on the basis that the Society’s rules had overridden privilege. The House of Lords in Morgan Grenfell at [32] considered that the true reason for the decision in Parry-Jones was that the client’s LPP had not been infringed because the Society could not use the information for any purpose other than the investigation into the accounts. The Keith Committee referred in paragraph 26.2.2 to the Law Society’s request for protection for documents in the hands of the client. The Committee saw the logic of this but considered that the result could be that the client could convey any information with a request for advice to a solicitor to be immune from the attentions of the Revenue. Their conclusion at paragraph 26.6.5 was for a distinction to be made between documents containing facts necessary to determine the true tax liability, which even if subject to LPP should be disclosed if the claim to LPP would unreasonably impede the ascertainment of facts necessary to the proper ascertainment of the taxpayer’s tax liabilities; and advice, which should not be disclosed. They further recommended at paragraph 26.6.6 that legislation should expressly state if it was intended to exclude LPP and that a mechanism for disputing claims to LPP should be enacted.
The Keith Committee, by a majority (which I do not mind disclosing included myself), also recommended the extension of the same privilege to professionally qualified agents. They said at paragraph 26.6.11:

“It is difficult in theory to make any valid distinction between advice about tax matters given to his client by a tax agent and similar advice given by solicitors. This is particularly so in England and Wales where most tax agents are not solicitors but mainly other professional persons such as accountants.”

This recommendation was adopted in 1989 and is found in s 20B(9) and (10). At that stage it seemed that legally qualified advisers and “tax advisers” (as defined) were in the same position.

The decision of the House of Lords in Morgan Grenfell was that it could not be implied from the express saving for lawyers excluded an implied LPP for documents in the hands of the client. Unfortunately their Lordships quoted s 20B(9) in its original 1976 form containing a saving for accountants’ working papers, see [14] and the Appendix, on the basis that the Revenue had agreed that the subsequent amendments had not changed the meaning that s 20(1) had in 1976, see [9]. Therefore the House of Lords never considered the 1989 saving in s 20B(9) and (10) for documents that are the tax adviser’s property and consist of relevant communications between the tax adviser and the client (and any other tax adviser) the purpose of which is the giving or obtaining of advice about the client’s tax affairs.
A final development should be mentioned. In 2000, after the House of Lords decision, Parliament amended this series of sections by adding s 20BA and Sch 1AA which contained an express exception for items subject to LPP defined to include certain communications between a professional legal adviser and his client. Although this addition is likely to be relevant to the legal adviser rather than the client as the section is concerned offences involving serious fraud, Parliament made a further express limitation of this new privilege to legal advisers. It should also be mentioned that para 6 of Sch 1AA also contained power to make regulations for the resolution of disputes about LPP but only in relation to the new provision, see the Orders for the Delivery of Documents (Procedure) Regulations 2000 reg 7.
This background shows that while there exists essentially similar safeguards for documents in the hands of lawyers and tax advisers, the saving for LPP in the hands of the client that the House of Lords found not to have been impliedly overridden by the section in Morgan Grenfell is strictly for LPP, as a human right that can be invaded only in exceptional circumstances, see [39] and the reference to Foxley v UK (2001) 31 EHRR 25 p 647 para 44. The Courts have recognised the distinction between lawyers and others, as in the passage quoted in paragraph 5(5) above from Three Rivers District Council v Bank of England (No.6). There is absolutely no possibility of my deciding that something similar to LPP exists in relation to advice from accountants. There is no support for the existence of a previously-unrecognised fundamental human right attaching to all advice that has nothing to do with the law. It is not necessary for me to deal with every contention recorded above but I am in general agreement with the Revenue’s answers to the taxpayers’ contentions.
Accordingly, the only exception for accountants’ advice is that it is irrelevant. The test of that is the Inspector’s (here the Officer’s) reasonable opinion, which is a matter that I am required to consider. The Parent Company’s memorandum contains representations about this aspect which I have considered but not summarised above as essentially I am concerned with reasonableness of the Officer’s opinion. In their letter of 12 November 2007 the Parent Company mentions that from telephone conversations with the Revenue they believe that the Revenue may refer to certain emails but it contends that what the adviser thinks is not relevant, citing the passage from Morgan Grenfell referred to at paragraph 4(5) above. I agree with the Revenue’s contention at paragraph 5(5) above that this is a misreading of the passage. In brief, the transaction in issue is a marketed tax avoidance scheme disclosed by a firm of chartered accountants. The transactions are presented as being to facilitate the winding up of an overseas company. An email states:

“As the preference is not to mention the declaration and payment of the dividend by [the overseas company] the ‘outline proposal’ element of the note is brief and just details the intention to issue the warrants to [another overseas vehicle]….Just as a presentational point, we mention that the reason for the issue of the warrants is to facilitate the winding up of [the overseas company], but we do not explain how the issue helps to achieve that—perhaps a point to gloss over…”