Privilege: to what is HMRC entitled?

HMRC are not entitled to compel taxpayers or third parties to provide information or documentation that is subject to legal professional privilege, whether in the context of an enquiry, investigation or litigation.

Legal professional privilege encompasses both (i) legal advice privilege and (ii) litigation privilege.  Legal advice privilege attaches to confidential communications between a client and their legal advisers which form part of the continuum of giving and obtaining legal advice.  Litigation privilege attaches to confidential communications, including with third parties, created for the dominant purpose of litigation (whether ongoing or in reasonable prospect).

In the context of corporate clients, there has been a degree of uncertainty about who is the "client" for the purposes of legal advice privilege (hence whether communications between certain individuals and the corporate client's legal advisers are, or are not, subject to legal advice privilege).

A recent decision in the RBS Rights Issue Litigation has compounded that uncertainty.

• The High Court has defined "client" narrowly to include only those individuals who are authorised to seek and receive legal advice of behalf of the relevant corporate client and not individuals who are authorised only to provide information to the corporate client's legal advisers.  The decision also suggested, tentatively, that the "client" might be limited even further to those individuals comprising the "directing mind and will" of the corporate client.
• It had been hoped that the High Court's decision (which is not strictly binding on other High Court judges, but which is binding on judges in the First-tier Tribunal (Tax)) would be appealed directly to the Supreme Court.  For reasons explained below, however, no appeal will proceed.

This article considers the background to and scope of the High Court's decision in RBS; why the authors consider it to be incorrect (and hope that it will be overturned); and what practical steps should be taken for now to seek to ensure that communications remain privileged and therefore need not be provided to HMRC –  including:

• Consider carefully who within the client organisation is likely to form part of the "client" if the court takes a narrow view. This is likely to include those authorised to seek and obtain legal advice on behalf of the organisation, but not those who are merely authorised to provide information to the lawyers.
• Where external lawyers are instructed, consider identifying in the engagement letter the core team of individuals within the client organisation who are authorised to provide instructions to the lawyers. It is however not likely to be helpful to set out an exhaustive definition.
• Communications with the lawyers from those outside the core team responsible for instructing the lawyers and obtaining their advice should be avoided.
• In the event that, as the matter progresses, other individuals are required to become involved in instructing the legal advisers, consider recording their authority to do so.

Contents

Limits of compulsion

The scope of LLP

Who is "the client"?

The RBS Rights Issue Litigation

The Future and Practical Tips

Limits of compulsion: HMRC and Legal Professional Privilege

Civil powers

As was explored in our earlier Article 39 (HMRC's Powers of Investigation), Schedule 36 to the Finance Act 2008 ("Schedule 36") and Schedule 23 to the Finance Act 2011 ("Schedule 23") confer on HMRC extensive powers to compel taxpayers and third parties to provide information and documents.  Those powers cannot, however, be used to compel taxpayers or third parties to provide information of documentation that is subject to legal professional privilege ("LPP").¹  If any dispute were to arise as to whether any particular information or documentation was subject to LPP, provision is made for the dispute to be resolved by the First-tier Tribunal (Tax) (the "F-tT").²

The same limitations apply to HMRC's powers to obtain information from foreign authorities since, under the UK's double tax treaties (and tax information exchange agreements), HMRC are generally limited to asking for that which they would be able to obtain using their domestic powers.³

In the absence of those limitations, HMRC might have a clear interest in obtaining privileged communications to the extent, for example, they shed light on the purpose of a taxpayer or transaction as well as to understand the strengths and weaknesses of the taxpayer's case.

