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Judgments - Regina v Special Commissioner and Another, Ex P Morgan Grenfell & Co Ltd


Lord Nicholls of Birkenhead Lord Hoffmann Lord Hope of Craighead Lord Hobhouse of Wood-borough Lord Scott of Foscote









ON 16 MAY 2002

[2002] UKHL 21


My Lords,

    1. I had had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. For the reasons he gives, with which I agree, I would allow this appeal.


My Lords,

    2. In the 1990s Morgan Grenfell ("MG") marketed a simple tax avoidance scheme to create chargeable gains for clients who had available capital losses. The gain arose out of a premium paid by MG for a long lease of property held by the client, which then took an underlease at a rack rent. The efficacy of the scheme depended upon the client being able to deduct the rent and MG being able to deduct the premium as trading expenses. The client's position was uncontroversial but MG's was more problematic. MG contended that the long lease was a trading asset and that the premium was a payment on revenue account. The Inland Revenue disagreed. It said that the purchase of the lease fell outside the scope of MG's trading activities and that it was a capital asset. The premium was therefore a capital payment.

    3. The issue was debated between MG's tax advisers and the revenue in the case of a scheme which had been sold to Tesco. There is no dispute that MG were completely open about the way the scheme operated. They did not conceal any relevant transactions. But the inspector asked to see documents relating to the advice which MG had obtained from leading counsel and solicitors about whether the scheme would work. MG objected on two grounds. First, that the documents were irrelevant. They would show no more than the opinions of the lawyers about the legal effect of transactions which had been fully disclosed. The second was that they were protected by legal professional privilege ("LPP"). The inspector invoked his power under section 20(1) of the Taxes Management Act 1970 (as substituted by section 57(1) of and Schedule 6 to the Finance Act 1976 and amended by section 142 of the Finance Act 1989):

    "Subject to this section, an inspector may by notice in writing require a person?

    (a)  to deliver to him such documents as are in the person's possession or power and as (in the inspector's reasonable opinion) contain, or may contain, information relevant to?

    (i)   any tax liability to which the person is or may be subject, or (ii) the amount of any such liability..."

    4. On 28 September 1999 the inspector issued a notice under the section, demanding a wide range of documents relating to the advice MG had sought and received in connection with the Tesco transaction. MG issued judicial review proceedings to quash the notice on the grounds of ultra vires, contending, first, that the documents could not reasonably be thought to contain relevant information and secondly, that the Act upon its true construction did not entitle the inspector to require delivery of documents subject to LPP.

    5. The Divisional Court (Buxton LJ and Penry-Davey J) rejected both arguments and dismissed the application. On the first point, the court accepted that the inspector could reasonably consider that the "perception" of the transactions by MG and its advisers revealed by the documents might throw light on whether they formed part of MG's ordinary trading activities. On the second, they held that the general terms of section 20(1) ("such documents as are in the person's possession or power") could not be qualified to exclude documents subject to LPP.

    6. In the Court of Appeal (Schiemann and Sedley LJJ and Blackburne J) MG did not pursue the first point and the Court of Appeal agreed with the Divisional Court on the second. It is solely on the construction of the Act that MG appeal to your Lordships' House.

    7. Two of the principles relevant to construction are not in dispute. First, LPP is a fundamental human right long established in the common law. It is a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice. The cases establishing this principle are collected in the speech of Lord Taylor of Gosforth CJ in R v Derby Magistrates Court, Ex p B [1996] AC 487. It has been held by the European Court of Human Rights to be part of the right of privacy guaranteed by article 8 of the Convention (Campbell v United Kingdom (1992) 15 EHRR 137; Foxley v United Kingdom (2000) 31 EHRR 637) and held by the European Court of Justice to be a part of Community law: A M & S Europe Ltd v Commission of the European Communities (Case 155/79) [1983] QB 878.

    8. Secondly, the courts will ordinarily construe general words in a statute, although literally capable of having some startling or unreasonable consequence, such as overriding fundamental human rights, as not having been intended to do so. An intention to override such rights must be expressly stated or appear by necessary implication. The speeches of Lord Steyn and myself in R v Secretary of State for the Home Department, Ex p Simms [2000] 2 AC 115 contain some discussion of this principle and its constitutional justification in the context of human rights. But the wider principle itself is hardly new. It can be traced back at least to Stradling v Morgan (1560) 1 Pl 199.

