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Thursday, 25th April 2024 |
| You have implemented a plan to reduce your taxes in a lawful manner. Would it shock you if the Revenue asked to see the legal advice letters you got regarding the plan? This happened to Morgan Grenfell and they were shocked - and rightly so, it turns out. |
The powers of the Revenue Commissioners to enter premises, to inspect documents there, to ask questions and enforce an answer, and generally to obtain information about taxpayers and business persons is almost unlimited. This statement may cause surprise to those listening to calls at Trade Union conferences for more Revenue powers. The reality is the challenge facing the Revenue is to deploy staff to exercise all their powers, rather than any lack of power.
Numerous sections of the tax code give ‘search and seize’ powers to the Revenue. Section 905 is the section upon which the Revenue most frequently relies when entering a business premises with a view to obtaining access to documents on the premises. That section permits ‘An authorised officer… at all reasonable times… to enter any premises or place where… any trade, profession or other activity the profits or gain of which are chargeable to tax, is or has been carried on’… or indeed where any records, or any property relating to the business activity in question, may be located. The Revenue Commissioners may, if they wish, roll a furniture van up to a premises and remove its entire computer systems. They are entitled to be told the passwords on all secure files.
There are some modest restrictions on these remarkable powers. They need a Court warrant before entering a principal private residence. They may not use or examine client files of a professional person.
Morgan Grenfell’s experience
The powers of the Inland Revenue in the UK are not identical to those in Ireland but they are broadly similar. This was discovered by the firm of Morgan Grenfell & Company Limited recently.
Morgan Grenfell are well known as bankers and fund managers. It seems they also marketed tax avoidance schemes. Amongst their clients was Tesco plc whose use of the scheme was challenged by the Inland Revenue. One might have thought that that would be a matter strictly between Tesco and the Inland Revenue but the Inland Revenue had a different view. They served a notice on Morgan Grenfell requiring them to hand over copies of the legal advice they had obtained from tax experts and from counsel on the tax scheme.
Morgan Grenfell refused to hand over these papers, and objected to the request on two grounds. Firstly they pointed out that the expert advice in question was completely irrelevant to the amount of Tesco’s tax liability. The expert advice amounted simply to people’s opinions on the interpretation of tax law. The Inland Revenue were as capable (we hope) as anyone else of interpreting the tax law (which after all they write). If they wanted counsel’s opinion on it no doubt they could go and pay for it themselves.
What is legal privilege?
Secondly, Morgan Grenfell claimed legal professional privilege in relation to the advice they had obtained.
Professional legal privilege is the right of a person to refuse to disclose to anyone professional advice obtained on a legal matter, especially a matter which could become the subject of a court case.
The Revenue reacted to this by saying that their statutory powers to obtain information were not stated to be subject to legal professional privilege and that the only protection given in those powers is they may not demand the client files of a professional person giving legal advice. The fact that the person giving the advice was protected as regards his files, did not mean that the person who received it could not be compelled to hand over his copy of the advice.
Both the UK High Court and the UK Court of Appeal had sided with the Revenue argument. However the House of Lords reversed the lower courts.
Lords to rescue
The position taken by the House of Lords was that legal professional privilege was a principle which stood outside statute law. It was based in part on fundamental human rights, and in part on public policy. Lord Hofman said ‘The policy of legal professional privilege requires that the client should be secure in the knowledge that protected documents and information will not be disclosed at all… Legal professional privilege is a fundamental human right long established in the common law. 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’.
The House of Lords took the view that since the statutory powers of the Revenue to enter premises, seize documents, and demand the production of documents did not explicitly override legal professional privilege, legal professional privilege must be presumed to be uninterfered with, and to override the statutory powers.
What about Ireland?
If that judgement of the House of Lords were followed in Ireland, the result would be that the many sections of legislation conferring search, seize, and information gathering powers upon the Revenue, which do not purport explicitly to override professional legal privilege, must be presumed to be subject to that privilege. In other words, although nothing is said about it in the statutes, the Revenue are not entitled to any documents through which the taxpayer obtained legal advice on a transaction.
Of course it cannot be assumed that a UK judgement necessarily would be followed in the Irish courts, until the Irish courts have had their say on the topic. However it would be surprising, given that professional legal privilege was described by the House of Lords as a fundamental human right, if the Irish courts, constrained as they are by our constitution, did not uphold the privilege in equally forceful terms.
The Morgan Grenfell judgement is quite important. Until the House of Lords had given their judgement there was a widespread view that legal advice given in relation to tax matters, although privileged in the hands of the adviser giving it, was open to Revenue inspection in the hands of the taxpayer. The taxpayer who did not wish to share his tax adviser’s deepest thoughts with the Revenue Commissioners was thought to be able to acquire immunity from that prospect only from a policy of not retaining advice letters once he had read them.
The interpretation of tax law is not a straightforward matter. The law is often ambiguous, and arguments may be advanced in favour of one interpretation, or in favour of a different interpretation. The advice given by a tax adviser to a taxpayer can therefore often refer to possible arguments that could be raised against the interpretation which the taxpayer is adopting. It is natural that a taxpayer would wish to keep such advice to himself. The Morgan Grenfell case may assist him to do so. |
Pat McDaid is a Partner in KPMG.
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| Article appeared in the June 2002 issue.
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