The First Tier Tribunal (FTT) has ruled that engagement letters are largely not subject to legal professional privilege (LPP), except in very limited circumstances, in a case brought by taxpayer, Edward Behague.

In the case of Edward C Behague v Revenue & Customs [2013] UKFTT 596 (TC), HMRC opened an enquiry into the taxpayer's affairs in November 2007. In April 2012, HMRC issued an information notice to Mr Behague, which the taxpayer appealed against on the grounds that the documents requested were subject to LPP and not reasonably required for the purposes of HMRC's enquiry.

The documents in question were an engagement letter between the taxpayer and his solicitors, and a report in relation to trust arrangements prepared by the solicitors. This case only concerns the LPP status of the documents with the appeal against the information notice itself being heard on 6 November.

HMRC accepted that all communications between the taxpayer and his solicitor for the purposes of giving or obtaining legal advice were subject to LPP. However, HMRC contended that engagement letters between a solicitor and his client were not privileged if they purely set out the terms on which the solicitor will act.

The FTT agreed that in so far as the client engagement letter sets out the terms of the contract it is not subject to LPP, so in general, engagement letters are not subject to LPP. However, it went on to look at what the actual engagement letter said and decided that three parts of the letter are subject to LPP because they set out what advice the solicitor would cover.

HMRC said that the solicitor's report on trust arrangements amounted to financial or wealth management advice and not legal advice. However, the FTT said that the report mainly consisted of legal advice and was subject to LPP. Finally the Tribunal ruled that even though the schedules themselves would not necessarily be subject to LPP, because their disclosure could identify the subject matter on which the solicitor gave the legal advice in the report, all the schedules were subject to LPP.

The ruling in this case highlights the precedent set by the Prudential legal privilege case earlier this year.

'This case provides a useful reminder of the issue of LPP in very simple circumstances,' says Meg Wilson, a CCH tax specialist. 'As the Supreme Court ruled in January this year in R (on the application of Prudential plc v Special Commissioner of Income Tax [2013] BTC 45, documents containing legal advice from accountants do not qualify for legal professional privilege.

'It is vital that accountants understand the rules of LPP and take action to ensure relevant documents retain their privilege. This is likely to be especially pertinent in multi-disciplinary practices.'

The decision was released on 21 October 2013. Read the judgment HERE