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Professional Privilege Seminar

Category Technical Articles
AuthorAdmin
LECTURE by Michael Conlon QC, FTII, FIIT
THE CHARTERED INSTITUTE OF TAXATION
CONFIDENTIALITY, PRIVILEGE AND THE TAX ADVISER – 16 OCTOBER 2002
Large Pension Room, Gray’s Inn

CUSTOMS & EXCISE’S APPROACH

  1. Introduction
    1.1 Indirect taxes
    1.2 Statutory overview
    1.3 Specific provisions
  2. Statutory powers
    2.1 Furnishing information
    2.2 Production of documents
    2.3 Removal and copies
    2.4 Penalties
    2.5 Power to enter premises
    2.6 Entry and search
    2.7 Production orders
    2.8 Procedural requirements
  3. Legal professional privilege
    3.1 Nature of right
    3.2 Relationship with Customs’ powers
    3.3 Customs’ Statement of Practice
  4. Conclusions
    4.1 Value of Statement of Practice
    4.2 Some points to watch

1. INRODUCTION

1.1 Indirect taxes

The Commissioners of Customs & Excise manage “indirect taxes”. These include: (1) Community customs duties, levies etc.; (2) excise duties (i.e. duties on alcohol, tobacco, hydrocarbon oils, gaming, air passengers); (3) value added tax; (4) insurance premium tax; (5) landfill tax; and (6) climate change levy.

Very wide powers. Used sparingly; the more draconian only in cases of serious fraud. Customs prefer to rely on trader/adviser co-operation. Challenge in the VAT and Duties Tribunals, in criminal proceedings and by judicial review. Public perception; criticism of Ministers; common law safeguards; Human Rights Act 1998. However, the balance may be shifting; prevention and detection of serious fraud and countering sophisticated tax avoidance schemes.

1.2 Statutory overview

A complex patchwork: section 1(1) Customs and Excise Management Act 1979 definition of “assigned matter”; overlap of powers. Broadly, the relevant provisions for the categories listed at paragraph 1 above are: (1) sections 8-16, 77-81, 157-164 CEMA; (2) as for category (1) but with additional provisions applicable to “revenue traders” in Parts IX and IXA, CEMA; (3) Schedule 11, VATA 1994; (4) Schedule 7 FA 1994; (5) Schedule 5 FA 1996; and (6) Schedule 6, FA 2000. Certain provisions of the Police and Criminal Evidence Act 1984 (regarding arrest, search and seizure) are applied by virtue of the Police and Criminal Evidence Act 1984 (Application to Customs and Excise) Order 1985 (SI 1985/1800).

1.3 Specific provisions

This seminar focuses on confidentiality and privilege. This is likely to arise in the context of powers to obtain information and documents and the right of the taxpayer to resist disclosure. From the indirect taxes perspective the main statutory provisions relate to VAT (and relevant provisions for the other duties and taxes follow them closely). I shall therefore concentrate on Schedule 11, VATA.

2. STATUTORY POWERS

2.1 Furnishing information

Customs may require every person concerned (in whatever capacity) in the supply of goods or services (or in receiving such a supply), or the acquisition or importation of goods, to provide such information relating to the goods or services or the supply, acquisition or importation, as Customs may reasonably require: para 7(2)(a), Sched 11, VATA. This applies to suppliers and recipients and, arguably, intermediaries. From 27 July 1999, it extends to a person to whom has been assigned the whole or part of the consideration for the supply: para 7(9). It is implicit that Customs must specify precisely what information they require and how it relates to the goods or services etc. Information does not equate with an oral cross?examination: CCE –v- Harz & Power [1967] 1 All ER 177.

2.2 Production of documents

Customs may demand from the persons described at 2.1 above, documents relating to goods or services or to the supply, acquisition or importation, to be produced at the principal place of business or at such other place and time as they may reasonably require: para 7(2)(b). The power includes demanding the documents from a third party who has possession of them. It is without prejudice to any lien: para 7(3). Again the documents and their nexus must be specified. Any profit and loss account and balance sheet are expressly included: para 7(4). Documents can only be demanded from a third party if he holds them to the sole order of the person described at 2.1 above. This may exclude documents held under an “Anton Piller” (i.e. search) order or received on discovery: EMI Records Limited –v- Spillane [1986] STC 374.

2.3 Removal and copies

Customs may copy or make extracts from the document: para 7(5). Where necessary Customs may remove the document but must provide a receipt: para 7(6). Documents reasonably required by the taxpayer for conduct of the business must be returned as soon as practicable or copies provided: para 7(7). Customs are liable for lost or damaged documents: para 7(8).

2.4 Penalties

Failure to comply with a demand for information or a document may attract civil or criminal penalties: section 69(1)(c) VATA and section 16(1) CEMA. A court or tribunal cannot order production (but see 2.6 below).

2.5 Power to enter premises

Customs may enter premises used in connection with the carrying on of a business at any reasonable time for the purpose of exercising their VAT powers: para 10(1). Customs may, at any reasonable time, enter and inspect any premises if they have reasonable cause to believe they are used in connection with the taxable supply or acquisition of goods and that the goods may be found there: para 10(2), Schedule 11, VATA. “Inspection” is by eye; “search” is by hand.

