Sign Up for PublicationsThe Tax Context: Recent Developments Regarding Legal Privilege
Recent United Kingdom/ English law developments:
Under English law, the UK tax authority (His Majesty’s Revenue and Customs, HMRC) has the power to serve a notice on a third party, requesting them to provide it with information or to provide a document if that information or document is reasonably required for the purpose of checking the tax position of another person whose identity is known by the tax authority or for the purpose of collecting a tax debt of the taxpayer. More recently, the spotlight has landed on such third party notices served by HMRC on solicitors. As expected, the issue of privilege over documents held by the solicitor, became the main focus of attention. Under English law, legal professional privilege will attach to documents that are made for the purposes of seeking legal advice from the solicitor or for the purpose of giving legal advice to the client and that are confidential as between solicitor and client.
The procedure under which HMRC can issue a closure notice is codified: it can do so in circumstances where it first obtains the consent of the taxpayer, or absent such consent, with the approval the relevant tax court (usually the First-tier Tax Tribunal). The main safeguard to protect the interests of taxpayers and third party recipients of such a notice, is that HMRC must demonstrate that the information is reasonably required for the purposes of checking the tax position or collecting a tax debt. Once the notice is issued, the scope of the disclosure can further be limited by virtue of Regulations that provide a mechanism to contest whether specific categories of information are privileged or not.
In a recent case Third Party & Taxpayer v HMRC [2023] UKFTT 71 (TC), HMRC sought information relevant to two properties acquired by the relevant tax payer – the information included client account and client ledger information, correspondence between the firm of solicitors and the tax payer; all evidence provided by the taxpayer as proof of the source of funds used for the property purchases; completion notices; as well as details of debt relevant to fund the purchases and any other payments towards the costs. The latter included bank information from which the money was paid and the account number.
Although the third party notices were approved by the Tribunal, the restrictions upheld by the Tribunal are insightful. First, information not in possession of the third party cannot be included and should not form part of such request. Second and more importantly information protected by legal professional privilege is also protected from such disclosure. However, some of the information held by the solicitors related to the conveyancing process, and these were held not to be protected. Examples include communications between the solicitor and persons other than the clients including the counterparty; the fruits of the advice, such as documents giving effect to the transaction will not be privileged as they are not communications; and the client ledger entries will not be protected as they do not include legal advice. A similar approach was followed in R v Inner London Crown Court exp Bains and Bains [1988] QB 579, in which it was held inter alia that documents showing how the conveyance was financed were not protected.
In board terms, the Tribunal recognized that correspondence between the client and the solicitor that seeks or gives legal advice regarding the terms of the contract would be protected as being subject to privilege. It also accepted that proportionality is key but expected solicitors to keep distinct and separate files of each matter as a result of which any disclosure process of unprotected documents would noy be overly burdensome. The tribunal rejected a suggestion that a general duty of confidentiality owed by solicitors to a client can override the requirements of the third party notice legislation. It also rejected the argument that such a notice would conflict with the taxpayer’s human rights under art 8 of the European Convention and the Hunan Rights Act 1998: it held that while there is a public interest in ensuring effective tax inspections, any interference must be subject to effective and adequate safeguards against abuse by tax authorities. In this instance where HMRC exercised their powers under the information notice provisions and were required to apply to a tribunal for such approval, there are effective and adequate safeguards in place to guard against any such abuse.
Therefore, although privilege can be a shield that protects against disclosure, a focused approach by a tax authority directed at a solicitor seeking disclosure of documents that fall outside privilege would likely succeed.
Recent Developments in the United States:
The U.S. Supreme Court recently dismissed its review of In Re Grand Jury, 23 F.4th 1088 (9th Cir. 2021), a Ninth Circuit appeal regarding the scope of the attorney-client privilege in cases where the communications involve both legal advice as well as non-legal tax return preparation discussions—i.e., “dual purpose communications.” Although the attorney-client privilege generally protects from disclosure the content of confidential communications between an attorney and a client made for the purpose of obtaining or providing legal advice, in the tax context, courts typically have found that legal communications regarding tax disputes or tax planning issues are privileged, whereas communications regarding tax return preparation are more akin to non-legal business communications that generally do not enjoy attorney-client privilege protections on their own.
Whether and to what extent the attorney-client privilege applies in cases that involve dual-purpose communications is currently, and now remains, subject to a circuit split. For example, the D.C. Circuit held in In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014), that the attorney-client privilege applies to communications involving both legal and non-legal advice if one of the “significant purposes” of the communications is to obtain legal advice, that is, if a primary purpose of the dual-purpose communication was to obtain legal advice, then the attorney-client privilege is available. In In Re Grand Jury, on the other hand, the Ninth Circuit held that dual-purpose communications would be protected from disclosure by the attorney-client privilege only if the “primary purpose” of the communications was to obtain legal advice. 23 F.4th at 1092. As the Ninth Circuit explained, the “natural implication of [the primary purpose test] is that a dual-purpose communication can only have a single ‘primary’ purpose,” and unless that purpose is to obtain legal advice, the dual-purpose communication will not be protected from disclosure by the attorney-client privilege. Id. at 1091. The Seventh Circuit has taken an even stricter approach, holding in United States v. Frederick, 182 F.3d 496 (7th Cir. 1999), that dual-purpose documents—such as documents that are prepared for use in preparing a tax return and for use in litigation—are not privileged.
It is unclear why the U.S. Supreme Court refrained from taking the opportunity to articulate a uniform standard for determining whether and when the attorney-client privilege applies to dual-purpose communications. Until there is clarity on this issue, tax dispute practitioners and taxpayers alike would benefit from being mindful of the types of dual-purpose communications that might not enjoy attorney-client privilege protections despite being prepared (at least in part) to provide legal advice, particularly given the controlling law in the venue(s) that a privilege dispute might arise.