Background – Sports Direct, the FRC and privilege

Last year we reported on the High Court’s first instance decision compelling the disclosure of privileged information by an audit client to the Financial Reporting Council (“FRC”). That case concerned the FRC’s investigation into the 2016 audit of Sports Direct International (“SDI”). The FRC made its application pursuant to the Statutory Auditors and Third Country Auditors Regulations 2016 (“SATCAR”). SDI appealed the decision.

There is a concern across the auditing industry at the consequences of a ruling that would erode the right to privilege and bring about a chilling effect in respect of businesses’ readiness to share confidential information with their auditors. In March 2020, we were pleased to report that the Court of Appeal had reversed that ruling, citing the fundamental human right to the protection of litigation privilege and the fact that SATCAR did not convey an express and unambiguous direction of Parliament to override it when providing the FRC with powers to obtain information from audit firms.

The SDI saga continues

There is a further decision from the Court of Appeal. It concerns three documents which contained advice from SDI’s tax accountants in respect of a new e-retail structure of an SDI subsidiary, involved in distance selling. The tax advice concerned putting in place a structure that increased the likelihood of SDI sales attracting VAT payable within the UK, rather than elsewhere. Nugee LJ handed down his decision in respect of an application by SDI asserting privilege against the FRC over this material. The decision was not, as with the previous decision, concerned with the FRC’s regulatory powers of requiring disclosure to it of privileged documents – but provided some clarity on the over-arching principles behind litigation privilege.

Nugee LJ confirmed the long-standing position summarised in Three Rivers[2004],namely that documents attract litigation privilege where:

  1. They are communications between a client and its lawyers or a third party,
  2. For the purpose of obtaining advice or information,
  3. In respect of litigation in progress or in prospect, and
  4. They are made with the sole or dominant purpose of conducting that litigation.

The Court accepted that “litigation” over the tax effectiveness of the structure was likely to be in contemplation when the documents were created. SDI was aware that the relevant distance selling arrangements were likely to attract enquiry as to whether and in which EU Member State VAT was payable, and that various regulators and revenue agencies had been interested by this issue. The question before the Court was whether the material had been provided for the “sole or dominant” purpose of conducting any anticipated litigation.

Nugee LJ found that it had not. Rather, it set out to advise the retailer on how to pay less tax under a revised 2015 structure. Specifically, it was not produced for the purposes of obtaining evidence for, or advice upon, that litigation. Therefore, the “sole” or “dominant” purpose of the advice could not reasonably be said to be assisting in litigation contemplated by SDI. As such, litigation privilege was not engaged.

This ruling highlights the importance of considering, before it is given, the purpose of tax advice. Tax advice from accountants does not attract legal advice privilege as it would if given by lawyers. Therefore, if privilege is to be claimed over that advice, it must be for the purpose of litigation. Labelling a document “Confidential: Litigation Privilege” is not enough to achieve this (although it may help in convincing a court that one of its purposes is indeed to assist with future litigation). If the document is relevant to anticipated litigation, that fact should be recorded, and if instructions for the production of the report come from lawyers instructed to advise on that anticipated litigation, the grounds to claim privilege will be stronger. This decision should prompt businesses and their advisors to examine whyadvice is sought from tax accountants, before that advice is given.