2.6 Entry and search

This requires a warrant issued by a JP. Customs must lay information on oath that there is reasonable ground for suspecting a fraud offence and that evidence may be found on the premises: para 10(3). A fraud offence is an offence within sections 72(1) to (8) VATA: see para 10(4). The terms of the warrant must be strictly complied with e.g. date, named officer, premises, number of accompanying persons, provision of copy to occupier etc., otherwise the entry and search is unlawful: para 10(5), (6); section 16 PACE 1984 and M & J Singh –v- HM Advocate [2001] STC 790. A warrant may be appropriate even if the taxpayer has agreed to “cooperate”: R –v- CCE ex parte McNicholas Construction Co Limited [1997] STC 1197. Entry may be by force if necessary: para 10(3). Customs are entitled to seize and remove any documents or other things whatsoever found on the premises which they have reasonable cause to believe may be required as evidence for the purposes of proceedings in respect of the fraud offence. Customs may also search any person found on the premises whom they have reasonable cause to believe is in possession of such documents or things: para 10(3)(b), (c).

2.7 Production orders

Customs are empowered to obtain a warrant from a JP ordering access to any recorded information (e.g. in a computer) where there are reasonable grounds for believing that a VAT offence is being, or will be, committed and the information may be required as evidence in proceedings for the offence: para 11(1), Sched 11.

2.8 Procedural requirements

Where Customs exercise powers under paras 10 or 11 they must provide the occupier of the premises with a record of what has been removed, allow reasonable access and provide copies: para 12(1)-(6). Access or copies can be denied where there are reasonable grounds for believing that it would prejudice the investigation: para 12(7). A court may direct Customs to comply with paragraph 12: see para 13.

3. LEGAL PROFESSIONAL PRIVILEGE

3.1 Nature of right

Legal professional privilege is a fundamental human right long established in the common law: see R –v- Derby Magistrates Court ex parte B [1996] AC 487 and R (on the application of Morgan Grenfell & Co) –v- Special Commissioner of Income Tax [2002] STC 786. For the purposes of PACE there is now a statutory definition: section 10 PACE (communications in connection with the giving of legal advice or in connection with or in contemplation of legal proceedings, items enclosed with or referred to in such communications for those purposes).

3.2 Relationship with Customs’ powers

Customs’ powers to demand information or production of documents or of entry and search or access to recorded information do not entitle them to inspect, copy or remove items covered by legal professional privilege: section 8(1)(d) PACE as applied by the Customs Application Order 1985. In practice, Customs may adopt the “black sack procedure” (items which might be subject to LPP removed during a search for examination by an independent Counsel to determine whether LPP might be claimed). In a case where Customs used this procedure in executing a search warrant of the premises of solicitors alleged to be party to a VAT fraud, the Divisional Court held that the search was not rendered illegal: R –v- CCE ex parte Popely and Harris [1999] STC 1016.

3.3 Customs’ Statement of Practice

Customs have issued VAT Leaflet 700/47/93: “Confidentiality in VAT matters (tax advisers) – Statement of Practice”. This helpfully summarises their statutory powers. It extends the concept of LPP to confidential advice given by tax advisers. These are persons (who need not be professionally qualified) appointed directly or indirectly by a client to give advice on the clients’ tax affairs. Such advice may include:

  • notes of meetings;
  • telephone calls;
  • internal memoranda;
  • letters;
  • faxes;
  • management letters;
  • auditors working papers.

Customs note that a management letter or working papers may contain information about goods or services or supplies, acquisitions or importations (which they are entitled to see). In such a case a certified extract is acceptable. The Statement of Practice provides that Customs “will not normally request the tax adviser or trader to produce a communication relating to confidential opinion or advice”. They state, however, that confidentiality may sometimes be “overridden by legal requirements”.

4. CONCLUSIONS

4.1 Value of Statement of Practice

The Statement of Practice offers some measure of comfort. However, it is concessionary and was made after consultation with the ICAEW, the CIOT and the VAT Practitioners Group. These bodies have ethical rules and guidelines. The regime is a form of “scouts honour”. The position if Customs decided to resile from the Statement of Practice is uncertain. The Statement of Practice only applies to VAT. Customs may accept that it extends to other indirect taxes. The principle in Morgan Grenfell probably applies. But what if Customs encountered a tax avoidance scheme promoted by a firm of non-qualified tax advisers, details of which were found in the possession of a third party ...?

4.2 Some points to watch

Great care is needed in framing written tax advice to clients. Matters of a “management” nature, or concerned with specific goods, supplies, acquisitions or importations must be kept separate from confidential advice. Beware tax sections in “due diligence” reports which become incorporated in e.g. business sale or share issue documentation. Beware also the ramifications of the Popely case.

MICHAEL CONLON QC
Pump Court Tax Chambers
16 Bedford Row
London
WC1R 4EF

31 October, 2002

 

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