If or when HMRC decides to ask lawyers for protected evidence on their clients' offshore activities the profession will enter unchartered waters, writes Richard Wilson QC
Judging by the number of new measures and initiatives coming from HMRC, tackling offshore tax avoidance and evasion is high on the government’s list of priorities. Politically, this makes great sense: reports suggest that HMRC’s efforts have already yielded significant returns for the Exchequer, and those engaging in criminal conduct such as tax evasion and those with the ability to obtain the advice that will enable them legally to avoid tax through the use of offshore structures (and who have sufficient wealth to make it worthwhile) are likely to be popular targets with the wider public.
HMRC has a considerable arsenal of powers at its disposal in this battle, enabling it to obtain a significant amount of information and to impose significant financial penalties on taxpayers and, in certain cases, their advisers. However, HMRC’s use of their information gathering powers has now brought them into conflict with the legal profession.
In January of this year, the Law Society issued a statement referring to the likelihood of solicitors’ firms receiving notices from HMRC under Schedule 23 of the Finance Act 2011, seeking details of any client who has sought to create an offshore entity, the entity details (name, jurisdiction and date of registration) and details of the person with beneficial ownership or interest in the entity and the nature of the benefit or interest.
The purpose of obtaining information is obvious: it will help HMRC identify those who are using offshore structures (a favourite target of HMRC) but the concern on the part of the legal profession is that the information being sought may be protected by legal professional privilege (LPP) with the result that solicitors are put in the invidious position of having either to hand over material that might be said to be privileged (and therefore face claims from their clients) or become embroiled in a dispute with HMRC, potentially requiring an appeal to made to the Tribunal.
HMRC’s stated position is that the information sought is not privileged as it does not include advice given by the solicitors, merely information relating to the structures established, however, the Law Society’s position (relying on well-established House of Lords authority) is that LPP covers not merely the advice given by a solicitor, but 'all communications between a solicitor and his client relating to a transaction in which the solicitor has been instructed for the purpose of legal advice… notwithstanding that they do not contain advice on matters of law or construction…' and that this is likely to include at least some of the information that HMRC wishes to obtain.
The Law Society has vowed to protect the right to privilege 'vigorously' and will resort to litigation if necessary. Given the importance the Courts (including the European Court of Human Rights) have placed on privilege as a fundamental right and the extremely limited circumstances in which it may be overridden, if this dispute does find its way into Court, the outcome is uncertain.
If HMRC is serious about its stated intention not to seek privileged material, it may be that it will reconsider the scope of requests it makes to solicitors in order to avoid a dispute that would be difficult to resolve. However, all may not be lost for HMRC as even if the extent of privilege is as wide as the Law Society contends, there is a well-established exception in circumstances of ‘iniquity’ which means that no privilege applies where a purpose consults a solicitor in the furtherance of a criminal purpose, a category that would clearly include tax evasion (but not avoidance), thereby providing a way for HMRC to obtain the information it seeks, although not without the difficulty of proving that that exception applies.
In addition, privilege applies only to lawyers and not other tax advisers, such as accountants, therefore professionals other than lawyers may be a more straightforward source of information and so they may have to expect being the focus of HMRC’s enquiries to an even greater extent in the future.
Richard Wilson QC is a barrister at Serle Court