As Benjamin Franklin famously said: “Nothing is certain in this world except for death and taxes.” Following the recent House of Lords ruling in R v Special Commissioner, ex parte Morgan Grenfell & Co, one might now be tempted to include legal professional privilege.
The House of Lords' decision was concerned with the scope of a tax inspector's statutory powers to demand the production of documents relevant to a taxpayer's tax liability. These powers are granted under Section 20 of the Taxes Management Act 1970, which affords the taxpayer certain safeguards and restrictions to qualify these powers. In particular, the act expressly preserves legal professional privilege for documents in the hands of a taxpayer's legal advisers. However, the act contains no such express reference in relation to privileged documents in the hands of the taxpayer themself.
The House of Lords' decision will have sounded a welcome note of reason to many involved in the field of tax planning. In June 1999, the presiding special commissioner Stephen Oliver QC decided that legal professional privilege was overridden by Section 20 of the Taxes Management Act in relation to documents in the hands of the taxpayer. The Divisional Court and the Court of Appeal both subsequently upheld this ruling. The basis for this view was that Parliament had provided the taxpayer with a number of specific protections under the act; no wider qualification of the general words of Section 20 had therefore been intended.
As Lord Hoffmann observed, this interpretation led to the irrational conclusion that Parliament had intended to preserve privilege for documents held by a taxpayer's lawyers, but not for copies or originals of the same documents in the hands of the taxpayer themself. It is hard to imagine that Parliament could have intended the law to apply in a way which might well have led to lawyers not committing unfavourable advice to writing or else advising clients to retain written advice themselves.
The House of Lords' decision has put matters back onto a more rational footing. The courts have recognised that legal professional privilege is a fundamental human right, long established in common law. Any intention to override such a right must be stated expressly or appear necessary by implication. The act contains no express exclusion and the various safeguards enumerated fall far short of a necessary implication. As a result, their Lordships have put a firm stop to claims by the Inland Revenue that it is entitled to the production of privileged communications.
Interestingly, the Lords also noted that legal professional privilege has been held by the European Court of Human Rights to be part of the right of privacy guaranteed by Article 8 of the European Convention on Human Rights (ECHR) (Foxley v
United Kingdom) and held by the European Court of Justice to be part of community law (AM&S Europe v
Commission of the European Communities
). In this case, it was not necessary for the House of Lords to decide whether tax inspectors' powers under the act were compatible with the ECHR, but the warning was clear: the principle that an individual (or a company) must be able to consult their lawyer in confidence is not one to be treated lightly.
So, an issue that has generated a great deal of controversy and debate has finally been resolved in favour of the taxpayer. Parliament never intended to override a taxpayer's fundamental right to receive legal advice in confidence. In addition, it will often be possible to argue that correspondence between the taxpayer and the legal adviser is not relevant to the taxpayer's tax liability in any event. It is, of course, only communications between lawyer and client that are privileged: tax advice from accountants and other non-legally qualified persons is not protected by legal privilege. The House of Lords' decision may not stop the Inland Revenue from requesting the production of privileged documents and suggesting that a taxpayer who refuses to disclose such documents must surely have something to hide. However, the Inland Revenue will not be able to use its statutory powers to compel production of confidential communications between lawyer and client. This is undoubtedly good news for both taxpayers and for lawyers.