UK tax tribunal finds privilege does attach to internal law firm documents

The case centred on enquiries made by HMRC into the tax returns and remuneration of partners at an international law firm between 2014 and 2024, including payments made between the UK and US arms following a transatlantic merger in 2009.

The law firm, then known as Hogan Lovells International LLP, produced documents to HMRC in response to information notices issued under schedule 36 of the Finance Act 2008 – the formal process by which HMRC can demand information and documents when it is checking a taxpayer’s tax position.

Although taxpayers are legally obliged to provide the information requested, this is subject to certain safeguards, including that taxpayers do not need to provide information that is subject to legal privilege.

The dispute arose over the status of three documents that the law firm withheld from HMRC on grounds of privilege. The documents relate to ongoing concerns within the firm of a perceived “imbalance issue” linked to “the financial consequences of the arrangements governing partner remuneration and payments between the two firms” following the merger.

These documents were: a set of slides prepared by a UK tax partner at the firm, setting out the issues arising from the imbalance of payments between the UK and US LLPs and possible avenues to resolve it; an executive summary document prepared by a US-based partner regarding the possibility of including a corporate member in the LLP; and a paper that summarised the firm’s position on the potential corporate member to be presented to the board and firm’s senior management.

HMRC argued that the “imbalance issue” was principally considered to be a commercial and managerial problem. It said the documents were therefore not being prepared in the context of giving legal advice and were not privileged.

The law firm disagreed and made an application to the FTT to determine the privilege status of the three documents under a specific set of rules for this purpose.

The FTT determined that the “imbalance issue” was “simultaneously a contractual, tax, regulatory, governance and commercial problem” and that they could not be realistically separated from each other, such that the documents in question were “capable of forming part of a continuum of legal advice”.

It also ruled that confidentiality was maintained throughout this time period, even though these documents were circulated within the firm’s committees and groups. It reasoned that the sensitivity of the issue within the firm was clear from contemporaneous documents; that circulation was limited to a small relevant group and that the recipients of the documents understood that they were receiving the documents in the context of resolving this specific “imbalance issue”. The tribunal ruled that the “absence of express words of confidentiality or an agreement” did “not materially detract from” this conclusion.

Turning to the individual documents, the FTT determined that the set of slides were prepared by the individual in their capacity as a lawyer, with the “dominant purpose” of providing legal advice, and that confidentiality had been maintained throughout. It said that some commercial information within the slides could be severed from the legal advice and the slides could therefore be provided to HMRC in redacted form. However, the tribunal commented that this commercial information was not new and had already been disclosed to HMRC in other documentation.

The FTT said that the executive summary was prepared by the individual acting as a lawyer for the purpose of providing legal advice and ruled that the entire document was privileged and not disclosable. Similarly, it said that the paper was “far more consistent with a document prepared for the purpose of communicating and evaluating legal advice within the relevant legal context than with a document whose dominant purpose was merely to record a commercial agreement between the parties”. It held that the document was also not disclosable.

The FTT noted the possibility of an appeal against this decision, directing that disclosure of the redacted slides should be deferred until the appeal deadline had passed – 56 days from the decision notice – so as not to undermine the purpose of any appeal.

Ian Robotham, a tax disputes and investigations expert with Pinsent Masons, said the case provided some important lessons for taxpayers on the importance of determining whether advice is given in a legal capacity and a relevant legal context. “The decision contains some useful procedural points for taxpayers seeking to defend claims to legal professional privilege,” he said. “On witness evidence, the tribunal was prepared to receive evidence explaining how documents were created, circulated and used within the organisation, but drew a clear distinction between factual evidence and legal conclusions on privilege, which remained a matter for the tribunal itself. That serves as a reminder that parties should think carefully about the purpose and scope of witness evidence when preparing privilege challenges.”

Alan Sheeley, civil fraud and asset recovery expert at Pinsent Masons, said the case proved that privilege remains a “a fertile battleground in tax and commercial litigation” and that solicitors should always ensure they have contemporaneous evidence to defend a claim robustly. “When privilege is asserted over a document, solicitors should really consider all the possibilities as to any attack on that category of documents and advise clients as to risks surrounding this area – this case being a perfect example,” he said. “Where privilege is challenged, contemporaneous evidence of the legal context can be critical in defending a claim, and advisers should consider at an early stage how that evidence may ultimately need to be demonstrated to a court or tribunal."

Robotham said the case also raised interesting questions about documents produced jointly by lawyers and non-lawyers and the challenge in defending claims to privilege for documents where authorship is not clear-cut. “Interestingly, the tribunal declined to decide whether the absence of identified legal authorship affected privilege in this case, but this issue may arise in other case.”

Stuart McNeill, a banking litigation expert at Pinsent Masons, said the decision provides a useful illustration of the practical steps that organisations can take to strengthen claims to legal privilege, particularly when navigating sensitive issues within a group structure. “Businesses should ensure that legal advice is clearly identified as such, that the in-house legal team are involved when sharing advice within an organisation, that confidentiality is preserved throughout, and that particular care is taken when later communications draw on privileged material,” he said.