    9. Section 20(1) contains no express reference to LPP and the question is therefore whether its exclusion must necessarily be implied. For this purpose it is necessary to examine section 20(1) in its context. It was first enacted as part of a group of sections dealing with the powers of tax authorities to obtain information, inserted into the 1970 Act by section 57(1) of and Schedule 6 to the Finance Act 1976. These sections have since been amended and amplified on a number of occasions but the revenue do not suggest that the amendments have changed the meaning which the relevant words in section 20(1) had in 1976. It is therefore sufficient to consider the 1976 provisions, the material part of which are for convenience reproduced as an appendix to this opinion.

    10. The argument for the revenue is essentially that Parliament has provided a number of specific safeguards and restrictions for the protection of the taxpayer, including an express preservation of LPP for documents in the possession of a barrister, advocate or legal adviser. It therefore necessarily follows that no wider qualification of the general words of section 20(1) was intended.

    11. The first form of safeguard is some form of judicial or administrative control, graduated according to the intrusiveness of the power. Thus the inspector's power to require delivery of documents under section 20(1) or (3) requires the consent of a general or special commissioner: subsection (7). Consent is not needed only if the Board of Inland Revenue itself makes the request under section 20(2). Likewise, only the Board may give a notice under section 20(1) or (3) to a barrister, advocate or solicitor: section 20B(3). Notices to tax accountants under section 20A(1) (see section 20A(3)) and searches under section 20C(1) require the consent or warrant (as the case may be) of "the appropriate judicial authority", which in England means a circuit judge: section 20D(1)(a).

    12. The second restriction is the preservation or creation by section 20B(2) of a limited form of litigation privilege in tax appeals, analogous to that enjoyed by a party to civil or criminal proceedings. A notice by an inspector under section 20(1) or (3) cannot require the taxpayer to produce "documents relating to the conduct of a pending appeal by the ["him"]". For some reason which seems to me unclear, this privilege does not protect the taxpayer when the notice has been given by the Board: see R v Inland Revenue Commissioners, Ex p Taylor (No 2) (1990) 62 T.C. 578, 593. It is in any case a litigation privilege which does not cover the same ground as (though it may overlap with) LPP. It applies to documents relating to the conduct of an appeal by, for example, a taxpayer in person, and not merely communications and documents relating to the obtaining of legal advice. On the other hand, it is confined the documents relating to a tax appeal, whereas LPP applies to legal advice whenever sought and for whatever purpose. The distinction between LPP and litigation privilege is succinctly stated by Lord Denning MR in Buttes Gas and Oil Co v Hammer (No 3) [1981] QB 223, 243-244.

    13. The third restriction is that an inspector cannot give notices under section 20(1) or (3) or section 20A(1) to a barrister, advocate or solicitor. The decision to give such a notice must be taken at a higher administrative level, by the Board.

    14. Fourthly, by section 20B(9), a tax accountant (defined by section 20D(2) to include anyone who assists someone else in the preparation of his tax returns or accounts and so possibly including a lawyer) cannot be required by notice under section 20(3) to deliver "documents which are his (the accountant's) property and originate as working papers of that relationship."

    15. Fifthly, sections 20B(8) and 20C(3) deal specifically with LPP, but only in relation to documents in the possession of the lawyer. They cannot be required to be delivered by a notice under section 20(3) or 20A(1) without the client's consent and they cannot be seized or removed under section 20C(1).

    16. In my opinion the first four safeguards or restrictions are concerned with questions so distinct from LPP that they provide no basis for any implication that it was intended to be excluded. The provisions for judicial or administrative control are intended to prevent abuse of the statutory powers. In the present case, for example, the special commissioner who consented to the notice under section 20(1) was required to be satisfied that "in all the circumstances the inspector is justified in proceeding under this section": section 20(7). That involves a judgment as to whether the inspector was acting reasonably. It requires the special commissioner to balance the public interest that the inspector should have information needed to make a correct assessment against the interests of the taxpayer in not having his privacy invaded further than necessary: compare R v Inland Revenue Commissioners, Ex p T C Coombs & Co [1991] 2 AC 283. But LPP does not involve such a balancing of interests. It is absolute and is based not merely upon the general right to privacy but also upon the right of access to justice: see the R v Derby Magistrates' Court, [1996] AC 487.

