Legal Professional Privilege in HMRC Investigations

Legal professional privilege (LPP) is one of the most fundamental protections available to a client facing an HMRC investigation. It is also one of the most misunderstood: its scope is narrower than many practitioners assume, it does not protect advice from accountants however technical, and it can be waived inadvertently if advisers are not vigilant. This guide provides a thorough analysis of LPP in the HMRC context, its foundations, the key case law, its interaction with Schedule 36 FA 2008 information powers, the crime-fraud exception and the practical steps for asserting and preserving privilege.

Foundations: What LPP Is and Why It Matters

Legal professional privilege is a substantive legal right that protects confidential communications between a client and their lawyer from compelled disclosure to any third party, including HMRC. Unlike many evidentiary protections, LPP is not merely a rule of evidence that can be abrogated by statute, it is a fundamental principle of the common law, recognised by the House of Lords in R v Derby Magistrates’ Court, ex parte B [1996] AC 487 as absolute, subject only to the narrow crime-fraud exception. Parliament can and does, abrogate LPP in specific, clearly-worded statutory contexts, but such abrogation requires express language and will not be inferred.

Why LPP Matters in HMRC Investigations

In the context of an HMRC tax investigation, LPP is relevant in at least four distinct situations:

1. Schedule 36 information notices: HMRC issues notices under Schedule 36 FA 2008 requiring the production of documents and information. Schedule 36 contains specific exclusions for privileged communications, but the scope of those exclusions and the way HMRC may attempt to narrow them, requires careful attention;
2. Dawn raids and search warrants: In criminal investigations, HMRC officers may attend premises under a search warrant or production order obtained under the Police and Criminal Evidence Act 1984 (as applied to HMRC). The practical management of potentially privileged material during a dawn raid is a critical skill;
3. Compelled disclosure via court order: In civil proceedings or tribunal appeals, HMRC may seek disclosure of documents in the taxpayer’s possession. LPP applies in those proceedings as it would in any civil litigation;
4. Proactive waiver: In negotiations with HMRC, taxpayers sometimes disclose legal advice to support their position. Uncontrolled partial disclosure risks waiving privilege over related communications.

Legal Advice Privilege and Litigation Privilege

LPP takes two distinct forms in English law, with different conditions of application and different scopes.

Legal Advice Privilege

Legal advice privilege (LAP) protects confidential communications between a client and their legal adviser (solicitor or barrister) made for the purpose of giving or receiving legal advice. The advice must be directed at understanding or exercising legal rights and obligations, it does not extend to commercial or business advice given by a lawyer incidentally to a legal retainer. LAP applies regardless of whether litigation is contemplated or in existence. It is the form of privilege most commonly relevant in tax investigation contexts, where the client consults their solicitor about their legal position in response to an HMRC enquiry or notice.

Litigation Privilege

Litigation privilege (LP) protects a broader range of communications, including communications with third parties (such as experts, accountants or witnesses), but applies only where litigation is reasonably anticipated or in existence and the dominant purpose of the communication was to assist in the conduct of that litigation. In the tax context, LP becomes available once appeal proceedings before the First-tier Tax Tribunal or Upper Tribunal are in contemplation. Where an HMRC enquiry is ongoing but no proceedings have been issued, LP is not available; only LAP applies.

Key Distinctions

• Third-party communications: LAP does not generally extend to communications with third parties. Communications between the client’s solicitor and, say, an accountant or forensic expert are not protected by LAP (unless the third party is effectively acting as part of the legal team in seeking legal advice). LP does protect third-party communications, but only once litigation is anticipated.
• Dominant purpose: LP requires that the dominant purpose of the communication was preparation for litigation. A document that was prepared partly for litigation and partly for other purposes is only privileged if litigation was the dominant purpose.
• Scope of client: LAP in the context of a corporate client requires careful analysis of Three Rivers (see below) to determine which employees fall within the “client” for privilege purposes.

Three Rivers DC v Bank of England [2004]: Defining Legal Advice Privilege

The House of Lords decision in Three Rivers District Council v Governor and Company of the Bank of England (No 6) [2004] UKHL 48; [2005] 1 AC 610 is the leading authority on the scope of legal advice privilege in England and Wales and its application to corporate clients creates important constraints that tax investigation advisers must understand.

The Facts

The Bingham Inquiry into the collapse of BCCI was chaired by the Governor of the Bank of England. The Bank retained solicitors (Freshfields) to assist in preparing for the inquiry. Documents passing between Freshfields and the Bank’s “Inquiry Unit”, a small group of Bank employees tasked with managing the inquiry response, were claimed to be privileged. The claimants challenged that claim, arguing that communications with Bank employees other than those in the Inquiry Unit and communications whose purpose was not the seeking or giving of legal advice, were not protected.

