On 23 January 2013 the UK Supreme Court handed down its much anticipated judgment in R (on the application of Prudential plc and another) v Special Commissioner of Income Tax and another  UKSC 1. The Supreme Court decided with a majority of five to two that legal advice privilege cannot be claimed in relation to confidential communications between accountants and their clients entered into for the purpose of requesting or providing tax advice. Legal advice privilege can be claimed only where such communications are between qualified solicitors, barristers, foreign lawyers or in-house lawyers and their clients.
A team from Herbert Smith Freehills in London acted for the Law Society of England and Wales who intervened in this important appeal. A full description of the case can be found in our London e-bulletin of 23 January 2013.
The issues considered by the Supreme Court
The generally accepted rule is that legal advice privilege applies to all communications passing between a client and its lawyers, acting in their professional capacity, in connection with the provision of legal advice.
Legal advice privilege is narrower than litigation privilege in that litigation privilege also applies to communications with third parties (who do not need to be a lawyer) as long as they are entered into when litigation was in contemplation and are for the dominant purpose of the litigation. However, legal advice privilege (which can apply when litigation is not in contemplation) only applies to lawyer client communications.
The specific issue raised by the appeal is whether legal advice privilege should extend to legal advice provided by accountants in relation to tax avoidance schemes where such advice would have been privileged if it had been obtained from qualified (tax) lawyers. The wider issue considered by the Supreme Court is whether and to what extent legal advice privilege should be extended to members of other professions who “ordinarily” provide legal advice.
The English tax authorities issued notices to Prudential seeking disclosure of documents relating to a tax avoidance scheme operated by Prudential in accordance with advice obtained from its accountants. Prudential sought to have the notices quashed or limited so as to exclude documents which contained tax law advice provided by their accountants, claiming that such communications were protected by legal advice privilege.
Prudential sought to argue that legal advice privilege 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 legal advice privilege should be the function of the adviser (ie, advising on the law) rather than the status of the adviser (ie, whether or not a qualified lawyer).
The decision of the Supreme Court
The Supreme Court acknowledged modern developments according to which tax advice in England tends to be provided by accountants rather than qualified (tax) lawyers. Nevertheless, the majority of the Supreme Court led by Lord Neuberger delivering the leading judgment decided that legal advice privilege did not extend to advice provided by non-lawyers for the following reasons:
- Currently, the boundaries of legal advice privilege are clearly drawn and understood and there is little scope for uncertainty. If legal advice privilege were to be extended to members of other professions who “ordinarily” provide legal advice this would lead to an “unacceptable risk of uncertainty and loss of clarity in a sensitive area of law”. For example, it would not be immediately clear which professions should be covered, what should be protected where a mixture of legal and non-legal advice is given (as is more likely in relation to advice provided by non-lawyers) and how to determine whether a particular profession or a member of that profession “ordinarily” provides legal advice.
- The question whether and to what extent legal advice privilege should apply to legal advice provided by non-lawyers in the context of otherwise non-legal services is a question of policy which should be left to Parliament and determination by statute after a full and considered consultation. This is even more so as an extension of legal advice privilege to other professions is likely to have to be more differentiated as is the case in relation to the legal profession. By way of example, Lord Mance (who agreed with Lord Neuberger) referred to a statute and consultation in New Zealand and Australia respectively which provide for separate differentiated tax advice privilege rather than a wholesale extension of legal advice privilege to accountants. This approach is to ensure that there is still scope for tax authorities to obtain sufficient information to allow them to carry out their job. For example, under New Zealand tax laws “tax contextual information” is not covered by the special tax advice privilege.
- Parliamentary committees in England have repeatedly considered whether to extend legal advice privilege to accountants and there are several pieces of English legislation which have expressly extended legal advice privilege to other professions such as patent attorneys, trade mark agents and licensed conveyancers, but not to accountants or other professions. It is not open to the courts to go against Parliament by taking a different view on the matter.
It is noteworthy that Lord Neuberger saw considerable force in the arguments brought forward in favour of an extension of legal advice privilege to other professions where they provide legal advice but felt that it would be wrong for the courts to extend privilege to other professions. Lord Sumption who delivered one of the dissenting judgments pointed out that the refusal to extend legal advice privilege to other professions was “contrary to principle, discriminatory and out of date”. Lord Clarke who agreed with Lord Sumption urged Parliament to consider the matter “as soon as reasonably practicable”.
There are many voices that are calling for an extension of privilege to advice provided by other professions and particularly by accountants. However, in the absence of legislation which will need to go through the normal consultation processes, this decision of the Supreme Court has, for the time being, closed the door on legal advice privilege applying to anything other than communications involving legal advice provided by qualified lawyers or possibly non-lawyers under the supervision of qualified lawyers.
Although this decision is not binding in Hong Kong or Singapore, it will have considerable persuasive force and it is prudent to assume that it will be followed by the Hong Kong and Singapore courts. Clients are therefore advised to bear in mind that their communications with their non-lawyer tax advisers (or any other non-lawyer professionals) are likely to be discoverable in the case of litigation or investigations (regardless of whether they contain legal advice) and to be cautious when deciding what to include in such communications.