R (Morgan Grenfell & Company Ltd) v Special Commissioner of Income Tax

JurisdictionEngland & Wales
CourtHouse of Lords
Judgment Date16 May 2002
Neutral Citation[2002] UKHL 21
Date16 May 2002

[2002] UKHL 21


Special Commissioner and Another
Ex Parte Morgan Grenfell & Co Limited

My Lords,


I had had the advantage of readingin 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,


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.


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…"


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.


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.


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.


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.


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.


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.


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.


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).


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.


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.


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."


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).


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...

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