The Key Holdings

1. The “client” in a corporate context is confined. For purposes of LAP, the “client” of the legal adviser is not the entire corporate entity and all its employees. It is the specific person or persons authorised to seek and receive legal advice on behalf of the organisation. Communications from employees who were not within this authorised group, even employees of the same organisation, were not privileged communications between client and adviser.
2. The purpose must be legal advice. Not every communication between a client and solicitor is privileged. The communication must have as its purpose the seeking or giving of legal advice. Information-gathering or factual reporting communications that are not seeking or providing legal advice are not protected by LAP, even where they pass between client and solicitor.
3. Litigation privilege has different requirements. The House of Lords confirmed that LP requires a dominant purpose of preparing for adversarial litigation and applies to a wider class of documents than LAP. But LP was not available on the facts because the Bingham Inquiry was an inquisitorial, not adversarial, process.

Implications for HMRC Investigation Advice

The Three Rivers analysis has direct practical consequences for tax investigation privilege claims:

• In a corporate tax investigation, LAP protects communications between the company’s authorised representative (typically in-house legal counsel or a designated director with authority to seek legal advice) and external solicitors. It does not automatically protect communications between every employee and external advisers;
• Instructions to a solicitor that contain factual accounts from undesignated employees are not privileged unless the purpose of including those accounts was to enable the solicitor to give legal advice, not merely to compile a factual record;
• HMRC may challenge privilege claims on the basis that the relevant employees were not the “client” for Three Rivers purposes. Advisers should ensure that the privilege claim is properly documented and that the basis for it is clearly analysed.

R (Prudential plc) v HMRC [2013]: The Accountant Problem

The Supreme Court decision in R (Prudential plc and another) v Special Commissioner of Income Tax and another [2013] UKSC 1; [2013] 2 AC 185 is the definitive modern authority on whether LPP can extend to advice from non-lawyer professionals, including accountants. The answer is no.

The Facts

Prudential plc had received advice from its accountants (PricewaterhouseCoopers) about the lawfulness under tax law of a specific transaction. That advice was, by any measure, advice about legal rights and obligations, the same advice that could have been given by a tax solicitor. Prudential claimed that the advice was privileged under LAP, arguing that the functional equivalence of the advice to legal advice should attract the same protection. HMRC sought production of the communications; Prudential resisted on grounds of privilege.

The Supreme Court’s Ruling

The Supreme Court, by a majority of five to two, declined to extend LAP to advice given by qualified accountants on legal matters, even advice that was indistinguishable in content and quality from advice a solicitor would have given. The Court held that extending LPP to accountants was a matter for Parliament, not the courts. Any extension would require precise definition of the class of professionals entitled to claim privilege, consideration of public interest and resolution of the regulatory implications, all matters for legislative rather than judicial determination.

Why This Matters for Tax Investigation Advisers

The Prudential decision has an enormous practical impact in the tax investigation field. Most tax practitioners who advise clients on the legal merits of disputed positions, whether a transaction was lawful, whether a penalty can be defended, whether a disclosure should be made, are accountants or tax advisers, not solicitors. The Prudential ruling means that:

• Advice from accountants and tax advisers is not privileged, however legal in character. HMRC can compel production of an accountant’s written advice on the tax treatment of a transaction, even where the accountant was effectively acting as a tax lawyer;
• The distinction between tax advice and legal advice does not save the privilege. Even advice that addresses a point of statutory interpretation, the clearest form of legal analysis, is not protected when given by a non-lawyer;
• Clients who want privileged advice on tax law must instruct a solicitor or barrister. Where a client requires written advice on a legal position in circumstances where privilege may become important, that advice should be obtained from a solicitor or barrister, with the accountant copied in rather than originating the advice.

Schedule 36 FA 2008 and Excluded Items

Schedule 36 Finance Act 2008 gives HMRC power to issue information notices requiring taxpayers (and third parties) to provide documents and information. Paragraph 19 of Schedule 36 excludes “privileged communications” from the scope of the information power.

The Statutory Exclusion

Paragraph 19 provides that a taxpayer is not required to produce a document if it is an “item subject to legal professional privilege.” That phrase is given the same meaning as it has in the Police and Criminal Evidence Act 1984, the same LPP framework applicable in criminal proceedings. This means:

• Communications between a client and their professional legal adviser (solicitor or barrister) made in connection with the giving of legal advice are excluded;
• Communications made in connection with or in contemplation of legal proceedings and for the purposes of those proceedings are excluded;
• Items enclosed with or referred to in such communications and made in connection with the giving of legal advice or in connection with or in contemplation of legal proceedings are excluded.

