The Supreme Court confirmed today that legal advice privilege (“LAP”) cannot be claimed in respect of confidential communications between accountants and their clients for the purpose of requesting or providing legal advice. LAP can be claimed only where such communications are between qualified solicitors, barristers or foreign lawyers (including in-house lawyers) and their clients: R (on the application of Prudential plc and another) v Special Commissioner of Income Tax and another  UKSC 1.
Herbert Smith Freehills partners Heather Gething and Julian Copeman, assisted by Andrew Cooke, advised the Law Society of England and Wales on its successful intervention in the appeal. The Law Society was represented by Sir Sydney Kentridge QC, Tom Adam QC and Tim Johnston of Brick Court Chambers. The Bar Council, the Institute of Chartered Accountants in England and Wales (“ICAEW”), the Association Internationale pour la Protection de la Propriété Intellectuelle UK and the Legal Services Board also intervened.
By a majority of five to two, the Supreme Court confirmed the current position that LAP is confined to confidential legal advice provided by professional, qualified lawyers. The Supreme Court therefore accepted the Law Society’s position that LAP should not be extended beyond its current scope at common law and that any such extension was a matter for Parliament.
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Disclosure of documents, both to HM Revenue and Customs (“HMRC”) and in tax litigation, enables a proper investigation of a taxpayer’s liability to tax by placing before HMRC, the Tax Tribunal or the court all of the documents that are relevant to assessing that liability. This allows HMRC, the Tax Tribunal or the court to make a decision based on a review of all of the relevant evidence, so as to reach a just and fair conclusion.
However, the requirement for a taxpayer to disclose relevant documents is limited where they are covered by LAP. LAP is a necessary corollary of the right to obtain skilled advice about the law without fear that the information provided to a solicitor or barrister will be used to prejudice his client. LAP has been confirmed by the House of Lords as a fundamental human right. Where LAP applies, a taxpayer can withhold a document from disclosure to HMRC, just as in commercial litigation a litigant can withhold a document covered by LAP from disclosure. LAP therefore needs to be subject to clear limitations because its effect is to deprive HMRC, the Tax Tribunal or the court of potentially relevant evidence.
HMRC issued information notices (under section 20 of the Taxes Management Act 1970, now superseded by Schedule 36 of the Finance Act 2008) to Prudential seeking documents relating to a marketed tax avoidance scheme, details of which had been disclosed to HMRC under the Tax Avoidance Schemes (Information) Regulations 2004. Prudential brought proceedings for judicial review, seeking to quash or limit the notices, arguing that the notices unlawfully required Prudential to disclose documents that were subject to LAP. In particular, Prudential asserted that documents by which it had sought or received legal advice on tax matters from its accountants were within the scope of LAP and that the notices could not oblige Prudential to disclose such documents to HMRC. The issue to be decided by the Supreme Court was whether confidential legal advice relating to tax matters provided by an accountant rather than a solicitor or barrister could fall within the scope of LAP and therefore be protected against disclosure.
Prudential sought to argue that LAP should be available for advice on tax law given by accountants because accountants provide the same services as qualified lawyers in the context of giving tax advice. In that context, Prudential suggested that the determining factor for the application of LAP should be the function of the advisor (i.e. advising on the law) rather than the status of the advisor (i.e. whether or not a qualified lawyer).
Decisions of the High Court and Court of Appeal
The High Court (Charles J) and Court of Appeal (Mummery, Lloyd and Stanley Burnton LJJ) held that they were bound by previous Court of Appeal authority to find that LAP is restricted, at common law, to advice sought from or given by members of the legal profession (Wilden Pump Engineering Co v Fusfeld  FSR 159 followed).
In any event, the Court of Appeal also held that even had it not been so bound, it would not have accepted that LAP should be extended as requested by Prudential as any such extension was a matter for Parliament. (Click here for our bulletin on the Court of Appeal decision.)
Supreme Court decision
Lord Neuberger, giving the leading judgment with which Lords Walker, Hope, Mance and Reed agreed, held that Prudential’s appeal should be dismissed. He noted that whether Prudential’s case was that the Supreme Court should change the common law or merely “clarify” it, the fact is that previous authorities, textbooks and official reports all proceeded on the basis that LAP can only be claimed over advice provided by a qualified lawyer. He noted that, in principle, the case advanced by Prudential and the ICAEW that LAP should be based on the function of the communication (i.e. a request for or provision of legal advice) rather than the status of the advisor was a strong one. Nevertheless, he concluded that, as a matter of policy, LAP at common law should be restricted to communications between a qualified lawyer and his or her client and could not be claimed over communications between an accountant and his or her client.
While acknowledging that in the modern era, the scope of LAP did not reflect the fact that clients now seek legal advice from professionals other than qualified lawyers, Lord Neuberger declined to extend LAP at common law because:
- the consequences of extending LAP to confidential communications requesting or providing legal advice between professionals other than qualified lawyers and their clients were hard to assess and would lead to uncertainty in the application of a rule that is currently clearly understood;
- any extension of LAP raised questions of policy that should be considered by Parliament; and
- Parliament has in fact enacted legislation relating to LAP such that it would be inappropriate for the court to extend LAP.
Uncertain scope of the requested extension
Lord Neuberger rejected Prudential’s argument that LAP should apply to communications requesting or providing legal advice between a client and any member of a profession that was recognised as competent to give legal advice and appropriately regulated when doing so. Uncertainty in the application of that rule would be inevitable. Who is a member of a profession? On which areas of law is that profession competent to advise? How is that professional regulated when giving advice? Would evidence be required by the court, on a case by case basis, to answer each of these questions?
