Revenue's investigatory powers no longer extend to contractors' legal advice

A recent case between the investment bank Morgan Grenfell and the Inland Revenue at the House of Lords has reversed a previous Court of Appeal judgment to limit the powers Revenue inspectors have to demand access to the documentation of legal advice during an investigation, including the advice contractors receive over their contracts or status.

The bank, Morgan Grenfell, had refused to disclose legal advice to Revenue inspectors on a tax avoidance property scheme it had sold to the supermarket chain, Tesco.

The relevance of the overturned decision for contractors is that the Revenue can no longer demand access to legal advice they have received regarding their contracts or employment status.

Anne Redston, Tax Partner at Ernst & Young and author of the book 'IR35 - Personal Service Companies,' provided a brief analysis of the case.

She said: "The leading judgement in the Morgan Grenfell case was given by Lord Hoffmann. In his Lordship's opinion, legal professional privilege (LPP) is a fundamental human right long established in our common law. The basis of the law is that a client is entitled to take advice from his lawyer without fear that any disclosure he makes and any advice he receives might afterwards be used against him. Any court interpreting legislation is bound to take LPP into account. Any intention to override such an important right must be expressly stated in the law.

"The issue in the Morgan Grenfell case was that some documents from its lawyers were in the possession of the taxpayer. The Revenue accepted that where they were in the possession of the lawyer, they could not override LPP. However they said that they could use their powers under Section 20 Taxes Management Act 1970 to require them to be disclosed if they were in the possession of the taxpayer.

"However, in Lord Hoffmann's view, this would produce the 'irrational result' that Parliament had preserved LPP for documents in the hands of the lawyer, but not in the hands of the taxpayer, despite the fact that the privilege belonged to the taxpayer and not the lawyer.

"If Parliament had meant to override LPP in Section 20, the judge held that the words would have had to be unambiguous, and even then the Human Rights Act (and the European Court of Human Rights) was likely to prevent the rule being legal in the UK."

So what does this mean for contractors?

Anne said: "If a contractor receives an opinion on his contracts, or his status, or receives other advice from his lawyers such as whether he would succeed before the Commissioners; he cannot be required to give this to the Revenue. It is however unlikely that the same protection applies to advice from others, such as accountants or tax specialists, although this area is likely to be carefully examined in the light of the judgement."