    17. The second restriction by reference to litigation privilege also gives rise to no implication about LPP. It may well give rise to the implication that no litigation privilege was to exist other than in the circumstances specified in section 20B(2), as was held by the Court of Appeal in R v Commissioners of Inland Revenue, ex parte Taylor (No. 2) (1990) 62 T.C. 578, 593. But it has no bearing on LPP.

    18. The provision which requires that a notice to a barrister, advocate or solicitor should be given only by the Board does not in my opinion take the matter any further. It is entirely consistent with the preservation of LPP, which indeed is expressly preserved in such a case by section 20B(8).

    19. Finally, section 20B(9) is a curious provision which appears designed to protect the proprietary interest of the tax accountant in his working papers: compare Chantrey Martin v Martin [1953] 2 QB 286 and Gomba Holdings UK Ltd v Minories Finance Ltd [1988] 1 WLR 1231. It has nothing to do with LPP.

    20. Although I appreciate that the revenue rely upon the inference to be drawn from the cumulative effect of these various provisions, I do not consider that even cumulatively they come anywhere near giving rise to an implication that LPP was intended to be excluded. In my opinion, the revenue stand or fall by the express references to LPP in sections 20B(8) and 20C(3). If these are consistent with the preservation of LPP for documents in the hands of the taxpayer, the other provisions are no more than makeweights.

    21. The argument for the revenue on sections 20B(8) and 20C(3) is simple. If Parliament intended to preserve LPP in general, why did it specifically provide for its preservation in respect of documents in the possession or power of a lawyer? The inescapable inference is said to be that LPP was not intended to be preserved for documents in the possession or power of the taxpayer. This was the view of the Divisional Court, the Court of Appeal and also Bingham LJ in R v Inland Revenue Commissioners, Ex p Taylor (No 2) (1990) 62 T.C. 578, 593-594.

    22. I see the force of this argument but I think that it has difficulties which were not fully addressed either in the Court of Appeal or in the Taylor case. Why should Parliament want to preserve LPP for documents in the hands of the lawyer but not for documents (which may well be copies or originals of the same documents) in the hands of the taxpayer? The irrationality of such a scheme was commented upon by Advocate General Sir Gordon Slynn in A M & S Europe Ltd v Commission of the European Communities (Case 155/79) [1983] QB 878, 913-914:

    "If one considers the real purpose of the protection...I can for my part see no justifiable distinction between such documents in the hands of the lawyer and in the hands of the client. If the lawyer has one copy and the client another, both should be protected. The request and the reply, if relating to legal advice, are of the same nature. To tell the client that if he leaves his documents at his lawyer's office they will be protected, but that, if he keeps them himself, they are not seems to me indefensible and likely to encourage, eg the giving of oral advice if it is unfavourable advice, and the destruction or transfer to the lawyer's office of documents. It would be quite extraordinary that if the lawyer's documents were, by chance, left at the client's premises, the day the inspector called, they must be produced, but that if the lawyer took his file away with him, they would not. In my opinion the rule covers communications between lawyer and client made for the purpose of obtaining or giving legal advice in whoever's hands they are and whether legal proceedings have begun or not. It covers also the contents of that advice (given orally or in writing), in whatever form it is recorded - whether in a letter or in a summary or in a note or in minutes."

    23. Mr Brennan QC, for the Inland Revenue, said that there was no real anomaly because the inspector could indirectly obtain documents in the possession of the lawyer by applying to the taxpayer. He would have to produce them on the ground that, although in the lawyer's possession, he was entitled to them as against the lawyer and they were accordingly in his "power". The purpose of section 20B(8) was to prevent the lawyer from being placed in a situation in which he had a statutory duty which conflicted with his duty to his client. It eliminated conflict by providing that the duty to the client prevailed. If the revenue wanted the documents, they had to serve a notice on the client.

