In a decision handed down on 5 October 2020 (The Financial Reporting Council Ltd v Frasers Group plc (formerly Sports Direct International plc)  EWHC 2607 (Ch)), the High Court held that advice from accountants on a proposed new tax structure was not prepared for the dominant purpose of litigation, and as a result not protected by litigation privilege.
This would have been the case even if litigation over the relevant tax affairs had been in reasonable contemplation at the time the advice was provided.
This judgment reinforces that, for litigation privilege to apply, the relevant document or communication must have been prepared for the dominant purpose of obtaining advice or evidence in relation to litigation that is reasonably in contemplation.
Even if it is contemplated that a proposed new tax structure likely will be subject to litigation, advice as to how to implement that particular structure is not first and foremost advice as to the conduct of the potential litigation.
The decision highlights the key point that advice about a potential course of action may not be covered by litigation privilege, even if that particular course of action may be expected to end up in potential future litigation.
The case stems from an on-going investigation by the Financial Reporting Council (FCR) into the conduct of accountants Grant Thornton in relation to the financial statements of Sports Direct International plc (SDI) (now Frasers Group plc), founded by British retail entrepreneur, Mike Ashley.
As part of its audit, SDI had provided certain legally privileged documents to Grant Thornton on a limited waiver basis.
SDI's subsidiary, Sportsdirect.com Retail Ltd (SDR), engaged Barlin Delivery Ltd to provide delivery services to SDR's customers. This engagement was part of a tax structure (upon the advice of Deloitte LLP) to ensure that SDR paid VAT on its sales to EU customers in the UK rather than in the country of each relevant EU customer.
The FRC, as part of its investigation on the issue of related party transactions in the 2016 Financial Statements of SDI, exercised its power under its Audit Enforcement Procedure to request SDI to disclose certain documents, which included those that SDI disclosed to Grant Thornton in 2015 recording the advice from Deloitte on the proposed tax structure.
In response, SDI disclosed approximately 2,000 documents, but crucially withheld a number of documents – in particular, three reports detailing VAT advice given by Deloitte to SDI in 2014 and 2015.
SDI argued that these documents did not have to be disclosed to the FRC as they were protected by litigation privilege.
SDI asserted that the relevant tax structure was put in place for the exclusive purpose of responding to anticipated litigation from the French tax authority, and so litigation privilege applied in this case.
As a result, the FRC made an application to the High Court seeking disclosure of Deloitte's tax advice.
Mr Justice Nugee rejected the claim to litigation privilege over the Deloitte tax advice. He reiterated the applicable legal principles for litigation privilege, as previously set out in the leading case of Three Rivers DC v Bank of England (No 6)  UKHL 48:
- Litigation must be in progress or in contemplation;
- The communications must have been made for the sole or dominant purpose of conducting that litigation; and
- The litigation must be adversarial, not investigative or inquisitorial.
Nugee J also made the point that, even if tax advice was given that may, at a given point in the future, be used to justify the tax structure in the event of a legal challenge by the tax authorities, that did not change the fact that it was put in place at that particular time, because SDR wanted that structure in place for tax efficiency, and so was not a litigation purpose.
Nugee J also added that whether a regulator's involvement in an investigation might justify a conclusion that litigation is reasonably in contemplation was not the relevant question here, and the evidence before him on this point was not of any real significance.
- This judgment is a timely reminder of the limited scope of litigation privilege and the importance of the principle that, even where litigation may have been reasonably in contemplation at the time a particular document was created, the dominant purpose of the document needs to have been for a litigation purpose in order for litigation privilege to apply.
- The case highlights the strict distinction between commercial and litigation-related purposes, and illustrates the difficulties that corporate entities are likely to encounter in trying to ensure a document will be privileged if it has mixed purposes.
- Advice about a potential course of action may not be covered by litigation privilege, even if that course of action is expected to lead to litigation. Where the document or advice in question is legal advice given by lawyers, legal advice privilege (rather than litigation privilege) is likely to apply. However, legal advice privilege does not apply to advice from other professionals, as confirmed by the Supreme Court in R (Prudential plc) v Special Commissioner of Income Tax  UKSC 1.
- The decision highlights that corporate entities should not assume, just because privileged documents have been provided to third parties (such as auditors) under a limited waiver, that litigation privilege would be automatically retained for those documents to the rest of the world. Care must still be taken as to the dominant purpose of those documents.
Simon Sloane is a partner and Bhavul Haria is an associate in the dispute resolution team at Fieldfisher. For more information on our litigation expertise, please visit the dispute resolution pages of the Fieldfisher website.
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