Reports prepared by accountants on a tax structure for a company have been found by the
The decision, given in
While the decision is not binding here, it may be of persuasive authority before the Irish courts as the test for litigation privilege in both jurisdictions is similar.
What happened in the
The FRC's investigation arose from reports that SDI's subsidiary,
The FRC requested three reports prepared by SDI's accountants, and sent to its former auditors, recording the accountants' advice on this arrangement and the possible VAT implications.
SDI claimed that these documents were protected by litigation privilege and did not have to be disclosed. The key issue before the
What is litigation privilege ?
Litigation privilege applies to:
- confidential communications between a lawyer and a client, or between either of them and a third party;
- where the communication was for the sole or dominant purpose of litigation or a regulatory investigation; and
- at the time the communication was made, the litigation or regulatory investigation was in being or was reasonably apprehended.
If a communication or document is protected by litigation privilege, it does not have to be disclosed in the course of legal or regulatory proceedings.
The sequence of events
- 2010 - SDI's accountants devised a tax structure for SDR to enable VAT to be payable in the
UK on EU sales ("the 2010 structure"). June 2014 - This was queried by the French tax authorities.July 2014 - SDR became aware that tax authorities in EU member states were scrutinising and challenging similar structures adopted by other retailers. From this point, SDR is said to have operated on the basis that it would be involved in tax litigation in the near future.July 2014 - SDR instructed lawyers and accountants to assist it in preparing to respond to a likely challenge to its VAT arrangements from the French tax authority; to minimise the risk of litigation with other tax authorities; and to put it in the strongest possible position to defend any future challenges that were made.January 2015 - The accountants produced a report which set out their recommendations on a new structure and steps to mitigate the risk of challenges from EU tax authorities.February 2015 - On its accountants' advice, SDR put in place a new tax structure which, it hoped, was less likely to be successfully challenged ("the 2015 structure").April 2015 - The accountants produced their second report which summarised the 2015 structure.July 2015 - The accountants produced their third report which mirrored the second report but with updated figures.August 2015 - The French tax authorities began a formal investigation into SDR's VAT arrangements.
Were the accountants' reports privileged?
As to the second and third reports, they were written after the 2015 structure had been adopted for the purpose of explaining how VAT was to be accounted for under this structure. The purpose of these reports was not to assist SDR's position in future litigation, but to enable SDR to ensure that it was operating the structure as the accountants advised it should.
SDI argued that the anticipated litigation was not limited to the 2010 structure and it had worked on the basis that it was inevitable that both structures would be challenged. While the
The Court stated:
"A taxpayer who takes advice as to how to structure his affairs does not do so for litigation purposes. He does so because he wants to achieve a particular result for tax purposes... Even if it is contemplated that the particular structure will be likely to be attacked by the relevant tax authorities and that there will be litigation, the advice as to how to implement the new structure... is not primarily advice as to the conduct of the future possible litigation. It is primarily advice as to how to pay less tax..."
Key Takeaways
- For litigation privilege to apply, the communication or document must have been prepared for the sole or dominant purpose of litigation or a regulatory investigation that was in being or reasonably contemplated.
- Even where it is contemplated that a particular tax structure may be challenged, advice on how to implement the structure of itself (as distinct from advice on the conduct of any potential litigation in relation to the tax structure) is not protected by litigation privilege and may be discoverable.
- However, where that advice is legal advice given by lawyers to their client, it may be protected by legal advice privilege, a separate strand of privilege.
Originally published by
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
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