Notices to be issued by HMRC to trust and company services providers in February are likely to conflict with the client's right to legal professional privilege (LPP), says the Law Society of England and Wales.
According to a report by STEP, the notices will request firms that advise clients on the establishment of offshore companies or trusts to provide details to HMRC of any client seeking to create an offshore entity and their interest in the entity, under Schedule 23 to Finance Act 2011.
These 'pre-notice letters' are to be sent to some Trust or Company Service Providers (TCSPs). There is uncertainty over the definition of a TCSP – it may cover a whole range of firms that provide or refer offshore advice to their clients.
Advisers will be asked to provide the name and address of the client; the entity details (name, jurisdiction, date of registration); and details of persons with beneficial ownership or interest in the entity. Failure to comply could attract penalties under paragraph 30 and 31 of Schedule 23.
Both STEP and the Law Society have been in protracted talks with HMRC about this issue over the past year. There are also concerns about the potential breach of LPP as well as access difficulties firms might have in obtaining the relevant data.
According to the Law Society, HMRC agrees that its powers under paragraph 17 of Schedule 23 to the Finance Act 2011 do not override LPP. However, HMRC's position is that LPP is not engaged by these disclosure notices, because it is asking for information about transactions, which, unlike advice, are not covered by LPP.
The Law Society has taken counsel's advice on HMRC's position, and disagrees with it. “HMRC's request is likely to be related to advice that clients have sought – for example, in relation to the establishment of an offshore company or trust – [so] LPP is very likely to be engaged,” it says.
It cites Lord Carswell's remarks in Three Rivers District Council v Bank of England (2004 UKHL 48, 2005 1 AC 610) that 'all communications between a solicitor and his client relating to a transaction in which the solicitor has been instructed for the purpose of obtaining legal advice will be privileged, notwithstanding that they do not contain advice on matters of law or construction, provided that they are directly related to the performance by the solicitor of his professional duty as legal adviser of his client’.
A law firm presented with an HMRC pre-notice letter must satisfy itself as to whether or not complying with it would breach the client's right to LPP, says the Law Society. If the firm declines to comply, it can appeal to a tribunal on the grounds that LPP is a 'reasonable excuse' for its refusal, as provided by paragraph 28 of Schedule 23 of the Finance Act 2011.