Criminal powers

When it comes to criminal investigations, HMRC have extensive information gathering powers conferred by the Taxes Management Act 1970 ("TMA"),⁴ the Proceeds of Crime Act 2002 ("POCA"),⁵ and the Serious Organised Crime and Police Act 2005 ("SOCPA").⁶ Similarly to the position in relation to HMRC's civil investigatory powers, the POCA and SOCPA regimes contain express language prohibiting the compulsion of material subject to LLP,⁷ and the TMA regime is subject to a common law prohibition.⁸

The scope of LLP

Two branches

As mentioned above, LPP has two branches: legal advice privilege and litigation privilege.  Common to both branches is the requirement that the relevant communication has remained confidential, though a limited loss of confidence vis-à-vis one party will not result in the communication losing its privileged nature vis-à-vis the world at large.⁹  For example, the fact that a taxpayer client shares with an associate (confidentially) a note of legal advice does not mean that the privilege attaching to that note has been lost vis-à-vis HMRC (or that the associate should not assert the taxpayer client's privilege in that note if asked by HMRC to provide a copy).

It should be noted that no adverse inferences may be drawn by HMRC or any Court or Tribunal as a result of a taxpayer claiming (validly) privilege in a document/information.¹⁰

Legal advice privilege

All confidential communications between a client and their lawyer which form part of the continuum of giving and receiving legal advice are protected from disclosure by legal advice privilege.

The communication does not need to be made between a client and their legal adviser directly; a communication made via an agent will still attach legal advice privilege.¹¹  Nor does the legal adviser have to be wholly independent of the client; confidential communications with an in-house lawyer are privileged to the same extent as communications with private practice lawyers (provided, of course, that the communications form part of the continuum of legal advice).¹²  The legal adviser must, however, be a qualified lawyer (providing advice as such): advice on the law given by (for example) accountants is not privileged.¹³

Who will constitute "the client" for these purposes (such that communications between them and their legal adviser will attract legal advice privilege) was considered in Three Rivers No 5¹⁴ and the RBS Rights Issue Litigation,¹⁵ which cases are considered below.

Litigation privilege

Litigation privilege applies to confidential communications between a client and their lawyer, or between one of those parties and a third party, provided (i) the communication came into existence for the dominant purpose of litigation and (ii) that litigation was ongoing or in reasonable prospect.

It should be noted that such communications would, in any event, be unobtainable by HMRC using their powers under Schedule 36.  That schedule contains an express prohibition on HMRC compelling any person to "provide or produce information that relates to the conduct of a pending appeal relating to tax or any part of a document containing such information".¹⁶

The remainder of this article is not concerned with the scope of litigation privilege.  However, the authors note that a recent High Court decision – SFO v ENRC ("ENRC")¹⁷ – has taken a strict approach to the scope of litigation privilege in the context of criminal investigations, finding that litigation (viz, a prosecution) was not in reasonable contemplation (hence litigation privilege did not arise) even though a criminal investigation by the SFO was reasonably contemplated.  In essence, the Court decided that litigation would only be in reasonable contemplation once it had been determined that there was some truth in the relevant allegations (or at least some material to support them).

Who is "the client": Three Rivers No 5

Background

After the collapse of BCCI, the liquidator and creditors of BCCI sued (inter alia) the Bank of England ("BoE") for misfeasance in public office.  In those proceedings, the BoE claimed legal advice privilege in respect of numerous documents that had come into existence for the purposes of a (non-adversarial) judicial inquiry into the supervision of BCCI (the "Bingham Inquiry").  The relevant background to that claim was as follows:

• Shortly after the Bingham Inquiry was established, the BoE had appointed a panel of three individuals to deal with all communications between the BoE and the Bingham Inquiry, which panel came to be known as the Bingham Inquiry Unit (the "BIU").
• The BIU were responsible for communicating with the BoE's legal advisers (Freshfields) in relation to the Bingham Inquiry.
• Other employees and ex-employees of the BoE were instructed to produce material for use by the BIU in obtaining advice from Freshfields.
• The issue was whether or not those documents (created by other employees/ex-employees) were subject to legal advice privilege.  It was common ground that litigation privilege was inapplicable (since it was conceded that the Bingham Inquiry was not "litigation" for these purposes).

Decision

In Three Rivers No 5, the Court of Appeal decided that the documents created by employees/ex-employees who were not members of the BIU were not subject to legal advice privilege.

