Reinsurance E-Alert

January 2008 

Underprivileged? No implied privilege for accountants' tax advice

A Special Commissioner has ruled that there is no notion of privilege attaching to the communications of tax advisers.

The decision stems from a case involving disclosure of correspondence under Section 20 of the Taxes Management Act 1970 under which HMRC can require a taxpayer (or a third party) to deliver or allow inspection of documents in their possession or power that may contain information relevant to the taxpayer's tax liability.

A number of exceptions to the section 20 rule exist and include an exception for:
· Auditors acting in that capacity;
· Documents covered by professional privilege ; and
· Communications in the possession of tax advisers (lawyers or otherwise) or communications from clients or their other advisers regarding tax advice.

It was decided by the House of Lords in the case of R v A Special Commissioner ex parte Morgan Grenfell & Co Ltd [2002] UKHL 21 that section 20 is subject to the doctrine of legal professional privilege, a common law right that entitles the withholding of certain evidence during the course of judicial and quasi-judicial proceedings on the basis that that evidence relates to legal advice obtained or prepared for the purpose of actual or anticipated litigation. Therefore, an implied exception to section 20 existed for documents held by a taxpayer or a third party to which legal professional privilege applied. An express exception for legal professional privilege is contained in Schedule 1AA of the Act. However, this only applies to orders made for disclosure where there are reasonable grounds for suspecting a serious fraud offence has been committed and the documents are required as evidence in the resulting fraud proceedings.

In the present case, HMRC requested a section 20 notice from the Special Commissioner to obtain disclosure of certain documents from a company which had been tipped off as being involved in a marketed tax avoidance scheme. The company argued that although the documents sought were not subject to legal professional privilege (and therefore did not benefit from the exception provided by Morgan Grenfell), the correspondence sought should not have to be disclosed. The company argued that applying the purposive approach to Morgan Grenfell, privilege would exist for correspondence with non-legal advisers about the law and therefore would cover advice from accountants on tax matters. HMRC argued that only legal professional privilege benefited from an exception in section 20 and this exception did not extend to any other similar type of privilege.

The Special Commissioner found in favour of HMRC and ordered disclosure of the company's documents. The decision was made on the basis that there is a distinction between legal professional privilege and privilege in other professions. It was recognised that something similar to legal professional privilege exists in relation to advice from accountants, but not so as to avoid the operation of Section 20. Therefore, there would only be an exception to section 20 if the documents sought were irrelevant to the tax payer's liability, which was not the case here. However, in a personal capacity and as an aside, the Special Commissioner questioned the logic of the distinction between the privilege that exists over advice from lawyers and advice from accountants in the same context of tax advice, as the overlap between the two may be substantial. This echoes the calls of the accountancy profession for a form of privilege to be extended to tax advice to redress the imbalance between the protection proffered for advice from lawyers and the exposure of communications from accountants.

Going forward, taxpayers need to be mindful of the distinction between the tax advice received from lawyers and advice from accountants given the greater rights of HMRC to access correspondence with accountants. If a taxpayer seeks to rely on a section 20 exception when faced with an application by HMRC for disclosure, they should ensure that documents which are retained on the basis of privilege actually benefit from legal professional privilege.