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Court Report
The Technical Advisory Service summarises recent court cases which could impact upon practitioners.
P v P Divorce Case
The case of P v P was decided in relation to the duties of lawyers in a matrimonial
case, but its implications go much further.
Until February 2003, divorce lawyers who suspected their clients of illegal money-making activities were not under a duty to disclose their suspicions to the public authorities. Client confidentiality reigned supreme.
When Part 7 of the Proceeds of Crime Act 2002 came into force in February 2003, it brought with it a range of new obligations on divorce (and other) lawyers which change their roles and displace client confidentiality in a number of circumstances.
The Facts
Mr. and Mrs. P were married in 1979 and are now in their early fifties. In January
2002, Mrs. P filed a divorce petition. She had indicated her belief that the
combined assets of herself and her husband amounted to £19m. Forensic
accountants were instructed and reported in October 2002.
The forensic accountant’s report had raised suspicions that part of the matrimonial assets might be tainted by tax evasion. This would mean that they might be ‘criminal property’ within the meaning of section 340 – Proceeds of Crime Act 2002.
In the legal team’s opinion, the lawyers – simply by opening negotiations with Mr. P’s lawyers – might become liable to prosecution under section 328 of the Act. This section deals with a person who “becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person”. The lawyers planned to assist Mrs. P to get her hands on a share of Mr. P’s assets and so could fall foul of section 328.
In order to get round this, the lawyers had to submit a report to NCIS. However, they were still faced with a dilemma. Could the lawyers tell their client, Mrs P, that a report had been filed? Could they tell Mr. P’s lawyers? If they did, would they be guilty of ‘tipping off’? If they did not, would they be guilty of failing to divulge relevant information at the appointment listed for 18 July?
It was more than likely that the report submitted by them to NCIS would be passed on to the Inland Revenue and result in a tax bill for Mr. P. Since they knew of this risk they were obliged by the rules of court to make it known to Mr. P before the 18 July hearing. The lawyers called for a secret court hearing to obtain the court’s instruction to resolve their problem.
The Judgement
The judge decided that Mrs. P’s lawyers were correct in believing that
they had a problem under section 328 of the Act, and that they were correct
to make a report to NCIS when they did. The lawyers could not claim exemption
from the need to make a report. The judge suggested that a solicitor may wish
to submit a single report to NCIS on behalf of himself, counsel and his client,
where the client is an innocent party.
The judge then moved on to consider whether the lawyers could inform anyone that they had made a report to NCIS. She decided that the exemption for legal professional privilege did apply in connection with possible ‘tipping off’. Therefore Mrs. P’s lawyers were permitted to inform Mrs. P and the lawyers acting for Mr. P and Mr. P himself, that they had submitted a report to NCIS, and to provide them with copies of that report.
The lawyers would only be liable for prosecution for ‘tipping off’ if the lawyers made that disclosure with the intention of furthering a criminal purpose.
The Implications
The case of P v P was decided in relation to the duties of lawyers in a matrimonial
case, but its implications go much further.
Accountants should be aware that the lawyers were permitted to disclose their NCIS report to their client, and to the opposing lawyers and their client, because of an exemption in the Act which applies only to “a professional legal adviser”. Members of other professions would not be permitted to make such a disclosure to their clients, because it would be ‘tipping off’.
Briefly, the lawyers had to file a report with NCIS because they were proposing to negotiate a settlement which would involve money or assets being transferred from Mr. P to Mrs. P when they suspected that some of Mr. P’s assets were tainted with illegality (in this case, tax evasion).At this point there was no question of any assets actually having been transferred, but entering into the proposed negotiations could be regarded as “becoming concerned in an arrangement” involving criminal property. That was enough to trigger potential criminal liability for the lawyers themselves (under section 328) and they had to protect themselves by making their report to NCIS.
However the relevant sections of the Act (sections 327-329) apply to everyone, not just lawyers, nor even just professionals, they apply to every citizen. The sections also apply in every circumstance, not just to matrimonial disputes.
Marks & Spencer plc v Customs & Excise [2003] EWCA Civ 1448
M&S recently lost its case against the Commissioners of Customs & Excise
in respect of the VAT status of teacakes.
The Commissioners had previously advised that a teacake was subject to VAT whereas in actual fact it was subsequently discovered that teacakes were exempt. M&S requested that Customs repay the VAT overpaid in respect of the teacakes which went back for 20 years from 1994, amounting to £3.5m. Customs rejected the claim, which resulted in M&S taking their case to the Court of Appeal. At the Court of Appeal, Mr Justice Moses dismissed M&S’s claim for a repayment stating that 90% of the extra cost of the VAT had been passed onto the customer. However, M&S did win a separate appeal over a claim for overpayment in respect of gift vouchers.
M&S are currently waiting for the outcome of their case regarding the use of losses amongst an EU group and the UK, following the decision by the High Court to refer the matter to the European Court of Justice.
Regina (Browallia Cal Ltd) v City of London General Commissioners
In this case, a taxpayer had previously been denied a right to appeal against
an out of time loss determination.
The Inspector had issued a loss determination in July 2001 relating to the company’s accounting period to December 1995. The Inspector did not accept the taxpayer’s reasons for being unable to appeal the determination within the 30 day time limit and therefore, under section 49 of Taxes Management Act 1970, referred the case to the Commissioners.
In the absence of any further information, and being of the opinion that they had no more jurisdiction than that of an Inspector in determining the reason for the taxpayer being unable to appeal, the Commissioners rejected the application.
However, at the Queens Bench Division, Mr Justice Evans-Lombe (November 2003) said that the Commissioners should have considered the application in the interest of justice in deciding whether the application should go ahead. He stated that the Commissioners were not restricted in their own view of the determination, and that by outright refusal to hear the appeal, their own refusal should be quashed.
The appeal was therefore granted.
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