The basis for the Court's decision was that, for the purposes of assessing privilege, the "client" did not encompass all employees of the BoE but was limited to the particular group (the BIU) who had been given responsibility for coordinating communications with the BoE's solicitors, Freshfields.

The RBS Rights Issue Litigation: Three Rivers No 5 reconsidered

Background

The RBS Rights Issue Litigation (the "RBS Litigation") comprised group litigation brought against RBS in relation to a rights issue of shares in the bank announced in April 2008.  In the context of that litigation, RBS claimed privilege in "transcripts, notes or other records" of interviews conducted by or on behalf of the bank with its employees and ex-employees as part of certain internal investigations.  As in relation to Three Rivers No 5, it was not contended by RBS that the documents were subject to litigation privilege. The only ground of privilege relied on was legal advice privilege.

RBS contended that the documents were privileged because:

• If English law applied, the documents were privileged as a record of lawyer / client communications for the purposes of giving or obtaining legal advice – ie, the interviewees were part of the "client" on a proper interpretation of Three Rivers No 5.
• Even if the interviewees were not part of the "client", the documents were privileged as part of the lawyers' working papers.
• In the event that the Court found the documents not to be privileged under English law, the English court should apply US law (not English law) to the question of whether the documents were privileged (because there were close connections with the US, including that one of the investigations was undertaken as part of RBS's response to subpoenas issued by the US Securities and Exchange Commission) and the documents were clearly privileged under that law.
• Even if English law applied, and if the documents were not privileged under English law, the English court should exercise its discretion to order that disclosure or inspection could be withheld because of RBS's rights under US law.

Decision

The judge (Hildyard J) rejected the claim to privilege on all grounds, and refused to exercise his discretion to prevent disclosure and inspection. The arguments and the judge's conclusions on each of the issues identified above are considered in more detail below.

Scope of "client"

RBS argued that Three Rivers No 5 was an unusual case which should be confined to its own particular facts. RBS justified that approach, in part, by reference to the extensive academic criticism of the decision and its disapproval in other jurisdictions including Singapore.

In particular, RBS argued that the application of Three Rivers No 5 should be confined to the particular context where a special unit (in that case the BIU) had been established as the exclusive conduit for communications between the client organisation and its lawyers, and internal documents were prepared by other employees (who were not authorised to communicate with the lawyers) to assist that unit in the preparation of communications with the lawyers. In other words, the decision did not apply to communications directly between a company's lawyers and its employees who were authorised to communicate with the lawyers.

Hildyard J recognised that there was force in these criticisms and attempts to confine the application of Three Rivers No 5, saying: "It may be that in a suitable case the Supreme Court will have to revisit the decision…".  However, he considered the decision to be binding authority that legal advice privilege is limited to communications between lawyer and client and "the fact that an employee may be authorised to communicate with the corporation's lawyer does not constitute that employee the client or a recognised emanation of the client".

In what the judge referred to as "the fundamental and most powerful part of RBS's case", RBS submitted that it was not contrary to Three Rivers No 5 that an individual who was authorised by the client corporation to communicate either instructions or factual information to the corporation's lawyers, to enable the corporation to seek legal advice, should be treated as part of the client and protected by legal advice privilege.

The judge however rejected that submission, finding (in essence) that the effect of Three Rivers No 5 is to limit the "client" to those who are authorised to seek and receive legal advice on behalf of a client corporation, and that authority to provide information is not sufficient for these purposes.

The judge said he did not think it necessary to determine whether a further implication of Three Rivers No 5 was to restrict the "client" to those who are the "directing mind and will" of the organisation. However, he added:

"I suspect that such a restriction will often reflect reality: a corporation is unlikely to authorise an individual to seek and receive legal advice on its behalf to an individual or body which is not its directing mind and will. Further, in my view, there are good reasons for it not doing so, and for the law not extending privilege if it does. So I do incline to the view that only communications with an individual capable in law of seeking and receiving legal advice as a duly authorised organ of the corporation should be given the protection of legal advice privilege."

Lawyer's working papers

As noted above, RBS submitted that even if the interviewees were not part of the "client", and therefore the interviews themselves were not privileged, the lawyers' notes of those interviews were privileged as part of the lawyers' working papers.

