Press Release

24 July 2008

McGrigors Tax Litigation and Investigation team Identify New Case Precedent

 

Under changes effected by the Finance Act 2007, professional services firms and financial institutions are now able to recover their costs in responding to orders obtained by HM Revenue & Customs criminal investigation teams for the production of client files.

 

McGrigors LLP were recently successful in identifying that, due to sweeping changes in the law governing the conduct of criminal investigations by HMRC from 1 December 2007, HMRC are now required to use a power under which a Judge is permitted to exercise discretion to award "the costs … of anything done or to be done in pursuance of [the] order". 

 

As a result, McGrigors successfully obtained an order for recovery of the costs – both internal and external – of a professional advisory firm in responding to an order for discovery of certain client files. 

 

Changes in the Law

 

This outcome appeared to take HMRC by surprise, despite it being behind the changes to the law. The changes aligned HMRC criminal investigation procedures with those of the other investigating authorities, such as the Police and SFO. When seeking discovery of "special procedure material", which includes client files and other information held by financial institutions or professional services firms under a duty of confidence, HMRC must now use the production order under paragraph 4, Schedule 1, Police and Criminal Evidence Act 1984.  Previously HMRC could use their bespoke power under Section 20BA, Taxes Management Act 1970.  The limited cost recovery position under that section did not provide for costs recovery in responding to the order.

 

This difference is very significant.  Financial institutions and professional services firms are under duties of confidence to their clients and must therefore not disclose documents to the authorities unless they are able or required to do so in law. Accordingly, they must undertake a thorough, document-by-document examination to avoid disclosing any documents which fall outside the scope of the order.  This examination must also ensure that they do not disclose documents over which a claim to legal professional privilege could be maintained.  This careful process of sifting documents, including numerous emails, can be very time intensive.

 

Scope of Costs awarded

 

McGrigors LLP successfully obtained recovery of costs for the following:

 

  • external legal costs (solicitor and Counsel) for attending the hearing of HMRC's application for the production order, including seeking to negotiate the scope of the order in advance
  • internal costs in identifying documents which were in scope of the order, once granted (broadly, lost revenue as a result of diverting fee earners from client work to review files, based on a fair charge out rate for such fee earners)
  • external legal costs in reviewing and approving the disclosure of the material identified as being in scope
  • external legal costs in seeking the award of costs

 

In seeking the award of costs, McGrigors emphasised that its client was mindful of its wider public duties to assist in criminal investigations, and reflected this by not seeking to recover all its internal costs. However, the authorities have to recognise that client confidentiality is a cornerstone of professional and banking services, so firms must approach their response to production orders with due care and consideration. Inevitably this leads to significant costs and it was appropriate for this to be met out of public funds. 

 

Implications

 

Whilst this result is of primary interest to businesses which have previously been prepared for the receipt of Section 20BA production orders in tax crime investigations (but will instead receive Schedule 1 productions orders going forward), recovery of costs is available in all cases where an investigating authority is required to apply for a Schedule 1 production order.  All professional services firms and financial institutions should be reviewing their protocols to ensure that costs are sought where appropriate.

Andy Peat

Business Development Director
Telephone: +44 (0)20 7054 2710
Mobile:  +44 (0)7894 835 386
Email: andy.peat@mcgrigors.com

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