HMRC cannot demand disclosure of documents that are subject to legal professional privilege. However, it is not uncommon for HMRC to ask for them. Careful thought is required when assessing if a document really is privileged (and so can be withheld) and, if so, whether the benefits of sharing it with HMRC might outweigh the risks. In this post, we address five common questions on privilege, which follows on from the more general tips on information requests that we previously shared part of a series on tax disputes in the UK.

First things first. Legal professional privilege (LPP) protects a client’s confidential communications with their lawyer made for the purpose of obtaining legal advice. It can also protect confidential communications with third parties (such as expert witnesses) made for the purpose of preparing litigation. LPP is a fundamental right that belongs to the client; it prevents the protected communications from being disclosed without the client’s consent. It is also a notoriously difficult area of law. Recent trends have shown increasing scepticism from HMRC and regulatory authorities regarding LPP.  

Can HMRC ask for privileged documents? 

HMRC can (and do from time to time) ask to see documents that are privileged, but it is up to you whether to provide those documents or not – you are not obliged to do so. Sharing advice may be helpful in resolving a dispute, but the consequences and potential downsides need to be considered. If you provide a piece of advice, privilege could be lost not just in respect of that document, but also for related documents (which may or may not be so “helpful” for your position). “Cherry-picking” which privileged documents you share is generally not allowed. And, in a cross-border context, the implications for other jurisdictions of sharing advice with HMRC would need to be considered. 

What if privileged documents are leaked or inadvertently provided?

It depends on the circumstances of the leak. Privilege is inherently linked to (and dependant on) confidentiality. If confidentiality is lost, privilege is lost and cannot be regained. If the advice has been posted on a public website and viewed by thousands of people (think Panama Papers), there is no coming back. But, if privileged advice was inadvertently included among documents provided to HMRC in bulk following an information request, or if an HMRC officer was accidentally copied into an email with privileged advice, it should be possible to salvage the situation. It is crucial to act quickly, inform the recipient that LPP applies, and ask them to delete (and not pass on) the material sent in error. Of course, it would be better to prevent inadvertent or accidental disclosures in the first place. Where HMRC ask for all emails from a particular inbox, it is advisable to review the emails first so any privileged material (and material that should be withheld for other reasons) can be removed. 

When does LPP apply? Does copying a lawyer make an email privileged? 

No, copying a lawyer does not automatically make an email privileged. The application of LPP depends on the purpose and substance of the communication. Merely copying a lawyer into emails about a company directors’ travel arrangements would not make those emails privileged. But the conclusion would be different, if the lawyer was copied to advise on how many days the director would be regarded as having spent in the UK for tax purposes because of those travel arrangements. Where a confidential communication is for the purpose of getting legal advice, it can attract LPP, whether it asks a specific legal question or sets out the factual background for the advice. 

The same principles apply if you have a company director who is a lawyer. Whether confidential communications (including emails) with the lawyer/company director are privileged will depend on the purpose and substance of those communications. Are you seeking legal advice? Or are you discussing commercial issues in respect of the running of the company?

Who is the “client” for LPP purposes?

Very broadly, only communications between a lawyer and their “client” can be privileged during an HMRC enquiry (there are exceptions to this if litigation is reasonably in prospect, but that often will not be the case until quite late in the enquiry process, or until a closure notice has been issued). 

Identifying the “client” can be one of the most problematic elements of the test for LPP. The “client” is restricted to those employees of a corporate who are given responsibility for obtaining legal advice. Documents produced by other employees may not be protected by LPP, even if the documents were prepared for the purpose of enabling legal advice to be given. As a practical matter, it is important to define the “client” group at the outset and maintain and update a record of that group through the enquiry. Note that too wide a “client” group may be deemed artificial and could risk a waiver of privilege, while too narrow may give rise to practical issues for the purposes of providing lawyers with instructions.  

Are the rules on privilege the same across different jurisdictions? 

No. The rules can vary between different jurisdictions. One difference between English and EU law is, for instance, that, under English law, privilege covers advice by inhouse lawyers and lawyers qualified abroad. In contrast, EU law recognises privilege only in respect of advice by external counsel qualified in an EEA country. There are also differences between privilege in the UK and the US. Under English law, it is possible to share selected documents for a limited purpose without losing privilege. This is referred to as “limited waiver”. As that concept is not recognised in the US, the IRS would likely consider any applicable US privilege to have been lost where a document is shared with HMRC (even if on a limited waiver basis). 

Bonus: how we can help!

Please get in touch with any of us or another member of Slaughter and May’s market-leading tax disputes team if you have any questions on the topics discussed in this blog or another tax disputes query. 

We have extensive experience in advising at every stage of a wide range of disputes from questions of UK corporation tax, partnership taxation and VAT grouping to treaty interpretation and transfer pricing. Whether you are looking for strategic advice in respect of an ongoing issue or proactive risk management through the creation of defence files or an audit of existing processes, we can help.