Solicitors (Northern Ireland) – Legal Professional Privilege – Conveyancing - AML – HMRC Investigations into Clients Tax Affairs – Third Party Notice

Background

The judgment of the First-tier Tribunal (Tax) in THIRD PARTY and TAXPAYER v Revenue & Customs (Information Notice - application by HMRC for information notices relating UK properties) [2023] UKFTT 71 (TC) (19 January 2023) provides a useful narrative upon which to consider the disclosure obligations of Conveyancing solicitors flowing from HMRC applying for an information notice relating to its investigation into a solicitors clients tax affairs. Specifically HMRC sought disclosure of the solicitor’s files in respect of two Conveyancing transactions.

The Third Party is a firm of solicitors in Northern Ireland.

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HMRC Position

The information schedule served on the solicitors sought the following information:

(1)?????????in respect of two properties ("Property 1" and Property 2" respectively) where the firm acted for the taxpayer on their purchase:

(a)?????????The client account and client ledger account for the taxpayer.

(b)????????All correspondence between the firm and the taxpayer in respect of the property purchases, including but not limited to letters, e-mails, faxes, notes of telephone calls and any completed forms sent to the firm.

(c)?????????All documentary evidence provided by the taxpayer as proof of the source of funds used for the property purchases.

(d)????????The Completion Notice for the property purchases.

(e)?????????Details of any mortgage taken out to fund the purchases, to include the amount of any mortgage, the bank or building society from which the money was received and the account number.

(f)??????????Details of any other payments made towards the cost of the purchases, to include the bank or building society from which the money was paid, the account holder and the account number.

(2)?????????In respect of one property ("Property 3") where the firm acted on the disposal:

(a)?????????The Completion Notice for the sale of the property disposal.

(b)????????Details of how any net proceeds from the sale was distributed to include, method of payment, the bank or building society to which the proceeds was paid, the account number and sort number.

(c)?????????All correspondence between the firm and the taxpayer in respect of the disposal, including but not limited to letters, e-mails, faxes, notes of telephone calls and any completed forms (to include the TR1 form) sent to the firm.

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Solicitors Response

The solicitors sought to have HMRC withdraw its request for information and documents citing the following reasons:

We do not accept that the information and documents requested are reasonably required to help HMRC check our client's tax position because:

1. We did not act for the client in respect of the purchase of [Property 1], so the requested information and documents are not in our possession.

2. All of the information and documents that you have requested in respect of the purchase of [Property 2] and the disposal of [Property 3] are protected by legal professional privilege, save for any that you can access from the public domain.

3. Our client has a right to respect for his private and family life, home, and correspondence in accordance with Article 8 of the Human Rights Act 1998.

4. Our duty of confidentially to our client and data protection legislation.

5. The unduly onerous nature of complying with your request for our Conveyancing files.

As the solicitors did not represent the taxpayer in relation to Property 1 it was removed from the application.

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Tribunals Findings

The tribunal found HMRC have reasonable grounds to suspect that the taxpayer may be liable to UK tax on income and gains which he has not declared to HMRC. It is not in dispute that the taxpayer was the settlor of three offshore trusts. It is unclear whether those trusts remain in existence, and the extent to which the taxpayer is a beneficiary of those trusts. The taxpayer has an economic interest in BVICo through the insurance wrapper arrangement. It remains unclear whether the taxpayer has received benefits from those arrangements. I find that HMRC have reasonable grounds to suspect that the taxpayer may have a liability to UK taxes in respect of the income and gains arising through those trust and insurance arrangements (including through subsidiary companies). I find also that the taxpayer may have liabilities to IHT as settlor of the three trusts.

43.????????I find that the taxpayer has not provided information and documents reasonably requested by HMRC for the purposes of checking his tax position. I therefore find that it is reasonable and proportionate for HMRC to seek information from third parties, and the Third Party in particular. But I make no finding as to whether the taxpayer's failure to provide information was done deliberately or with the intent of frustrating HMRC's enquiries.

44.????????In the light of the taxpayer's level of PAYE income, I find that it is reasonable for HMRC to suspect that (a) a source of funds for the purchase of Property 2 may be from one of the three trusts or BVICo (or a subsidiary), and (b) the destination of funds from the sale of Property 3 may be one of the three trusts or BVICo (or a subsidiary) - notwithstanding that he may have realised cash on the disposal of his previous home. I find that it is reasonable for HMRC to believe that the Third Party may be in possession of information which may indicate whether the taxpayer received funds for the purchase of Property 2 from one of the three trusts or BVICo (or a subsidiary), or whether the taxpayer?distributed the proceeds of sale of Property 3 to one of the three trusts or BVICo (or a subsidiary).

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Decision

So far as is relevant to the solicitors and specifically in relation to legal professional privilege the Tribunal found ?it is highly unlikely in relation to a Conveyancing matter that all the information and documents held by a law firm on its files would be subject to legal professional privilege.

49.????????In relation to transactional matters (such as Conveyancing), only legal advice benefits from privilege. Communications between a solicitor and his client will generally only benefit from advice privilege if they are both:

(a)?????????Made for the purposes of seeking legal advice from the solicitor or for the purposes of giving legal advice to the client by the solicitor; and

(b)????????Confidential as between solicitor and client.

In relation to the associated issue of client confidentiality it was held The duty of confidentiality owed to clients (whether pursuant to the professional obligations owed by solicitors to their clients, or pursuant to data protection legislation) is overridden by the statutory obligation to provide the information under the provisions of Schedule 36. I therefore find that the third-party notice overrides any duty of confidentiality that the Third Party owes to the taxpayer.

The other points advanced against HMRC were rejected and its application was approved.

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Comment

There is considerable regulatory focus on solicitors complying with their AML obligations and it is of interest that HMRC identify certain information, such as source of funds, that should be included in the solicitors file because of their requirements to undertake due diligence on their customers and clients for AML purposes, and the fact that lenders will only lend in line with the ability of the borrower or guarantor to service the loan.

This serves to highlight how information gathered through AML compliance may result, in certain circumstances, solicitors being required to provide such information to third parties. Considering the issues highlighted by HMRC in this case relating to the existence of offshore trusts there will no doubt be scrutiny in respect of the solicitor’s client due diligence requirements as provided for in the Legal Sector Affinity Group Guidance.

In terms of privilege the approved amended Notice issued by HMRC records Legal professional privilege is a complex area of the law that only properly applies in limited circumstances. I may wish to challenge any claim to legal professional privilege on the basis that I disagree that the documents or information being withheld properly fall within the scope of the privilege.

If you decide not to give me documents or information because you believe legal professional privilege attaches to them you need to let me have a list of each piece of information or each document being withheld.

The complexities surrounding this issue are also acknowledged by the Tribunal and as a consequence it will be prudent for solicitors to carefully review what information and documents they choose to disclose. if they have any doubts in relation to whether a document might attract privilege an expert opinion addressing this issue should be considered.

The Tribunal decision highlights how through regulatory and compliance obligations Conveyancing solicitors are likely to gather and hold important financial information and documentation that will on occasions require to be disclosed regardless of arguments advanced in relation to legal advice privilege or client confidentiality.

Gary Thompson FCII CIP

13/03/2023