Michael Hardwick and Catherine Richards look at when professional privilege applies in the disclosure of tax avoidance schemes


The Tax Avoidance Schemes (Promoters, Prescribed Circumstances and Information) (Amendment) Regulations 2004 (SI 2004/2613) (the second amendment regulations) came into force on 14 October 2004, amending earlier regulations made under the tax avoidance schemes disclosure rules contained in part 7 of the Finance Act 2004.


Following the enactment of the disclosure rules, there had been considerable debate regarding the applicability of legal professional privilege - specifically legal advice privilege - in this context. In a press release last month, the Inland Revenue stated that the 'effect of these changes is to ensure the [disclosure rules] operate as intended and apply fairly to everyone in the business of promoting or advising on tax avoidance schemes'.


The primary change effected by the second amendment regulations is that where a person is prevented by legal professional privilege, in accordance with section 314 of the Finance Act 2004, from complying with the entirety of a disclosure obligation in respect of a tax avoidance scheme caught by the disclosure rules and accompanying regulations, that person is to be treated as excluded from having any such disclosure obligation. A further consequence of the introduction of the regulations is that where circumstances of this type arise, it may be the case that by virtue of section 310, the relevant disclosure obligation will then fall on the end-user of a tax-avoidance scheme.


As concerns the particular position of solicitors, Law Society guidance published on 20 September 2004 advises that in many cases solicitors will be unable to comply with their disclosure obligations under the disclosure rules on the basis that the information required to be provided is likely to consist of, or to reveal, the substance of confidential communications between solicitor and client and is therefore likely to be subject to legal professional privilege.


Given the restrictions on disclosures by solicitors, it has been suggested recently that in practice the second amendment regulations will not have a substantive impact on the operation of the disclosure rules, the argument being that if information is privileged in the hands of a solicitor it will also be privileged in the hands of the client. Consequently, where a disclosure obligation would fall on a solicitor's client under section 310 in circumstances where the solicitor is not required to make a disclosure, the client too will be protected from having to disclose. However, such assertions appear to be based on a misunderstanding of the parameters of legal professional privilege, and we consider that a solicitor's client could not rely on legal privilege as a ground on which to object to having to make the disclosure.


Legal professional privilege attaches to confidential communications between a solicitor and client for the purpose of legal advice, and to the content of those communications. Most importantly, this protection extends to all such communications, including not only those containing actual legal advice, but also those conveying the facts and circumstances in respect of which that legal advice is to be given.


However, legal professional privilege does not apply to underlying information or facts in and of themselves. This limitation to the reaches of privilege gives rise to one of the primary distinctions between its application to solicitors and to their clients, in that a client may be obliged to disclose bare facts or information in circumstances where a solicitor is prevented from disclosing the same if they were conveyed to him in a confidential communication from the client.


By way of example in the present context, once a client has taken action to implement a transaction forming part of a scheme caught by the disclosure rules in respect of which legal advice was sought, although the confidential solicitor-client communications in respect of it would remain privileged, the client at that stage would be acting on the advice received and the fact of the actions taken by the client and information regarding the tax consequences that the client expects to obtain as a result would not be so protected.


The disclosure rules and accompanying regulations do not require the client to disclose either confidential solicitor-client communications or their contents. Consequently, the second amendment regulations do effect a substantive change in the application of the disclosure rules, as a solicitor's client will not be able to assert legal professional privilege to obviate a disclosure obligation under section 310 in respect of the underlying facts or information regarding a tax avoidance scheme.


It is to be remembered in this regard that privilege belongs to the client. Therefore, it remains open to a client with a disclosure obligation under section 310 in the circumstances described here to waive the privilege invoked by the solicitor to the extent necessary to return the disclosure obligation to the solicitor.



Michael Hardwick is chairman of the Law Society's tax law committee and a partner at City firm Linklaters. Catherine Richards is a tax associate at Linklaters