The importance of providing tax advice in a privileged environment has been affirmed by a recent UK decision. The case highlights opportunities for lawyers and accountants to work together to provide better protection for their clients.
Given the overlap in expertise between specialist tax lawyers and their counterparts in the accounting profession, the question is often asked “how do they differ”? Whilst there are many similarities and some differences, one of the significant differences between tax legal and tax accounting advice is the ability for the client of a tax lawyer to enjoy the benefit of legal professional privilege. Privilege protects communications between lawyers and their clients, allowing clients to talk freely without fear that those conversations, and subsequent advice given, could later be disclosed either to the authorities (such as the ATO) or in litigation. In the context of taxation matters, this means that the Commissioner is unable to compel disclosure of privileged tax correspondence or advice, for either use during audit or in proceedings involving the Commissioner.
As the law presently stands, notwithstanding the skills, expertise or experience of a tax accountant, communications between a tax accountant and the tax accountant’s client are not protected by legal professional privilege. Accordingly, in the context of dealings with the ATO including during audit, the ATO is able to call for all communications and advice between the client and its accounting advisors, notwithstanding that had the advice been given by a lawyer, it would be privileged and could be withheld from the Commissioner.
Depending on the circumstances, disclosure of what was thought to be confidential advice could cause serious prejudice to the client.
Given that communications between us and our clients are protected by privilege, we can work with you and your client to establish an “environment of privilege”, thus ensuring that your client’s expert tax advice is protected. We can achieve this environment without interference to your client relationship, and will work with you on a collaborative basis to ensure the best outcome can be secured for your client.
In the recent UK Supreme Court decision R (on the application of Prudential plc and another) v Special Commissioner of Income Tax and another  UKSC 1, the Court considered whether legal advice privilege should attach to communications between chartered accountants and their client in connection with expert tax advice given by the accountants, in circumstances where that advice would have been privileged had it been provided by a lawyer.The Court held that legal advice privilege does not extend to communications in connection with advice given by professional people other than lawyers, even where that advice is legal advice which that professional person is qualified to give. This would include expert tax advice given by tax accountants.
The decision and reasoning of the Court applied long-standing and well understood principles which limit the extent of legal professional privilege.
Whilst the Court acknowledged that the arguments in favour of extending the principle to chartered accountants giving expert tax advice were “powerful”, ultimately the Court declined to extend the privilege.