Legal privilege in tax disputes: why it matters

Legal privilege determines whether confidential communications must be disclosed to a court, HMRC or another regulator when a dispute arises. In tax matters, that question is often harder in practice than it appears.

Tax enquiries tend to evolve. Advice is taken from different advisers and documents are created long before anyone is thinking about litigation. Questions about privilege therefore often arise late, once positions have been formed and records already exist. Getting privilege right early is an important part of managing tax risk.

This article sets out the core principles of legal privilege and how they apply in tax enquiries and disputes. It is the first in a four part series looking at common pitfalls and the practical use of privilege in the tax context.

What is legal privilege?

Legal privilege is a fundamental common law right. It protects certain confidential communications from compulsory disclosure to a court, an opposing party or a regulator such as HMRC.

The rationale is simple. Clients must be able to seek legal advice openly and honestly. Without that protection, advice would be incomplete or not sought at all.

The courts protect privilege robustly, but only where its requirements are met and where it has not been waived, deliberately or inadvertently.

English law recognises two forms of privilege: legal advice privilege and litigation privilege. They serve related purposes but operate differently and apply at different stages.

Legal advice privilege

Legal advice privilege covers confidential communications between a client and a lawyer made for the purpose of giving or receiving legal advice.

'Legal advice' is interpreted broadly. It includes not only statements of law but advice on what should prudently be done in a legal context, such as how to respond to HMRC enquiries or assess tax risk. Communications from the client seeking that advice are also protected. In practice, most direct lawyer–client communications will attract legal advice privilege.

The limits of legal advice privilege are often misunderstood. It does not cover:

• advice given by non lawyers, including accountants or other tax advisers;
• commercial or business discussions, even if lawyers are copied in;
• underlying factual documents which lawyers may be asked to review or advise on; or
• documents that are not confidential, including those shared so widely that confidentiality is lost.

It is therefore wrong to assume that all tax advice is privileged, or that copying a lawyer into correspondence creates privilege. The focus is on the purpose and content of the communication, not its subject matter or recipients.

Litigation privilege

Litigation privilege is broader in scope but more limited in when it applies. It can cover communications with third parties, such as accountants or experts, but only where litigation is underway or reasonably in contemplation and the dominant purpose of the communication is the conduct of that litigation.

In tax disputes, this threshold is often difficult to identify. Whether and when an enquiry has crystallised into a dispute that may be litigated is highly fact specific. Even where litigation is reasonably contemplated, documents may fall outside privilege if their dominant purpose is something else, such as preparing or filing tax returns. It is easy to assume that litigation is contemplated as soon as HMRC asks questions; in practice, that point is often reached much later, commonly when HMRC takes a formal step such as issuing an assessment or closure notice.

As a result, the timing of when litigation privilege arises, and which documents it covers, is often a key issue in tax disputes.

What privilege does, and does not, protect

Privilege protects communications and the documents recording them. It does not protect underlying facts, nor can it be used to hide transactions or arrangements simply because they carry tax risk.

Common misconceptions include the belief that:

• "Everything involving lawyers is privileged."

This is not the case. Draft documents, internal summaries of advice, or communications copied to lawyers for information may fall outside the scope of privilege, depending on their purpose and content. Copying a lawyer into correspondence does not, of itself, make that correspondence privileged.

• "If a document is labelled ‘privileged’, then it is."

Labels may indicate an intention to treat material as confidential, but privilege depends on substance and context, not form.

• "Privilege protects wrongdoing."

It does not. Communications made for the purpose of furthering fraud or other iniquity fall outside the protection of legal privilege altogether.

• "All advice on tax law and tax planning is privileged."

Clients often believe that any advice on tax law, and resultant planning or structures, will be privileged. This is not true; such advice is only privileged if given by a lawyer and will not be protected if given by (for example) accountants. These kinds of planning documents prepared by accountants are often one of the first things that HMRC asks for.

Understanding these distinctions is particularly important where documents serve multiple purposes or are shared among different advisers.

Why privilege matters in tax disputes

Privilege can materially affect how a tax dispute is conducted and resolved. It shapes what a court, tribunal or regulator is entitled to see and rely on. Internal analyses, risk assessments and commentary on tax positions can become highly sensitive if they are later found to be disclosable.

Privilege also has practical implications for risk management. How documents are created, retained and shared can determine whether they must later be disclosed. Clear document handling practices play an important role in preserving privilege where it properly applies.

Privilege issues also commonly extend beyond the immediate enquiry or appeal. Material created for tax purposes may later be relevant in negligence claims, trustee beneficiary disputes or contribution claims between advisers.

A foundation for what follows

This article has set out the basic principles of legal privilege in tax disputes and enquiries. The next article in the series will look at how privilege most commonly arises in practice, focusing on recurring problem areas where multiple advisers are involved or material is created at different stages of an enquiry.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2026