An analysis of the impact of the recent Morgan Grenfell case on the Revenue's powers to demand information. Article by Tom Cawdron, published in the August 2002 issue of Tax Adviser. Tom Cawdron is a Tax Investigations partner at PricewaterhouseCoopers. He joined the company from the Revenue in January 1997. Key Points
- Revenue's powers under TMA 1970, s. 20
- Taxpayers right to obtain advice
- Keith Report recommendations still relevant
For the best part of 25 years the Inland Revenue believed that it had the ability to obtain from a taxpayer any information about that taxpayer’s tax liabilities, providing that information was relevant to the liability and was reasonably required by the inspector.
It was the inspector’s opinion which mattered, and increasingly inspectors have been of the opinion that information includes advice obtained by taxpayers about arrangements being entered into. On 16 May 2002 , in the R v Special Commr & Anor, ex parte Morgan Grenfell & Co Ltd  BTC 223 case, the House of Lords held that the Taxes Management Act 1970 (TMA 1970), s. 20 powers do not allow the Revenue to obtain legal advice taken by the investment bank about a tax arrangement to which the bank had been a party. Just how far-reaching is that decision?
Over its lifetime TMA 1970, s. 20 has seen many changes, with the addition of many new safeguards and procedures. For the purposes of this article, the two most significant provisions are s. 20B(8), introduced in 1976 and commonly referred to as ‘lawyers privilege’, and s. 20B(9)–20B(11), introduced in 1989 and referred to as ‘accountants privilege’. The latter provisions were introduced following the recommendations of the Keith Committee, which in 1983 had reported extensively on the Enforcement Powers of the Inland Revenue and HM Customs and Excise.
In the leading judgment in Morgan Grenfell, Lord Hoffman had no doubt that:‘LPP is a fundamental human right long established in the common law.’ [Legal professional privilege (LPP)]and that:
‘It is a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice.’
Lord Hoffman also pointed to the right to privacy enshrined in art. 8 of the European Convention of Human Rights (ECHR), although further consideration of the Convention was not necessary for the purposes of the decision, nor was it necessary for the court to consider whether the legal advice taken by the investment bank constituted relevant information for the purposes of s. 20.
Lord Hoffman carefully analysed many of the procedural aspects of the s. 20 provisions, but concluded that none of these gave any indication that when Parliament had enacted the s. 20 legislation, without specific indication to the contrary, it had not intended that s. 20 should override the normal rule of privilege. Lord Hoffman noted that in Standing Committee debates about the legislation Joel Barnet, then Chief Secretary to the Treasury, had said:
‘I should make it quite clear - even without my hon. and learned Friend sitting beside me - that the purpose of this part of the schedule is not to require privileged and confidential documents to be handed over to the Inland Revenue. That is certainly not the intention.’
In Morgan Grenfell argument had centred on the meaning of the provisions relating to lawyers privilege, to be found in s. 20B(8). Lord Hoffman had no doubt that these provisions were enacted to ensure that the Revenue was unable to obtain, from a client’s legal advisers, documents that it was unable to obtain from the client. Lord Hoffman commented that ‘LPP is, after all, a single privilege, for the benefit of the client, whether the documents are in his hands or that of his lawyer’. In an especially telling remark, in which the words ‘lawyer’ and ‘taxpayer’ are interchangeable with no loss of meaning or emphasis, Lord Hoffman said:
‘Why should Parliament want to preserve LPP for documents in the hands of the lawyer but not for documents (which may well be copies or originals of the same documents) in the hands of the taxpayer?’
In Morgan Grenfell only passing reference was made to the provisions of s. 20B(9)-(11), which had appeared in statute in their present form as part of the raft of Keith Committee recommendations enacted in 1989.
The Keith Committee had carried out a wide-ranging review of the enforcement powers of both the Revenue and Customs. In relation to LPP the Committee commented:
‘There could be no question, of course, of allowing the [Inland Revenue and Customs] Departments access to legal advice as such, even though this might reveal chinks in the taxpayer’s armour of which they might otherwise be unaware.’
Keith noted that s. 20B(8) prevented the Inland Revenue from obtaining privileged advice documents from ‘barristers, advocates or solicitors’ and recognised that historically tax agents were not legally qualified, that the legal profession was not involved in acting as tax agents to any significant extent, and that to restrict privilege to tax agents who were legally qualified would penalise the majority of taxpayers who were represented by agents not so qualified. Keith commented on the intrinsic difficulty and indeed unfairness in affording a different treatment to tax advice given by solicitors, as against precisely the same tax advice given by other tax agents. If that statement was true in 1983, it is all the more true today.
Keith recommended that privilege should be extended to duly appointed tax agents, in relation to tax advice given by such agents. Parliament adopted Keith’s recommendations and s. 20B(9)–(11) was enacted accordingly, so as to ensure that the Revenue should not be able to obtain from the tax agent, advice which had been given by the agent to the taxpayer.
In light of Morgan Grenfell, it now seems wholly illogical that Parliament should have wanted to allow ‘accountants privilege’ for tax advice documents in the hands of the tax adviser but not for tax advice documents (‘which may well be copies or originals of the same documents’) in the hands of the taxpayer. Lord Hoffman’s decision in Morgan Grenfell shows just how illogical Parliament’s actions would have been, if the tax advice which was being protected by the introduction of ‘accountants privilege’ was not already immune from the application of s. 20 when in the hands of the taxpayer. Lord Hoffman demonstrates in Morgan Grenfell that a taxpayer has the right to obtain professional advice about the application of the taxing statutes without fear that the advice may be disclosed to the Revenue, whichever type of qualified tax professional is the source of that advice.
020 7235 9381
August 2002 by