    24. I do not find this an adequate explanation. If Parliament had simply wanted to spare lawyers the difficulty of deciding which master to serve, it could just as easily have removed the problem by providing that documents in the hands of lawyers also had to be produced. Why should it have chosen to say that they could not be produced without the client's consent? If the client's consent is required when the documents are in the hands of the lawyer, why should it not be required when they are in the hands of the client himself? It seems to me strange to say that the lawyer could not produce the documents without the client's consent, but leave it to be inferred that a client served with a notice under section 20(1) would be obliged to give his consent. The documents in the hands of the lawyer might be in the "power" of the client but then again they might not. They might be attendance notes or similar documents belonging to the lawyer. Or he might have a lien over them for his fees. On any view, the revenue's entitlement to the documents would be subject to chance events in the way Sir Gordon Slynn described.

    25. Despite these difficulties, one is bound to ask why Parliament should have dealt expressly with documents in the hands of the lawyer but not with those in the hands of the client. LPP is, after all, a single privilege, for the benefit of the client, whether the documents are in his hands or that of his lawyer. When the lawyer is served with a notice under section 20(3) or 20A(1), he has no privilege of his own but may, indeed must, assert that of his client.

    26. I think that the explanation may lie in Parry-Jones v Law Society [1969] 1 Ch 1. The Law Society had a statutory power to make rules to enforce compliance with the Solicitors' Accounts Rules and Solicitors' Trust Accounts Rules and had made rules which entitled it for this purpose to require a solicitor to produce documents relating to his practice [or any trust] of which he was a solicitor trustee to an appointed investigator. Mr Parry-Jones objected to such a request on the ground that some of the documents contained confidential information relating to clients which could not be disclosed without their consent. He issued a writ claiming an injunction to restrain the Law Society from proceeding with its request. Buckley J struck out the writ as disclosing no cause of action and his order was affirmed by the Court of Appeal.

    27. Lord Denning MR dealt with the matter as follows, at pp 6-7:

    "We all know that, as between solicitor and client, there are two privileges. The first is the privilege relating to legal proceedings, commonly called legal professional privilege. A solicitor must not produce or disclose in any legal proceedings any of the communications between himself and his client without the client's consent. The second privilege arises out of the confidence subsisting between solicitor and client similar to the confidence which applies between doctor and patient, banker and customer, accountant and client, and the like. The law implies a term into the contract whereby a professional man is to keep his client's affairs secret and not to disclose them to anyone without just cause...This particularly applies in the relationship of solicitor and client. The solicitor is not to disclose his client's affairs to anyone at all except under the most special and exceptional circumstances. In reliance on these principles, Mr. Parry-Jones says that the accountant sent by the Law Society should not be allowed to see documents or information relating to a client's affairs...In my opinion the contract between solicitor and client must be taken to contain this implication: the solicitor must obey the law, and, in particular, he must comply with the rules made under the authority of statute for the conduct of the profession. If the rules require him to disclose his client's affairs, then he must do so."

    28. Diplock LJ gave a judgment to similar effect, at p 9:

    "So far as Mr. Parry-Jones' point as to privilege is concerned, privilege, of course, is irrelevant when one is not concerned with judicial or quasi-judicial proceedings because, strictly speaking, privilege refers to a right to withhold from a court, or a tribunal exercising judicial functions, material which would otherwise be admissible in evidence. What we are concerned with here is the contractual duty of confidence, generally implied though sometimes expressed, between a solicitor and client. Such a duty exists not only between solicitor and client, but, for example, between banker and customer, doctor and patient and accountant and client. Such a duty of confidence is subject to, and overridden by, the duty of any party to that contract to comply with the law of the land. If it is the duty of such a party to a contract, whether at common law or under statute, to disclose in defined circumstances confidential information, then he must do so, and any express contract to the contrary would be illegal and void."

    29. Salmon LJ agreed.

    30. One could hardly imagine a stronger Court of Appeal, but I am bound to say that I have difficulty with the reasoning. It is not the case that LPP does no more than entitle the client to require his lawyer to withhold privileged documents in judicial or quasi-judicial proceedings, leaving the question of whether he may disclose them on other occasions to the implied duty of confidence. The policy of LPP requires that the client should be secure in the knowledge that protected documents and information will not be disclosed at all. The reasoning in the Parry-Jones case suggests that any statutory obligation to disclose documents will be construed as overriding the duty of confidence which constitutes the client's only protection. In the present proceedings, however, it is accepted that the client is protected by LPP and that this can be overridden only by primary legislation containing express words or necessary implication.

