It is not unusual for accountants to provide clients with legal advice on tax related matters. What many clients may not have realised is that when it comes to the disclosure of such advice, the same rules do not apply that apply to legal advice received from lawyers. This could have a significant impact for a client in relation to whether it is able to withhold from showing the other side to a dispute what may constitute an important document.
The recent case of R (on the application of Prudential plc and another) (Appellants) v Special Commissioner of Income Tax and another (Respondents) confirmed that, at common law, Legal Professional Privilege (LPP) does not extend beyond the legal profession.
In brief, there are two main types of LPP:
Legal Advice Privilege (LAP) – this protects confidential communications between a client and his lawyer where the purpose of those communications is for the obtaining of legal advice.
Litigation Privilege – this protects communications between a client and his lawyer and/or a third party when such communications relate to legal advice, evidence or information created when litigation is contemplated or for actual ongoing legal proceedings.
Once LPP has been established, there are only very limited and exceptional circumstances when this can be broken.
In R (on the application of Prudential plc and another) (Appellants) v Special Commissioner of Income Tax and another (Respondents), Prudential Plc obtained legal advice from PWC in relation to a tax avoidance scheme. In 2007, Prudential were served with compulsive notices to deliver to HMRC documents which related to a tax avoidance scheme that Prudential were part of and that HMRC were investigating as being potentially unlawful.
Prudential brought a Judicial Review challenge against HMRC challenging the validity of the notices on the basis that the documentation sought by HMRC was protected by Legal Advice Privilege as it related to the seeking and giving of legal advice by PWC.
The case landed before the Supreme Court after Prudential’s argument was rejected by both the High Court and Court of Appeal. The Supreme Court was asked to rule on whether or not Legal Advice Privilege should attach to communications passing between accountants and their clients in connection with expert tax advice when, if the same advice had been given to the client by a member of the legal profession, there would be no doubt that Legal Advice Privilege would attach to those communications.
By a majority ruling of five to two, it was upheld by the Supreme Court that Legal Advice Privilege did not extend beyond the legal profession and would not therefore attach to communications passing between a chartered accountant and his client when giving expert tax advice. Although it was accepted by the court that “there is no doubt that the justification for LAP is as valid in the modern world as it was when it was first developed by the courts” and that “… it can fairly be said to be illogical in the modern world” the following reasons were given for the court’s decision:
- The consequences of allowing Prudential’s appeal are hard to assess and would likely to lead to what is currently a clear and well understood principle becoming an unclear principle, involving uncertainty.
- The question whether LAP should be extended to professional people giving advice who are not lawyers should be left to Parliament.
- Parliament has already enacted legislation which relates to LAP and has sought not to include the extension argued by Prudential so far, and therefore it would be inappropriate for the court to do so.
The majority opinion was that it is not always right for the courts to modify a common law rule, no matter how illogical or outdated it may be, by way of the limitations it places on modern practice. The uncertainty that such modification might create meant the court felt the issue was better left to Parliament. If LPP is extended to chartered accountants providing legal advice on tax related matters, the question it would pose is what other practices and professions should LAP extend to when legal advice is given by them.
It remains to be seen whether or not Parliament will legislate. However, until then, the position remains that when legal advice is given by someone other than a member of the legal profession, Legal Advice Privilege will not attach to those documents. Accordingly, any document containing legal advice and which is given by a professional outside of the legal profession will be disclosable.
Clients need to be aware of such issues if they are obtaining advice on accountancy/taxation issues prior to or at the same time as seeking legal advice. If there is any doubt, clients should seek legal advice first.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.
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