Consultants' tax structure advice not entitled to litigation privilege, says EWHC
The decision is the latest round in the long-running privilege dispute between the Financial Reporting Council (FRC) and a UK public company, turning on when litigation is the 'dominant purpose' of the consultants' reports.
The corporate taxpayer Frasers, then known as Sports Direct, had received enquiries from the French tax authorities regarding its online sales in France. Sports Direct interpreted this as an indication that the French authorities were likely to challenge the tax treatment of those sales. It duly instructed its tax consultants, Deloitte, to report on how it could defend such a challenge and how to restructure its affairs in order to reduce the risk of similar challenges from EU tax authorities in future.
In response, Deloitte produced a series of written reports, three of which later became the target of third-party disclosure orders obtained by the FRC against Sports Direct.
The company then tried to claim litigation privilege for these reports. To succeed, it had to show that the reports passed the 'dominant purpose' test, which states that litigation privilege applies to documents generated for the dominant purpose of obtaining advice or evidence for use in conducting actual or anticipated litigation only.
Nugee LJ accepted that, by the time the reports were produced, Sports Direct expected litigation in relation to its sales structure. However, he held that the dominant purpose of the reports was not to provide advice or information for the purposes of that litigation. There is, he said, a distinction between advice for use in litigation and advice on how to achieve a particular tax outcome.
All three of the Deloitte reports fell in the latter category, even though they were a reaction to the threat of a challenge by the French tax authorities. They did not provide advice on the merits of the challenge or how best to conduct or settle it, nor did they provide any evidence for the defence of the claim. Rather, he said, they were ‘primarily advice as to how to pay less tax’ (Financial Reporting Council v Frasers, 2020 EWHC 2607 Ch).
The decision ‘illustrates the difficulties that businesses are likely to encounter in trying to ensure that a document will be privileged if it has mixed purposes,’ commented law firm CMS Cameron McKenna Nabarro Olswang. 'It is not enough to show that litigation was anticipated; the courts now look closely at how the documents are expected to benefit the party in that litigation.'
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