In R (on the application of Prudential plc & anor) (appellants) v Special Commissioner of Income Tax & anor (respondents), the Supreme Court has held, by a majority of 5:2, that legal advice privilege (LAP) does not apply to communications between a client and an accountant seeking and giving legal advice on tax law. As a result, tax advice, when given by accountants, will not be privileged – even though the same advice would attract legal advice privilege if given by a solicitor.
The importance of this issue is reflected by the fact that seven members of the Supreme Court sat on the appeal. However, in rejecting the Prudential’s appeal, the Supreme Court has preserved what was generally accepted to be the status quo. The decision confirms that parties will only be able to rely on LAP if the relevant advice is given by a lawyer.
The Supreme Court’s decision accepted that the current limits of LAP are outdated but, for pragmatic reasons, concluded that an extension of the understood limits of LAP may do more harm than good. In his dissenting judgment, Lord Clarke expressed the hope that this issue will be considered by Parliament as soon as is reasonably practicable. However the Ministry of Justice has announced that it has no plans to amend the legislation to extend LAP to tax accountants.
HM Revenue & Customs (HMRC) served notices on the appellants (together ‘the Prudential’) under ss20(1) and 20(3) of the Taxes Management Act 1970 requiring it to provide information about a commercially marketed tax avoidance scheme. The Prudential resisted disclosure of some of the material sought on the basis that it was privileged. HMRC and the Special Commissioners rejected this argument, as did the judge at first instance and the Court of Appeal in judicial review proceedings subsequently brought by Prudential. Prudential appealed to the Supreme Court.
THE SUPREME COURT
Prudential’s main argument was, in broad terms, that it is now common for people to seek and rely on professional advice on tax law from accountants and there is no principled reason for LAP to be restricted to cases where the adviser happens to be a member of the legal professions, as opposed to a qualified accountant. The question of whether privilege attaches to legal advice should be determined by reference to the nature of the advice given, rather than the person giving it.
Although the majority accepted that the principled arguments for restricting LAP to communications with members of the legal professions were weak and ‘there is a strong case in terms of logic for allowing this appeal’ (Lord Neuberger), the Supreme Court rejected the appeal because:
- A reformulation of LAP would carry the risk of a clear and well understood principle becoming uncertain. There would be scope for confusion and inconsistency about which professions this applies to. Would it apply to architects and surveyors, for example, and would it apply to all of their advice or just some of it? At the moment, there is a strong presumption that LAP applies to any communications with members of the legal professions, because lawyers normally only give legal advice. Such a presumption would not apply in other professions.
- Given the significant consequences of extending the understood limits of LAP, it is more appropriate that the matter is left to Parliament to debate and deal with through the legislative process. Parliament may conclude that extending LAP to other professions is only appropriate on a conditional or limited basis.
- Parliament has legislated in this field on a number of occasions on the assumption that LAP only applies to advice given by lawyers. It would be inappropriate for the Supreme Court to depart from this assumption.
Lord Sumption and Lord Clarke gave dissenting judgments. Lord Sumption considered that the test for identifying the categories of adviser LAP could apply to was a functional one and that any distinction between lawyers and accountants who were both supplying the same skilled legal tax advice was both irrational and inconsistent with the legal basis of privilege. Lord Sumption said that LAP is a substantive right of the client which protects a client’s freedom of action when dealing with their legal advisers. Its availability does not depend on the adviser’s status, provided that the advice is given in a professional context.
Lord Sumption considered that the strongest argument for leaving the issue to Parliament to deal with was the argument at 3 above, ie that Parliament has legislated in this field on a number of occasions on the assumption that LAP only applies to advice given by lawyers (and indeed Parliament has considered on a number of occasions extending LAP to advice given by accountants, but has declined to do so). However, he concluded that this did not require the Court to refrain from giving a principled answer to the question. His main reasons were:
- LAP is a creation of the common law, not Parliament.
- Provisions in statutes proceed on assumptions about the common law, as declared by the courts. These assumptions may or may not be precise and it is the function of the courts to continue to clarify and develop the common law.
- The assumptions Parliament has made as to the scope of LAP are now contrary to principle, out of date and discriminatory. The courts should rectify the situation and ensure that legal, commercial or social practice is properly reflected in the way the law is applied.
- The concerns about LAP getting out of hand should not be addressed by discriminating between different categories of advisers. It can be addressed by the courts scrutinising the circumstances in which LAP is claimed and, in extreme cases, professional disciplinary actions.
Lord Clarke agreed with Lord Sumption and noted that it was a ‘striking feature’ of the judgments that they all agree with what the common law is or should be if the issue is treated as one of principle.