    31. It is unfortunate that the Court of Appeal was not referred to valuable judgments of the Supreme Court of New Zealand in Commissioner of Inland Revenue v West-Walker [1954] NZLR 191, which reached the opposite conclusion in the context of a statutory power to require the production of documents and information for the purposes of the administration of the taxing statutes. The New Zealand judges pointed out that LPP was not merely a rule of evidence but a substantive right founded on an important public policy.

    32. This is not to say that on its facts the Parry-Jones case was wrongly decided. But I think that the true justification for the decision was not that Mr Parry-Jones's clients had no LPP, or that their LPP had been overridden by the Law Society's rules, but that the clients' LPP was not being infringed. The Law Society were not entitled to use information disclosed by the solicitor for any purpose other than the investigation. Otherwise the confidentiality of the clients had to be maintained. In my opinion, this limited disclosure did not breach the clients' LPP or, to the extent that it technically did, was authorised by the Law Society's statutory powers. It does not seem to me to fall within the same principle as a case in which disclosure is sought for a use which involves the information being made public or used against the person entitled to the privilege.

    33. In the light of the Parry-Jones case, it seems to me explicable that Parliament should wish to make it clear that even if the Court of Appeal was right in saying that the true basis for the client's right to prevent his lawyer from disclosing documents concerned with obtaining legal advice to the tax authorities (or any other non-judicial authorities) was a duty of confidence rather than LPP, no such disclosure could be required under sections 20(3) or 20A(1) without the client's consent. No such provision was of course required in the case of documents in the hands of the client himself, to which the duty of confidence was obviously irrelevant. Any protection to which such documents were entitled had to be based upon LPP and, so far as it existed, would be subject to the principle that it could be removed only by express language or necessary implication.

    34. Mr Brennan showed us the debates on the provisions which become Schedule 6 of the 1976 Act in Standing Committee E and on Report in the House of Commons. He did not submit that they contained any material sufficiently unambiguous to be admissible under the principle in Pepper v Hart [1993] AC 193 but he produced them to show that the question of LPP was brought to the attention of the House. So it was, but I find no indication that the House was being told that the intention was to abolish or restrict it. On the contrary, the Chief Secretary to the Treasury (Mr Joel Barnett), with the Solicitor-General (Mr Peter Archer QC) in attendance, said to the Standing Committee (HC Debates) 10 June 1976, Vol VI, col 686:

    "I should make it quite clear - even without my hon. and learned Friend sitting beside me - that the purpose of this part of the schedule is not to require privileged and confidential documents to be handed over to the Inland Revenue. That is certainly not the intention."

    35. It is certainly true that some opposition amendments which were said to be intended to ensure that LPP was preserved were not accepted by the Government. But this was because they were thought (rightly or wrongly) either to go beyond the scope of LPP at common law or to be unnecessary. The Parliamentary material does not therefore assist in showing a clear intention to override a fundamental human right.

    36. I therefore do not think that the provisions upon which the revenue relies are sufficient to create a necessary implication that LPP was intended to be excluded. This means that I respectfully think that the reasoning of Bingham LJ in R v Inland Revenue Commissioners, Ex p Taylor (No. 2) (1990) 62 T.C. 578, 593-594 was too broad. It suggests that because Mr Taylor was the taxpayer, any documents subject to LPP could have been demanded, whether the beneficiary of the LPP was the client or himself. In my opinion, Mr Taylor would have been entitled to refuse to produce documents in respect of which he personally was entitled to LPP, such as legal advice from counsel about his own tax affairs. But, as in Parry-Jones v Law Society [1969] 1 Ch 1, I do not suggest that the actual decision was wrong. In the Divisional Court the Inland Revenue accepted that, as the information was sought under section 20(2) for the purpose of determining Mr Taylor's own liability to tax, it could be used only for that purpose. It could not, if subject to LPP, be used in connection with the tax liabilities of his clients. Glidewell LJ (at p 588) accepted this concession as correct and although he suggested that the revenue might make other use of a discovery that a particular document existed, I am not sure that this is right. It is not necessary to decide the point, but I do not think that the Inland Revenue were entitled to use any information supplied by Mr Taylor for another purpose. In consequence, I do not think that the disclosure of the documents by Mr Taylor in confidence for the limited purpose of determining his own tax liability infringed any LPP vested in his clients. If I am wrong about this and technically it did, then I think that to that extent the statute can be construed as having authorised it.