What the Exclusion Does Not Cover

The Schedule 36 LPP exclusion does not cover:

• Advice from accountants or tax advisers (per Prudential);
• Documents that merely record facts, even where those facts were communicated to a solicitor as part of a wider legal advice exercise;
• Communications that, while passing through a lawyer, were not “in connection with the giving of legal advice” in the Three Rivers sense;
• Documents over which privilege has been waived, whether expressly or by conduct.

HMRC’s Approach to LPP Claims Under Schedule 36

Where a taxpayer claims LPP over documents requested under Schedule 36, HMRC may dispute the claim. The mechanism for resolving the dispute is an application to the First-tier Tax Tribunal under paragraph 32 of Schedule 36, which can rule on whether a document is privileged. In practice, HMRC often accepts properly-documented LPP claims, but will probe claims that appear to sweep too broadly or that are made for documents whose category does not obviously attract privilege.

The adviser should prepare a schedule of claimed privileged documents, identifying each document by date, author, recipient and the basis for the privilege claim (LAP or LP), without disclosing the content of the documents. This schedule demonstrates that the claim is carefully considered rather than a blanket assertion and enables HMRC to identify specific documents it wishes to contest.

The Crime-Fraud Exception

The crime-fraud exception provides that LPP does not protect communications that were made in furtherance of a crime or fraud. It is a narrow exception and should not be confused with the suggestion that any communication relating to a suspicious transaction is unprotected.

The Principle

Communications are not privileged where they were made in order to obtain advice or assistance to carry out or in furtherance of, a crime or fraud. The exception does not apply merely because the subject matter of the advice is a criminal or fraudulent act, advice about how to defend against criminal charges or advice about whether a past transaction was lawful or unlawful, is fully privileged. The exception applies only where the communication itself was a step in or designed to facilitate the criminal or fraudulent scheme.

The HMRC Context

In tax investigation cases, HMRC occasionally invokes the crime-fraud exception to challenge LPP claims where it alleges that the taxpayer used the advice to perpetrate a deliberate tax fraud. For the exception to apply, HMRC must establish a prima facie case, not merely assert, that the communications were made in furtherance of crime. The threshold is objective: would a reasonable person, shown the evidence available, conclude that a prima facie case of crime had been made out? A mere assertion by HMRC that the transaction was improper or that the taxpayer may have committed fraud, does not engage the exception.

LPP in Dawn Raids and Criminal Investigations

HMRC’s criminal investigators (HMRC CID) can obtain search warrants under section 8 and Schedule 1 of the Police and Criminal Evidence Act 1984 as applied to HMRC by the Commissioners for Revenue and Customs Act 2005. The management of privileged material during a dawn raid is one of the most time-critical and practically important areas of LPP protection.

HMRC’s Protocol for Privileged Material

HMRC officers executing a search warrant are required, under PACE Code B, to:

• Allow the occupier (or their legal adviser) to identify potentially privileged material before it is removed;
• Separate potentially privileged items and not examine them pending determination of the privilege claim;
• If HMRC disputes a claim of privilege, the matter must be referred to an independent reviewer (typically a Queen’s Counsel not connected with the investigation) or to the court before the disputed material is accessed.

The Occupier’s Rights on the Day

Where HMRC arrives at a client’s business premises or home to execute a search warrant, the following steps should be taken immediately:

1. Call a solicitor immediately. The occupier is entitled to ask HMRC to wait while a solicitor is contacted. HMRC is not obliged to wait indefinitely, but a brief wait to allow a solicitor to be reached is reasonable. Do not proceed to identify documents without legal representation if at all possible;
2. Verify the warrant. Ask HMRC officers to produce the warrant. Check that it is signed, specifies the premises, identifies the investigation and has not expired;
3. Identify all potentially privileged material. Before HMRC begins removing documents, identify all files, correspondence and communications that may be privileged. Mark them clearly and inform the officer-in-charge that these items are claimed as privileged;
4. Do not allow potentially privileged material to be examined. If HMRC officers attempt to examine documents claimed as privileged before the privilege claim is resolved, the solicitor should object clearly and, if necessary, seek an urgent High Court injunction;
5. Request a schedule of all items removed. HMRC is required to provide a record of everything seized. Obtain a copy before officers leave.