A policy decision for Parliament
Beyond the issue of uncertainty, Lord Neuberger considered that the intricate policy issues which could arise meant that it should be for Parliament, and not the courts, to consider whether to extend LAP in the manner that Prudential sought. Parliament could commission consultations and take evidence in relation to the likely impact of any extension to LAP in a manner that the Supreme Court cannot.
As a result of such processes, Parliament could conclude, for example, that LAP should be extended to members of particular professions but only on a limited or conditional basis. Parliament could limit any extension of LAP to advice given by members of a particular profession about only certain aspects of law, or legislate that LAP should be available only in proceedings against certain parties. In the USA, there is a statutory privilege for tax advice provided by a federally authorised tax practitioner to his client which can only be claimed against the revenue authorities and, even then, not in criminal proceedings or matters of state law. Similarly, both the USA and New Zealand have extended LAP by statute to tax advisors except where the advice concerns a tax avoidance scheme.
In the UK, Parliament is best placed to balance the right of a taxpayer to withhold disclosure of advice that he has received from his accountant with the public interest in ensuring that HMRC is provided with any material relevant to assessing a taxpayer’s liability to tax.
Parliament’s intervention in the context of LAP
Further, it was relevant that Parliament in the UK has considered whether to create an extension of LAP to advice given by tax accountants by means of primary legislation. In 1983, the Committee on Enforcement Powers of the Revenue Departments (chaired by Lord Keith of Kinkel) recommended that a limited tax advisor privilege should be enacted by statute, but Parliament did not act on that recommendation.
Lord Mance, in agreeing with Lord Neuberger, concluded that Parliament “has…specifically decided to maintain a distinction between lawyers and tax advisers when it was suggested that the latter’s advice ought to give rise to a general LAP paralleling that existing in respect of lawyers’ advice.”
The submissions of Prudential and the ICAEW received the support of two of the seven Supreme Court Justices hearing the appeal. Lord Sumption, with whom Lord Clarke agreed, held that LAP should attach to any communication between a client and his legal advisor which is made for the purpose of enabling the advisor to give or the client to receive legal advice in the course of a professional relationship and in the exercise by the advisor of a profession which has as an ordinary part of its function the giving of skilled legal advice on the subject in question. Lord Sumption therefore stressed the function of LAP, rather than the providence of the advice in question, which he considered relevant only to the historical development of LAP. He was therefore of the view that LAP should be extended to reflect a business environment where professionals such as accountants, surveyors and pension advisors might all be said to have expertise or experience in giving legal advice about particular areas of law.
Like the Court of Appeal, none of the Justices in the Supreme Court suggested that LAP should be limited so that it could not be claimed by clients of either solicitors or accountants in the context of tax litigation. Charles J at first instance had suggested this as a means to ensure a “level playing field” between solicitors and accountants in the tax advice market, but the Court of Appeal confirmed that LAP, as a fundamental human right, could not be limited in that way.
The continuation of the status quo is unlikely to prove problematic for the majority of taxpayers. Evidence presented by Prudential in the High Court was that 90% of all tax advice in the UK was provided by professionals other than lawyers. The ICAEW’s evidence before the Court of Appeal suggested that it was reasonable to assume that chartered accountants provide the majority of tax advice in the UK. Clients have not, therefore, selected their advisors to date based on whether or not the advice of that advisor would be subject to LAP and we would not expect that to change in the future.
All litigants that have to date asserted LAP over advice that they have received from their accountants pending final determination of the appeal will now have to disclose that advice.
Legal advice is usually irrelevant to the determination of a taxpayer’s liability to tax – the advice, whether right or wrong, cannot affect the liability. However, HMRC are interested to obtain disclosure of correspondence which points to the taxpayer’s motives or objectives in implementing an arrangement, which can be relevant to the assessment of tax. HMRC are inclined to read adverse motives into casual statements made via email. Cautious use of email is therefore prudent.
In any event, only bespoke legal advice can be subject to LAP. Generic advice given in the context of marketing a disclosable tax avoidance scheme is not subject to LAP. However, were a tax advisor to instruct counsel to provide a legal opinion prior to the marketing of a scheme to the professional’s client, he could claim LAP over that advice provided that it was shared with the his client on a strictly confidential basis and was not required to be disclosed under Part 7 of the Finance Act 2004 (or any other enactment).
More generally, the key point is that the application of LAP to disclosure reviews in litigation remains unchanged. Had Prudential and the ICAEW been successful, the process of disclosure in both commercial and tax litigation would have become much more intricate, with a corresponding increase in the time taken and costs incurred in document reviews. Practitioners would have been required to assess, in each case, whether legal advice had been sought from a member of a profession recognised as competent to give legal advice and appropriately regulated when so doing. That would almost certainly have given rise to an increase in satellite litigation, not least as practitioners sought to determine which areas of law fell within the expertise of particular professions. Lord Neuberger pointed to the difficulty in answering this question in relation to actuaries, auditors, architects, surveyors, town planners, engineers and pension advisors.
From a wider policy perspective, it is now clear that the courts will not permit a party to claim LAP over communications with a person who is not a qualified lawyer. It remains to be seen whether bodies of professionals such as accountants will now seek to bring about a change in the law via the legislative process. They would do so with the support of Lord Clarke, who “hope[d] that the whole issue will be considered by Parliament as soon as reasonably practicable.”
In the meantime, it remains to be seen how the development of multi-disciplinary partnerships including solicitors and accountants under the Legal Services Act 2007 will affect the provision of tax advice services as the legal advice of non-lawyer professionals appropriately supervised by lawyers may be subject to privilege. It is noteworthy that the Supreme Court declined to give the guidance sought by the Legal Services Board, intervening in the appeal, as to how it should discharge its statutory duties in this regard.