High Court holds that legal advice privilege extends only to correspondence with lawyers


In a decision handed down on 14 October, the High Court (in judicial review proceedings) has confirmed that legal professional privilege (LPP) belongs only to clients of lawyers and not to clients of accountants even where the subject matter or advice given was the provision of tax advice. In consequence where documents brought into existence for the purposes of obtaining and giving legal advice enjoy the protection of LPP and may not be disclosed to third parties when the advice is given by a solicitor or barrister, the same is not true of such documents created for and by an accountant for the purpose of giving tax advice. The decision does not affect the position on litigation privilege.

Full disclosure of documents enables the Court to be properly informed and thereby promotes the administration of justice. Lawyers have a primary duty to the Court and to promote this objective. However, LPP is a common law right that was developed in order to protect the rights of individuals to obtain legal advice in confidence, subject strict limits. LPP extends privilege to documents created for the purpose of receiving advice to ensure clients are able to make full disclosure of the facts and circumstances to their legal advisers. There is a long line of cases which have limited LPP to lawyers for this reason.

In the context of the an enquiry made by HM Revenue and Customs ('HMRC') into a taxpayer's return, HMRC may not obtain any privileged material either from the taxpayer or from a third party about the taxpayer where the material in the hands of the third party remains privileged.

The Facts of the Case

HMRC issued two notices (under section 20(1) and 20(3) of the Taxes Management Act 1970, provisions since superseded by Schedule 36 to the Finance Act 2008) to Prudential seeking documents relating to a widely marketed tax avoidance scheme. Because of the intrusive nature of such notices, HMRC required permission from the Special Commissioners (as they then were). Notices could only be issued under these provisions where HMRC reasonably believed that the documents sought might be relevant to the tax liability of the taxpayer. Prudential sought judicial review of the decision to issue the notices on the grounds that (i) the documents sought were protected by LPP and (ii) that the information sought did not on any reasonable ground contain information relevant to the taxpayer's liability to tax.

The appeal therefore turned on two questions:

  • Whether LPP extends to clients obtaining skilled legal advice about tax law from an accountant as opposed to a lawyer; and
  • Whether the material sought was "relevant" to determining Prudential's tax liabilities.  

Decision: Legal Professional Privilege

Charles J held that he was bound by judicial precedent to find that LPP was only available to clients of lawyers and not accountants. He held that the Courts have unequivocally indicated that LPP is linked to the legal profession and not just to the purpose and nature of the advice and assistance sought. Accordingly, it does not attach to tax advice provided by accountants, despite the fact that it is legal advice. He acknowledged that:

  • Advice on tax issues is advice on law and that 'in modern conditions, firms of accountants give such advice'
  • There was force in the argument that a level playing field on the disclosure of legal advice to clients of lawyers and accountants should be created.

But he said that:

  • Clients of accountants have not been put off obtaining advice on tax law by the generally accepted view that they do not have the right to refuse to disclose that legal advice
  • There is a balancing act between the public interest in the Court having all the material before it and in the competing public interest in preserving confidence between a person and his professional adviser to promote the administration of justice
  • LPP is a 'fundamental' common law right which can only be usurped by express intention of Parliament
  • He was unable to extend LPP as Prudential had requested because the 'doctrine of precedent excluded him from developing the law'.

Decision: Relevance

The notices required Prudential to provide documents pertaining to the scheme which were discussed in internal email exchanges. The email exchanges had been provided to HMRC voluntarily but the documents referred to in the exchanges had not.

It was held that the information sought did or could reasonably contain information relevant to the taxpayer's liability to tax and so could reasonably be requested by an Inspector and further, neither the Inspector nor the Special Commissioner had acted unreasonably in relation to the request for and issue of the notices.

The concept of what was "relevant" information in these circumstances was interpreted broadly and not limited to 'factual material'. It could it seems extend to opinions. According to the judge, the decision before him was to ascertain whether the Special Commissioner's decision was perverse. The Special Commissioners had held that HMRC had not been provided with the key facts and that it was therefore entirely reasonable to seek additional documents which contained the missing links. It was up to Prudential to establish that the Inspector and the Special Commissioners could not reasonably hold the views that they did. The judge went further and observed that the Inspector need not be correct but he must be reasonable and that this will be a question of fact.

Impact of the decision

We expect this decision will be appealed and given the nature of the issue a leap frog to the Supreme Court would be warranted. In that case it is likely that the regulatory professional bodies and members of both professions will be involved.

The Treasury and HMRC continue to focus on tax intermediaries and the direction of current policy is to seek more disclosure from tax intermediaries not less:

  • In relation to banks, HMRC has issued a Code of Conduct which requires the board of directors to put in place arrangements to monitor products and tax planning so as to ensure that all products and planning fall within the sprit of the law and to sign a certificate to that effect.
  • The focus is now on tax agents. A consultation document (issued in April 2009) contains a proposal to require tax agents to disclose all names of clients whom they have advised in relation into tax schemes which are found not to work. This proposal if adopted would be impossible for lawyers to comply with as to do so would cause the lawyer to breach his client's privilege.