The case of Bilta –v- RBS offers hope to taxpayers wishing to assert litigation privilege over documents created in the course of internal investigations before formal proceedings have begun.
In SFO –v- ENRC last year, documents emanating from internal investigations into a bribery and corruption allegation were considered not to attract privilege and therefore had to be disclosed as part of the litigation process. Comments made in that case indicated that there may be a distinction between documents created with the purpose of avoiding litigation (not privileged) and those created for the purpose of conducting litigation (privileged).
Many taxpayers will have correspondence and discussions with HMRC prior to an appealable assessment being issued and it would be concerning if all internal documents created as part of this preliminary process were disclosable. Bilta –v- RBS gives some comfort that it is the commercial realities and likelihood of litigation that will be relevant, not merely whether there is a theoretical possibility of avoiding litigation.
(Legal advice privilege has different conditions and attaches to communications between legal advisers and their clients, regardless of the existence of any actual or potential litigation. However, legal advice privilege is not generally available for internal investigations.)
Internal investigation into alleged MTIC fraud
RBS was involved in carbon credit trading and, following purchase of these credits, reclaimed the VAT element from HMRC as input tax under normal principles. This type of trading is particularly prone to missing trader intra-community VAT fraud (MTIC fraud) and in 2009 HMRC began to investigate trades with a view to reclaiming input tax from anyone involved in the supply chain who "knew or should have known" that their transactions were connected with MTIC fraud. RBS cooperated fully with this investigation.
On 29 March 2012, HMRC wrote to RBS stating its view that it had "sufficient grounds" to deny RBS £86m of input tax although it would welcome RBS's response to the letter. If HMRC remained of the view that input tax should be denied following this response, it would issue a letter giving an appealable decision.
In the meantime, RBS began an internal investigation into the factual circumstances surrounding the carbon credits trading, including interviews with key employees. RBS's solicitors then used this information to prepare a report in respect of the allegations which was sent to HMRC as RBS's response and on the basis that RBS did not waive any legal professional privilege in providing the report to HMRC.
Bilta subsequently sought disclosure of the documents underlying the report, including transcripts of the employee interviews, whereupon RBS asserted litigation privilege.
Litigation privilege
The principles of litigation privilege were set out in Three Rivers. This requires that:
(a) litigation is in progress or in contemplation;
(b) the communications are made for the sole or dominant purpose of conducting that litigation; and
(c) the litigation is adversarial, not investigative or inquisitorial.
It was agreed that (a) and (c) were met, so the issue was whether the internal investigation was carried out for the "sole or dominant purpose of conducting litigation".
Conducting or avoiding litigation?
Following the SFO –v- ENRC approach, RBS could have been said to have had a purpose of avoiding litigation when it commissioned its report to send to HMRC, given HMRC's invitation to provide a response to its belief that there were grounds to deny the input tax before an assessment was issued. However, Vos J clearly doubted that there should be any distinction between defending a claim and dissuading a claim from being brought in the first place.
In any case, HMRC only had to prove under the Kittel test than that RBS knew or ought to have known that the relevant transactions were connected with fraud and RBS would have been aware that it was highly unlikely that it would persuade HMRC to drop a claim for £86 million on the basis of a solicitor's report, given that HMRC had already stated that it had sufficient grounds to support its case.
The reality was therefore that an assessment was almost certain to follow the HMRC letter and there was no realistic hope of avoiding litigation. Essentially, HMRC's letter was analogous to a letter before claim with the solicitors' report being the equivalent of the response required to that. As work underpinning a response to a letter before claim would be covered by litigation privilege, it was right that these investigations - which were carried out by specialist tax litigators at the direction of RBS's litigation department - should also be treated as having a dominant purpose of conducting litigation.
Multiple purposes
Bilta also argued that the dominant purpose of RBS's investigation was not litigation but to inform itself of its factual position and to supply a full and detailed account of the relevant facts to HMRC pursuant to its duties as a taxpayer.
However, Vos J saw the assembling of evidence to ascertain the strength of one's position as an ordinary part of any litigation and not separate from the litigation purpose and concluded that these purposes were "effectively subsumed under the purpose of defeating the expected assessment".
Importantly, the collaborative and cooperative nature of RBS's interactions with HMRC after the HMRC letter did not change his view. He noted that HMRC often requests the views of large corporate taxpayers prior to formally issuing an assessment and it was for RBS to convince HMRC not to do so. The fact that corporate taxpayers have to comply with their own protocols and statutory duties to cooperate with HMRC does not change the likelihood that an assessment will follow the correspondence which informs the taxpayer of HMRC's intention to issue an assessment.
Comment
The SFO –v- ENRC appeal will be determined in the Court of Appeal later this year and more clarity can be expected then. In the meantime, it will be important for taxpayers to note carefully the purpose of any investigations and generation of internal documents that pertain to discussions or correspondence with HMRC that seems likely to result in a disputed assessment.
