Confidentiality in the balance

Anxious tax advisers are awaiting a legal challenge to ahat the Inland Revenue should have access to client tax records. controversial ruling giving the taxman powers to seize confidential correspondence between a company and its legal advisors.

In a potentially landmark decision which sparked furore among tax advisers last week, Stephen Oliver QC, Inland Revenue special commissioner, ruled that the Revenue should be allowed access to any legal correspondence held by a company that relates to its tax liability in any way.

Tax practitioners fear the judgment could force them into situations where they might have to hand over client records to the Revenue, and legal experts say the judgment erodes the legal privilege of client confidentiality.

A backlash from the profession is already in full flow.

‘This case is causing quite a furore,’ says one Big Five tax investigation expert. ‘It allows the Revenue to get back-door access to documents they wouldn’t normally get from a taxpayer’s lawyers.’

But some tax experts believe the Revenue ruling is justified. Frank Haskew, of the English ICA tax faculty, says: ‘There doesn’t seem to be anything new here. Professional privilege doesn’t extend to a company.’

For access to confidential commercial information during an investigation, Revenue investigators have to obtain a notice under Section 20 of the Taxes Management Act. This is normally issued to the solicitor representing the company, and he or she can claim legal privilege on certain kinds of commercial information.

Until now accountants have relied heavily on this umbrella of legal privilege.

But under the judgment, the Revenue will be able to bypass the legal third party and demand information straight from the client.

The key question for accountants is when, not if, the company involved, an unnamed ‘provider of financial facilities’, will challenge the ruling.

A Revenue spokeswoman refused to comment on the specifics of the case, but said that an appeal was likely to come in weeks, rather than months, due to the significance of the case. The company can appeal to the Special Commissioner to block the Revenue’s demands. If this fails, then it can take its case to the High Court, and ultimately the House of Lords.

One international tax lawyer, who asked not to be named, says he expects any appeal was likely to succeed as the Revenue’s amended powers were too sweeping. ‘I think there will be a challenge and I think it will succeed,’ he says. ‘The decision was quite a wide one and I don’t think it will stand. I have the same view as accountants on this one.’

But as the legal battle intensifies, the exact relationship between the Inland Revenue and accountants providing tax advice remains more uncertain than ever. The principle of when client confidentiality can be challenged by the Revenue remains a grey area.

Stuart Parrin, a partner at AEGIS Consulting, the tax investigation specialist, believes the test case has exposed a widespread complacency among the profession about what tax records the Revenue is entitled to seize. ‘Tax advisors haven’t really bothered much with the issue of whether their advice is confidential. But the law is very unclear on what the Revenue can obtain from tax advisers.’

Parrin adds that while the Revenue only demands to see confidential information in serious cases, the ruling is likely to be viewed as part of a wider Revenue clampdown on ever more sophisticated tax planning. Some speculate that tax advisers and lawyers could be forced to hold their meetings offshore to protect confidentiality. Others in the profession argue that professional privilege law is in need of an overhaul. ‘A bit of me sees this case as a loss and a bit of me sees it as an opportunity,’ says John Whiting, tax partner at PricewaterhouseCoopers. ‘It should get lawyers behind accountants and tax advisers so we get sensible laws applied to everyone.’

Whiting adds that because the existing system of professional privilege has been closely associated with the legal profession, lawyers have been able to boast that clients are safer with them than accountants. ‘This judgment casts doubt on that privilege,’ he says.


Stephen Oliver QC, Inland Revenue special commissioner, is calling for a consistent set of principles about the Revenue’s ‘rights to procure disclosure of privileged documents.’ In his judgment in the dispute between a financial services company and the Revenue, he says this would best be achieved by a hearing involving all parties at which all of the issues could be fully debated.

Related reading