No litigation privilege in advice from accountants on tax structure

In a recent decision, the High Court has held that advice from accountants on a proposed new tax structure was not prepared for the dominant purpose of litigation, and was therefore not protected by litigation privilege, even if litigation over the relevant tax affairs was in reasonable contemplation at the time the advice was given: The Financial Reporting Council Ltd v Frasers Group Plc (formerly Sports Direct International Plc) [2020] EWHC 2607 (Ch).

The decision emphasises that, for litigation privilege to apply, a communication or document must have been prepared for the dominant purpose of obtaining advice or evidence in relation to litigation that is reasonably in contemplation. As the judge explained, even if it is contemplated that a particular tax structure will be subject to challenge, and eventual litigation, advice as to how to implement the new structure is not primarily advice as to the conduct of the potential litigation.

While not surprising, the decision illustrates the point that advice about a potential course of action may not be covered by litigation privilege, even if that course of action is expected to lead to litigation. Where the advice in question is legal advice given by lawyers, legal advice privilege (rather than litigation privilege) is likely to apply. However, legal advice privilege does not apply to advice from other professionals, as confirmed by the Supreme Court in R (Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1 (considered in this blog post).

Background

This is a further decision arising out of an application by the Financial Reporting Council (“FRC”) for an order requiring the respondent (“SDI”) to provide certain documents for the purposes of the FRC’s investigation into the conduct of SDI’s former auditors in relation to an audit of SDI’s 2016 Financial Statements. (For a previous decision confirming that SDI could not be compelled to hand over its privileged documents to the FRC, see this post.)

The FRC’s investigation arose out of reports about SDI’s subsidiary Sportsdirect.com Retail Ltd (“SDR”) engaging Barlin Delivery Ltd (“Barlin”) to provide delivery services to SDR’s customers. This was part of a new or enhanced tax structure adopted by SDR in 2015 (the “2015 Structure”) on the advice of Deloitte LLP following enquiries from the French tax authorities. The FRC’s investigation relates, among other things, to the non-disclosure of the relationship between SDR and Barlin (which was owned by the brother of SDI’s founder and majority shareholder) in SDI’s 2016 Financial Statements.

The documents sought by the FRC for the purposes of its investigation included documents which SDI disclosed to its auditors in 2015 recording the advice from Deloitte on the 2015 Structure (the "Deloitte Material"). SDI asserted that the Deloitte Material did not have to be provided because it was protected by litigation privilege. SDI’s evidence asserted that the 2015 Structure was put in place “for the exclusive purpose of responding to the real and present threat of litigation that was anticipated from the French tax authority and other tax authorities”.

Decision

The High Court (Nugee J) rejected the claim to litigation privilege over the Deloitte Material. He noted that there was little dispute between the parties on the applicable legal principles. As summarised in Three Rivers DC v Bank of England (No 6) [2004] UKHL 48, a successful claim to litigation privilege requires the following conditions to be satisfied:

“…(a) litigation must be in progress or in contemplation; (b) the communications must have been made for the sole or dominant purpose of conducting that litigation; (c) the litigation must be adversarial, not investigative or inquisitorial.”

The dominant purpose of conducting litigation, for these purposes, means obtaining advice as to the litigation or evidence, or information which might lead to evidence, for use in the litigation (see eg WH Holding Ltd v E20 Stadium LLP [2018] EWCA Civ 2652, considered here).

Applying this test, Nugee J found that the Deloitte Material was not prepared for the dominant purpose of litigation, even assuming that litigation was in reasonable contemplation at the time. He noted that the expected litigation would be primarily over the tax arrangements which were in place before the 2015 Structure was implemented. The purpose of the Deloitte Material was to suggest a new arrangement which would have a better chance of withstanding challenge from the tax authorities, and to explain how tax was to be accounted for under that structure. It was not to assist in the litigation about the old structure. While it could be described, in a broad sense, as responding to a likely challenge from the French tax authority, it was not for the purpose of enabling SDR to take advice as to the merits of litigation about the previous tax structure, or how best to conduct or settle that litigation, nor was it for the purpose of obtaining evidence to defend the claim.

Even if, as SDI submitted, litigation challenging the effectiveness of the 2015 Structure was also in reasonable contemplation at the time, it could not be said that the Deloitte Material was prepared for the sole or dominant purpose of the conduct of that litigation. As the court put it:

“A taxpayer who takes advice as to how to structure his affairs does not do so for litigation purposes. He does so because he wants to achieve a particular result for tax purposes…”

The judge’s conclusion with regard to the “dominant purpose” element of the test meant he did not have to decide if litigation was in fact in reasonable contemplation at the relevant time. He did however comment that, despite the “apparently bland nature” of the enquiry from the French tax authority, he was not persuaded that he could properly go behind SDI’s witness evidence that the relevant individuals did anticipate a challenge from the relevant tax authorities. Nor did he see reason to doubt the evidence that it was anticipated that such a challenge was likely to be followed by a claim, which would be defended by SDR and therefore lead to litigation.