It was common ground that lawyers' working papers are privileged. The judge explained the basis for this principle, by reference to previous authority, as being that disclosure of lawyers' working papers may betray or at least give a clue to the trend of the advice being given to the client.

It followed (and was not disputed) that a verbatim transcript of an unprivileged interview would not be privileged; there had to be some attribute of the notes which distinguished them from verbatim transcripts and triggered their protection as lawyers' working papers.

The burden of demonstrating this was on RBS. The judge concluded that the burden was not satisfied on the evidence. He pointed out that any notes of an interview, as opposed to a bare transcript, are likely to reflect to some extent the note taker's particular interests, lines of inquiry and perception of the relative importance of various points.

Here, RBS's evidence indicated that the notes included "mental impressions", and reflected preparation which revealed the lawyers' train of enquiry, but the judge held this was not sufficient. There was, he said, a real difference between reflecting a "train of enquiry" and giving a clue as to the trend of legal advice.

Applicable law

RBS submitted that the court should depart from the old established rule that it is the lex fori (or law of the forum) which governs issues of privilege because:

• the modern concept of legal professional privilege as a fundamental human right, rather than as an aspect of the law of evidence, rendered it inappropriate and obsolete; and
• the previous case law could be distinguished as it invariably concerned the position where the foreign right was more limited or had been waived, rather than (as here) where a party has sought to rely on a broader foreign right to privilege.

RBS proposed a new choice of law rule, which would apply the law of the place with which the relevant engagement or instructions had their closest connection (unless that would be contrary to English public policy). Here, RBS said, that would result in the application of US law.

The judge said it appeared likely, and he was prepared to assume, that the interview notes would be privileged under US law. However, he rejected the submission that US law should apply to the question, including on the basis that the English court's application of the lex fori to questions of privilege had been well settled since the mid-19th century, he did not think there was sufficient basis for applying a different rule where the foreign law gave broader protection, and there were practical difficulties in applying some other law.

Discretion to prevent disclosure / inspection

Finally, RBS contended that (even if English law applied and the documents were not privileged), the court should exercise its discretion to order that disclosure or inspection could be withheld. That was (in summary) because RBS had a right to withhold inspection under US law, and a reasonable expectation that the interview notes would be and remain privileged.

The judge accepted that the court had a discretion to prevent disclosure or inspection notwithstanding that a document is disclosable. He described the discretion as a "salutary one", not least where legitimate expectations may need to be taken into account in striking a balance, but said the court was likely to lean heavily in favour of disclosure unless there were compelling grounds to do otherwise.

The judge concluded that this was not a special case where the general public policy in favour of disclosure should yield to the foreign law right.

Appeal

Hildyard J granted RBS permission to appeal against his decision, and granted a "leapfrog" certificate enabling the appeal to proceed directly to the Supreme Court (rather than the Court of Appeal).  However, the claimants amended their pleaded case in such a way that the documents that were the subject of the dispute over privilege ceased to be relevant, hence no appeal to the Supreme Court will now be made.

The result is that Hildyard J's first instance decision stands and is binding on judges in the F-tT, and is of persuasive authority though not strictly binding on other High Court judges.  In consequence, corporate clients face uncertainty as to precisely which officeholders and employees will be treated as "the client" for the purposes of legal advice privilege, hence whether particular communications are or are not disclosable to HMRC.

The Future and Practical tips

RBS wrongly decided

Although the decision in RBS will not be proceeding to an appeal, it is hoped that the issue of who constitutes "the client" will arise, and be considered by a superior court, in another case in the near future.

In such a case, it is hoped that the court would find that RBS was wrongly decided for one (or more) of the following reasons (or for some other reason).

