The First-tier Tribunal’s recent decision in a case between Conegate and HMRC concerns the assertion of legal advice privilege over pre-transaction advice where a ‘main purpose’ or similar anti-avoidance rule is in point. It demonstrates that if care is not taken the taxpayer may inadvertently waive privilege through its conduct, and HMRC may become entitled to see the privileged advice despite a taxpayer’s objection to disclosing it.
Legal advice privilege (LAP)
LAP applies to confidential communications between client and lawyer concerning the seeking or giving of advice. Material covered by LAP does not have to be disclosed to HMRC.
In many tax enquiries, whether or not tax advice is covered by LAP is academic as the advice taken by a taxpayer is generally irrelevant to the determination of what tax is due. However, where legislation contains a main purpose test, or other anti-avoidance provisions are engaged, the advice sought and received by a taxpayer before entering into a transaction or arrangements may be relevant to the question of purpose, and therefore be one of the facts relevant to determining the correct amount of tax payable.
Accordingly, in cases where avoidance is alleged, HMRC may want to see a copy of any pre-transaction advice. If the advice is covered by LAP, the taxpayer is entitled to assert privilege and withhold it; if it isn’t, the advice must be handed over if it is relevant.
It is fair to say that HMRC does not always look favourably on a taxpayer asserting LAP in alleged avoidance cases and it is common for HMRC to ask the taxpayer to agree to waive privilege, in the ‘spirit of cooperation’.
The recent case involving Conegate concerned a dispute about whether Conegate was able to claim a loss in connection with the acquisition of an interest in a struggling business and injection of capital into the business in a way which ensured that the money did not benefit the seller. HMRC said that Conegate had chosen a way of pursuing its commercial transaction which involved a main purpose of generating a loss which could be set off against other income.
A procedural issue arose shortly before the hearing. A witness statement given earlier by a director on behalf of Conegate had summarised legal advice given to it about a potential ‘dry’ tax charge if a certain way of structuring the transaction was pursued, and the company law difficulties of pursuing a variation of this to avoid the charge. The witness's summary said that in light of this company law restriction, the only feasible alternative was the transaction which took place. Conegate also made disclosure of some of the related email correspondence with its lawyers. However, no summary or disclosure of discussions with its lawyers was given in respect of a six day period in the build up to the final transaction.
HMRC argued that the summary of the legal advice within Conegate's witness evidence amounted to ‘deployment’ of the advice to support its case, and thus involved an implied waiver of privilege meaning that the precise advice it received, including during the six day period, was disclosable. Conegate argued that it was merely referring to the existence of the advice, not relying on its content for the purposes of the proceedings; and that, if anything, HMRC was seeking to rely on the advice to advance its own case.
The tribunal reviewed case law on what constitutes ‘deployment’ and said that the essence of the test was whether the balance of fairness required the advice to be disclosed. It considered that the taxpayer had advanced a positive case based on the advice it had received, and that it was only fair for HMRC to see the advice, including the advice received during the six day ‘dark’ period.
When waiving privilege, it is not permissible to ‘cherry pick’ parts of the advice to disclose and the waiver must be over all advice going to the issue in question. Accordingly, having been found to have impliedly waived privilege by summarising part of the advice the taxpayer had received about how to structure the transaction; all the advice relevant to that issue became disclosable.
Because the privilege waiver issue had arisen late in the day, both parties had agreed that the tribunal should decide it not as a preliminary matter but along with the substantive dispute. Having decided that privilege had been waived, the tribunal went on to decide that, when coming to its decision on the substantive issue, it had no option but to draw an adverse inference from Conegate's failure to disclose the advice. Based on there being some references to losses in the communications with its lawyers which had been put in evidence before the tribunal, it filled in the ‘dark’ period by finding as a fact that Conegate must have received detailed advice about the best way to secure the loss in question, and that the focus on securing the loss meant that securing the loss became one of the main purposes of the transaction.
Asserting privilege is a fundamental right and, had the taxpayer not by implication waived privilege, no adverse inference could have been drawn by the tribunal on the failure to disclose the advice.
Although Conegate's real downfall came from taking a selective approach to disclosure, the knots it tied itself into around disclosure highlight the practical difficulty of asserting privilege in cases involving a dispute about purpose.
If advice is sought and wholly or partially followed, in the sense that a taxpayer chooses to do or not to do something as a consequence, it goes to, but may not be determinative of, the question of purpose. Even if the advice is disregarded, the advice may be circumstantial evidence of some other purpose, in other words, 'I didn’t follow the advice because...'. It may therefore be difficult in practice to explain the purposes behind a transaction without referring to the advice, and referring to the advice may then lead to waiver of the privilege, whether expressly or by implication.
Accordingly, if asserting privilege over advice leads to a gap in the evidence of the taxpayer’s motivations, and the burden sits on the taxpayer to prove a ‘good’ purpose, asserting privilege may not in practice help the taxpayer’s case.
Taxpayers should therefore carefully consider whether it is in their interest to assert privilege. In some cases, there may be wider considerations, unconnected with the tax dispute, that mean a taxpayer may not want to waive privilege. But even where such reasons exist, an assessment needs to be undertaken in each case between the risk that non-disclosure poses to the outcome of the tax dispute, and the merit of the other reasons for wanting to assert privilege.
In practice, the protection afforded by LAP in cases where tax avoidance is being alleged may be limited. It is worth bearing in mind that HMRC’s position can be that if you are taking advice on tax, you must be thinking about avoiding it.
Whilst the tribunal will not be entitled to draw an adverse inference where a taxpayer properly asserts LAP, if non-disclosure leaves the taxpayer with an evidential gap regarding its intentions, its case may be placed on a considerably weaker footing. And if the taxpayer’s case is difficult to run without referring to the advice, this will normally lead to the conclusion that the privilege has to be waived and thus HMRC should be allowed to see the advice in all its glory.
But with all of that said, although human nature is such that HMRC and, thereafter, a judge will inevitably be curious as to why advice has not been disclosed voluntarily, LAP is a fundamental right. It should never be assumed, despite any allusions to the contrary, that an unwillingness to disclose privileged advice must mean a taxpayer has something to hide or that it should be treated as in some way being ‘uncooperative’.
Jason Collins and Stuart Walsh are tax disputes experts at Pinsent Masons LLP, the law firm behind Out-Law.com.
This article is based on an article which was first published in Tax Journal on 27 April 2018.