R (Morgan Grenfell & Company Ltd) v Special Commissioner of Income Tax
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BLACKBURNE |
| Judgment Date | 02 March 2001 |
| Neutral Citation | [2001] EWCA Civ 329 |
| Docket Number | Case No: 2000/3540 |
| Court | Court of Appeal (Civil Division) |
| Date | 02 March 2001 |
[2001] EWCA Civ 329
Lord Justice Schiemann
Lord Justice Sedley and
Mr Justice Blackburne
Case No: 2000/3540
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
DIVISIONAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Timothy Brennan and Ingrid Simler (instructed by the Solicitor of Inland Revenue for the Crown)
The Hon Michael J Beloff QC, Giles Goodfellow and Sara Dunn (instructed by Slaughter & May for the Appellant)
This is the judgment of the court
Introduction
This is an appeal against the dismissal by the Divisional Court (Buxton LJ and Penry-Davey J) of an application by Morgan Grenfell & Co Ltd ("MG"), the well-known merchant bank, for judicial review of (1) a Special Commissioner's decision to give consent under s20(7) of the Taxes Management Act 1970 ("the 1970 Act") to the giving of a notice to MG under s20(1) of the 1970 Act; (2) the notice itself, which is dated 28 September 1999, requiring MG to deliver documents and notes of meetings with advisers relating to a property transaction between MG and the Tesco Group entered into in February 1995; and (3) a written decision of the Special Commissioner dated 16 April 1999 ("the Preliminary Decision") ruling (a) that he had no jurisdiction or discretion to allow MG to participate in an inter partes hearing of an application for consent to the issue of the s20(1) notice and (b) that, as a matter of necessary inference, the provisions of s20 of the 1970 Act override the taxpayer's ordinary right to legal professional privilege.
In issue before the Divisional Court were four questions which the court formulated in the following terms (at para 8 of [2000] STC 965):
"I.
Does s20(1) of the 1970 Act authorise an inspector to issue a notice requiring disclosure by a taxpayer of material subject to legal professional privilege?
II.
Does a commissioner hearing an application by an inspector under s20(7) of the 1970 Act have jurisdiction to permit the intended recipient of the inspector's notice to attend the hearing and make representations?
III.
In the present case, could the inspector have held the reasonable opinion that the material subject to legal professional privilege contained or might contain information relevant to MG's tax liability, as s20(1) of the 1970 Act requires?
IV.
To the extent that it is a separate issue from III, did the commissioner err in law in consenting to the issue of the notice in relation to the material subject to legal professional privilege?"
The court concluded (1) that s20(1) of the 1970 Act authorised an inspector to issue a notice requiring disclosure by a taxpayer of material subject to legal professional privilege; (2) that MG had no right to require an oral hearing and more generally, that the Special Commissioner had no jurisdiction to afford the intended recipient of the notice an inter partes hearing in respect of an application for consent under s20(7); (3) that, on the basis of the disclosed information, the Special Commissioner could have held the reasonable opinion that the material subject to legal professional privilege contained or might contain information relevant to MG's tax liability; and (4) that, to the extent that it was a separate issue, the Special Commissioner had not erred in law in consenting to the issue of the notice. The application was therefore dismissed.
MG's appeal, which is brought with the Divisional Court's permission, raises the following issues: (1) does s20(1) of the Act authorise an inspector to issue a notice requiring disclosure by a taxpayer of material subject to legal professional privilege ("the substantive issue") and (2) does the commissioner have a discretion to allow the taxpayer to make oral representations to him, inter partes, as to why consent should not be given to the giving of a notice under s20(1) of the Act ("the procedural issue")?
The background to the proceedings, so far as it is necessary to set it out, is a tax-related scheme whereby, in essence, MG's client (in these proceedings it is a member of the Tesco Group), grants a long leasehold interest in property which it already owns to MG in return for a lump sum. MG then sub-leases the property back to the client in return for a periodic rent. The lump sum payment made by MG is claimed by it to qualify for tax relief against its trading income while the capital receipt by the client (in this case Tesco) will not be taxed as giving rise to any capital gain because of the availability of some form of relief such as a capital loss. The scheme is advertised by MG as enabling participants "to secure extremely low cost funding through a tax arbitrage based on property" and is marketed as "STELA" (an acronym for Sale With Tax Enhanced Leasing Arbitrage).
As the Divisional Court pointed out (in para 4 of its judgment) MG have emphasised that they have throughout been open with the inspector of taxes: there is no suggestion here of tax evasion and, as MG contended, no question of tax avoidance either. Nevertheless, the inspector suspected (as he continues to do) that, on a true understanding of the matter, it might well emerge that the transactions, involving (as here) the purchase of supermarkets, are not trading transactions, but capital transactions, and should be treated as such for tax purposes. We were told by Mr Brennan, for the Crown, that the Revenue is aware of sixteen such schemes involving payments made of £259 million with tax at stake of £77 million. It was with a view to investigating these matters further that in regard to the particular transaction undertaken with Tesco in February 1995 the Revenue had recourse to its statutory powers of investigation under the 1970 Act.
To this end, in November 1998, the inspector served on MG a so-called "precursor notice" under s20B(1) that, if the documents specified on an attached schedule were not produced within a stated period, he would consider applying to a Special Commissioner for permission to issue a s20(1) notice. Among the items specified on the schedule were documents which MG contends are protected from disclosure by legal professional privilege.
MG responded by requesting of the Presiding Special Commissioner that they be granted the benefit of a inter partes hearing if and when the Revenue should apply for consent under s20(7) to the issue of a s20(1) notice. The letter requesting such a hearing also set out a summary of their reasons why consent should not be given among which was that, as the documents qualified for legal professional privilege, a s20(1) notice could not require their disclosure.
In the Preliminary Decision, given on 16 April 1999, the Special Commissioner, His Honour Stephen Oliver QC, concluded (so far as material) (1) that MG -as the intended recipient of an intended s20(1) notice had no right to attend the meeting at which the inspector seeks the Commissioner's consent under s20(7) and he had no discretion to admit them (2) that arguments based on the European Convention on Human Rights (the Human Rights Act 1998 not then being in force) did not alter this conclusion and (3) that a taxpayer's ordinary right of legal professional privilege does not entitle him to refuse to comply with a s20(1) notice.
At an ex parte hearing on 28 September 1999 and notwithstanding further written representations by MG's legal advisers, the Special Commissioner gave his consent to the issue of a s20(1) notice. On the same day the notice was issued to MG. These proceedings followed shortly thereafter.
Before coming to the two issues which arise on this appeal, it is necessary to set out the material provisions of the 1970 Act. We do so in their form as they existed in 1999. They were subsequently amended by the Finance Act 2000, effective from 28 July 2000, but in respects which do not affect the outcome of this appeal.
"20 Power to call for documents of taxpayer and others (1) 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, or
(b) to furnish to him such particulars as the inspector may reasonably require as being relevant to, or to the amount of, any such liability.
(2) Subject to this section, the Board may by notice in writing require a person-
(a) to deliver to a named officer of the Board such documents as are in the person's possession or power and as (in the Board'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, or (b) to furnish to a named officer of the Board such particulars as the Board may reasonably require as being relevant to, or to the amount of, any such liability.
(3) Subject to this section, an inspector may, for the purpose of enquiring into the tax liability of any person ("the taxpayer"), by notice in writing require any other person to deliver to the inspector or, if the person to whom the notice is given so elects, to make available for inspection by a named officer of the Board, such documents as are in his possession or power and as (in the inspector's reasonable opinion)...
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