• The decision in Three Rivers No 5 ought to have been limited to its very unusual facts, where a special unit had been established as the exclusive conduit for communications between the client organisation and its lawyers.  The Court of Appeal arguably did not intend to formulate a rule of law for all cases as to which employees represent the client for the purpose of legal advice privilege.
• In Three Rivers No 5, the issue was not who was "the client" (the client being the relevant body corporate, the BoE), but whether purely internal documents (not themselves constituting communications with the BoE's lawyers) created to assist the client in communicating with its lawyers were privileged.  That issue did not arise in the RBS Litigation, which was concerned with whether privilege attached to direct communications between the lawyers and employees who were authorised to communicate with them.
• The real question, when consider the application of legal advice privilege, should be which individuals are authorised by the company to communicate with its lawyers on the company's behalf, in accordance with the usual principles of attribution and agency.
• Given the policy rational for the existence of legal advice privilege (viz, that a person should be able to make full disclosure to their legal adviser in order to obtain advice on the law without fear that such disclosure might be used against them in the future) there is a convincing argument that legal advice privilege should not be confined to lawyer-to-client communications between lawyer and client, but should attach to all documents created for the dominant purpose of obtaining legal advice.

That said, the decision in RBS was considered by another High Court judge in ENRC (referred to above).  In that case, the judge strongly endorsed the narrow approach taken in the RBS Litigation to the question of who is "the client" for the purposes of legal advice privilege, although she stopped short of endorsing Hildyard J's  comments on whether "the client" comprised only those who are the "directing mind and will" of the relevant corporate.¹⁸

Practical tips

Unless and until the decision in the RBS Litigation is successfully challenged, it would be prudent to consider taking the following steps to ensure (so far as possible) that legal advice privilege is maintained.

• Consider carefully who within the client organisation is likely to form part of the "client" if the court takes a narrow view. This is likely to include those authorised to seek and obtain legal advice on behalf of the organisation, but not those who are merely authorised to provide information to the lawyers.
• Where external lawyers are instructed, consider identifying in the engagement letter the core team of individuals within the client organisation who are authorised to provide instructions to the lawyers. It is however not likely to be helpful to set out an exhaustive definition.
• Communications with the lawyers from those outside the core team responsible for instructing the lawyers and obtaining their advice should be avoided.

In the event that, as the matter progresses, other individuals are required to become involved in instructing the legal advisers, consider recording their authority to do so.

 

 

 

 

 

 

 

 

¹ This is provided for expressly by paragraph 23, Schedule 36.  There is no express provision in Schedule 23.  This is, presumably, because it is not anticipated that the "relevant data" prescribed by the regulations made in support of Schedule 23 could ever amount to information/documentation subject to LPP.  If, however, an issue as to LPP were to arise, the recipient of a Schedule 23 notice need only remind HMRC of the decision of Lord Hoffman in Ex parte Morgan Grenfell [2002] UKHL 21, confirming that – in the absence of express words to the contrary or necessary implication – legislation (relevantly, Schedule 23) was not intended to confer on HMRC the power to compel the production of privileged information/documentation.
² Information Notice: Resolution of Disputes as to Privileged Communications Regulations (SI 2009/1916).
³ See, for example, Article 28(3)(b) of the UK/Mauritius Double Taxation Convention (as amended by the 2011 Protocol).
⁴ Viz section 28BA.
⁵ Viz section 345.
⁶ Viz, section 62.
⁷ Section 348 of the Proceeds of Crime Act 2002; section 64 Serious Organised Crime and Police Act 2005.
⁸ Ex parte Morgan Grenfell: see EN1, above.
⁹ Gotha City v Sotheby's (No.1) [1998] 1 WLR 114.
¹⁰ See, for example, Wentworth v Lloyd [1864] 10 HLC 589.
¹¹ See, for example, Wheeler v Le Marchant (1881) LR 17 Ch D 675.
¹² See, for example, United States v Philip Morris Inc (No.1) [2003] EWHC 3028 (Comm).
¹³ Prudential v Pandolfo [2013] 2 AC 185.
¹⁴ [2003] QB 1556.
¹⁵ [2016] EWHC 3161 (Ch).
¹⁶ Paragraph 19(1), Schedule 36.
¹⁷ [2017] EWHC 1017 (QB).
¹⁸ See ENRC at [93].