Once more unto the breach: the FRC, strategic tax advice and litigation privilege

November 04, 2020

Key Takeaways

  • In Financial Reporting Council v Frasers Group plc, the High Court held that advice obtained from accountants on optimising tax strategy was not covered by litigation privilege, even though the advice was obtained ostensibly in order to prevent future litigation from occurring, and in circumstances where litigation was in reasonable contemplation.
  • The case provides guidance on applying the dominant purpose test, suggesting a distinction between past and future conduct.
  • The case also serves as a reminder that the courts will in general take a narrow view of the ‘dominant purpose’.

Background and history of proceedings

The background to the latest instalment in the long-running dispute between Sports Direct International (“SDI”) (now renamed Frasers Group plc) and the Financial Reporting Council (“FRC”) concerns distance selling arrangements adopted by SDI in relation to sales to customers based elsewhere in the EU. In brief, SDI’s arrangements were designed, “for perfectly valid commercial reasons” to ensure that VAT was payable in the UK rather than in the member state where the end customer was situated. SDI had disclosed relevant privileged material to its statutory auditors subject to a limited waiver of legal professional privilege (“LPP”).

During the investigation into the auditor, the FRC requested production under its SATCAR powers(on which, see our previous OnPoint here) of three such documents, over which SDI asserted litigation privilege. In brief, the FRC has authority to compel the production of documents both from entities subject to its regulation (in this case, SDI’s statutory auditors) and from clients of auditors (i.e. SDI). Privileged documents are however exempt from compelled disclosure. The three documents in question were PowerPoint presentations prepared by an accounting firm. They summarised proposed changes to the distance selling arrangements, the mechanics of how these would operate for VAT purposes, and identified certain commercial and legal considerations.

This is the third time in two years that the courts have had to rule on LPP disputes between SDI and the FRC. The original application, which concerned a variety of documents over which legal advice privilege or litigation privilege was asserted, had first been heard before Mr Justice Arnold in September 2018. Pending a (successful) appeal to the Court of Appeal on a separate set of documents (see our OnPoint on the Court of Appeal judgment here), the litigation privilege claim was stayed and a further hearing ordered. This judgment is the outcome of that hearing before Lord Justice Nugee.

Litigation privilege

The requirements of litigation privilege, a sub-set of LPP, are generally understood to be:

  • There must be pending or reasonably contemplated legal proceedings,
  • The communications or documents must have been made for the sole or dominant purpose of conducting that litigation, and
  • The litigation must be adversarial, not investigative or inquisitorial.

'Conducting’ litigation means seeking legal advice, evidence or information about obtaining evidence. In WH Holding v E20 Stadium,3 the Court of Appeal found that conducting litigation went to the merits of a case, as opposed to ancillary or commercial matters relating to litigation, applying the dominant purpose test relatively narrowly.

Litigation privilege applies to communications between a client or lawyer and a third party in the conduct of litigation; in contrast, communications solely between lawyer and client are protected by legal advice privilege whether or not litigation is in contemplation. In this case, the third party was a major accounting firm which, alongside an outside law firm, provided strategic VAT advice to SDI on changing and optimising its existing distance selling arrangements. The LPP dispute concerned the three presentations prepared by the accountants, over which only litigation privilege (and not legal advice privilege) could be claimed.

Was litigation in SDI’s reasonable contemplation?

SDI had received an email from the French government inquiring into the VAT implications of its distance selling arrangements, although the email did not threaten litigation. Other member state authorities subsequently also contacted SDI. SDI’s evidence was that the company was expecting full tax investigations and operating “on the basis that it would be involved in tax litigation in the near future.” SDI engaged the accountants and outside law firm shortly thereafter. The instructions included defending possible tax challenges and minimising the risk of litigation. Despite the “bland nature” of the email from the French tax authority, the judge accepted that SDI was reasonably anticipating litigation when the three presentations were created – the fact that outside counsel had by then been instructed probably being a relevant factor. The key issue was therefore not whether tax litigation was in contemplation, but whether the sole or dominant purpose of creating the presentations was the conduct of that litigation.

Dominant purpose

Broadly, there were three areas on which SDI received advice from the accountants (and from outside counsel): (1) lodging protective claims with HMRC for possible repayment of overpaid VAT, (2) preparing the best defence of the existing VAT structure, and (3) optimising the tax arrangements going forward to reduce the likelihood of successful challenge. SDI stated in its evidence that the changes it had made to its tax structure “were made… for the exclusive purpose of responding to the real and present threat of litigation that was anticipated from the … tax authorities.” The three presentations fell within this last category.

The judge did not have to determine whether (1) and (2) would satisfy the dominant purpose test, although it is clear that they would. (3) however, did not satisfy the test: the presentations had not been created for the dominant purpose of litigation. Had the objective been to defend the previous tax structure, the dominant purpose would have been to prepare for litigation. Where, however, the purpose was to put in place new arrangements “which would, it was hoped, have a better chance” of withstanding challenge, the test was not met. Thus, the presentations were “self-evidently not made with a view to taking advice about the old structure; nor [were they] made with a view to furnishing evidence, or the means of obtaining evidence, so as to defeat the claim.”

Past and future conduct

The court therefore drew an implicit distinction between past conduct and how this is best defended, in relation to which litigation privilege may be asserted; and future conduct, in relation to which litigation privilege may not in general be claimed. Nor was the court convinced by the argument that by advising SDI on its future tax arrangements, the accounting firm was in effect assisting it in heading off future legal challenge: “A taxpayer who takes advice as to how to structure his affairs does not do so for litigation purposes.


A number of points should be noted about the judgment:

  • While the past/future conduct distinction is a good starting point in assessing dominant purpose, it should not be pressed too far. It is clear that where the avoidance or settlement of litigation is the dominant purpose, litigation privilege may properly be claimed. Here, the judge was not satisfied that the purpose of the presentations was settling eventual future tax disputes.
  • The courts have been far from uniform in their application of the dominant purpose test. In some previous cases, both the Court of Appeal and High Court have aggregated a number of separate purposes into one single litigation purpose.
  • The application of the dominant purpose test therefore often hinges on fine factual distinctions and circumstances. Companies and individuals in receipt of a disclosure or production request should seek expert legal advice on whether they are entitled to withhold the documents.

How Dechert can help

Dechert has extensive experience advising corporates on various types of regulatory, administrative and criminal investigations. We are particularly well-placed to provide expert advice on disclosure obligations, including privilege issues arising in various jurisdictions, on how best to manage and respond to production requests, and on engaging with investigators and authorities in the process.



1) Statutory Auditors and Third Country Auditors Regulations (SATCAR) 2016, S.I. 2016/649.
2) [2020] EWHC 2607 (Ch). 
3) [2018] EWCA Civ 2652.

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