Electronic Devices and Privileged Data

The management of LPP over electronically-stored material is a particular challenge. HMRC officers may seize computers, phones and servers containing vast amounts of data, some of which will be privileged and some not. Where a device contains both privileged and non-privileged material, the appropriate approach is:

• HMRC should image the device rather than taking the original where practicable;
• The device or image should be held in sealed storage pending privilege review;
• An independent solicitor, counsel or court-appointed reviewer should review the contents and identify privileged material before HMRC accesses it.

In practice, HMRC’s handling of electronic devices is not always consistent with this protocol and challenges to the admissibility of evidence obtained without proper privilege review procedures have succeeded in criminal proceedings.

The Waiver Trap

Privilege can be waived and waiver, particularly inadvertent waiver, is one of the most dangerous risks in managing a tax investigation. Once privilege is waived, it cannot be reasserted over the same communication.

Express Waiver

A client expressly waives privilege when they choose to disclose a privileged communication to a third party without limitation. Submitting a solicitor’s opinion letter to HMRC as part of a settlement negotiation is an express waiver of privilege over that letter.

Implied Waiver

The more dangerous form is implied (or collateral) waiver. English law recognises that where a party deploys a privileged communication in litigation or negotiation, for example, by summarising or quoting from a legal opinion, they may waive privilege over related communications dealing with the same subject matter. The principle of consistency prevents a party from relying on part of a legal advice exercise as supporting their case while withholding the rest.

The “Cherry-Picking” Problem

In HMRC investigations, the waiver trap most commonly arises where:

• A taxpayer or their adviser summarises legal advice in correspondence with HMRC to support a particular position (“we have taken counsel’s advice which confirms that…”);
• An expert or accountant’s report refers to or cites a solicitor’s advice;
• A witness statement in FTT proceedings refers to the content of legal advice received;
• An adviser produces documents in response to a Schedule 36 notice without conducting a proper privilege review, inadvertently disclosing privileged material.

The risk is that deploying the privileged communication, even partially, may waive privilege not only over that document but over all related advice dealing with the same subject matter. This can expose a client’s entire legal advice file in an area where they originally intended to maintain privilege.

Common Scenarios: What Is and Is Not Protected

The following table summarises the privilege analysis in common tax investigation scenarios.

Practitioner Checklist: Protecting LPP in an HMRC Investigation

1. Ensure that critical legal advice is obtained from a solicitor or barrister. Where a client requires written advice on a legal position that may be subject to HMRC scrutiny, that advice should come from a qualified lawyer, not an accountant. The accountant can advise on the numbers; the lawyer advises on the legal position. This is the only reliable way to attract LAP.
2. Identify the “client” for Three Rivers purposes in any corporate investigation. Where advising a company, identify at the outset which employees are authorised to seek and receive legal advice. Structure all legally privileged communications through those individuals only.
3. Conduct a privilege review before responding to any Schedule 36 notice. Every document falling within the scope of the notice should be reviewed by a solicitor before production. Documents over which LAP or LP is claimed should be listed in a privilege schedule and withheld with a clear explanation. Do not produce documents in bulk without review.
4. Prepare a privilege schedule in the correct format. The schedule should identify each withheld document by date, author, recipient and broad category and state the basis for the privilege claim (LAP or LP). It should not disclose the content of the privileged communications.
5. Never refer to, summarise or quote from privileged advice in correspondence with HMRC. Even a passing reference to having “taken legal advice” on a point can create waiver risk if it goes further than a bare statement. If a position is supported by legal advice, present the position as the client’s own, not as a conclusion drawn from advice.
6. Prepare a dawn raid protocol for corporate clients. High-risk clients (those subject to COP9, criminal investigation or significant compliance risk) should have a written dawn raid protocol specifying who to call, where privileged documents are stored and the procedure for identifying and segregating potentially privileged material.
7. Do not allow HMRC to inspect potentially privileged material on a dawn raid. Officers are required to separate and hold potentially privileged items pending review. If they attempt to read or copy such material, the solicitor attending the raid should object immediately and, if necessary, apply for an urgent injunction.
8. Review electronic devices for privilege before they are imaged. Where HMRC seizes or images electronic devices, negotiate the procedure for privileged material in advance. Propose that the privilege review is conducted by an independent solicitor before HMRC accesses the images.
9. Assess the crime-fraud exception proactively. In cases where the client’s conduct may be alleged by HMRC to constitute fraud, consider whether any communications are potentially within the exception. Take legal advice on this point before asserting privilege over communications that could fall outside its protection.
10. Keep a complete record of all privilege claims made and the basis for each. If HMRC challenges any privilege claim, the solicitor should be in a position to explain precisely why each document is claimed as privileged. Undocumented blanket assertions of privilege are vulnerable to challenge and may fail before the FTT.

Frequently Asked Questions