UK Supreme Court gives voice to fundamental right of confidential legal advice between clients and their lawyers

As set out in our short e-alert on 23 January 2013, in Prudential Plc & Anor v Special Commissioner of Income Tax & Anor [2013] UKSC 1 (the “Prudential case”) the UK Supreme Court has handed down an important judgment rejecting an attempt to claim legal advice privilege with respect to confidential communications between accountants and their clients for the purpose of giving or receiving legal advice on tax law. As anticipated, the Supreme Court’s decision (a majority of five to two judges) confirms that, under the English common law, such privilege is restricted to confidential communications passing between qualified lawyers and their clients for the purpose of giving or receiving legal advice.  

In this article we will summarise some key points, while also summarising the Supreme Court’s reasons. In doing so, it is evident that there were some strong arguments for allowing the appellants’ appeal (which understandably had the support of the accountancy profession); particularly, given that the appeal focused on the substance (“function”) of the advice rather than status of the adviser. That said, the appeal was rejected principally on policy grounds, which we summarise below – see “Supreme Court’s reasons”.  

In the medium term, accountants and their tax clients may be forgiven for being disappointed. However, it will be interesting to see if the matter ends there, or whether accountants lobby the UK Parliament to legislate for a limited extension of legal advice privilege along the lines sought in the appeal. Going forward, the appellants and accountants will be fortified by two dissenting judgments in their favour; the strength of those two dissents suggests that, in the longer term, this may not be the end of the matter.  

Some key points

  • All the judgments expressly or implicitly acknowledge that, as a matter of English common law, legal advice privilege is an absolute fundamental right that permits of few limited exceptions.
  • What underpins the rationale for legal advice privilege is the need for clients to be able to instruct their lawyers with full candour.
  • Under English common law, legal advice privilege is a matter of the substance of the advice and the status of the adviser: (i) the confidential advice must be “legal advice” and (ii) the adviser must be a “qualified lawyer”.
  • A qualified lawyer (generally speaking) includes an in-house lawyer advising his “client”, provided legal advice is being given or asked for.
  • If someone wishes to minimise the risk of having to disclose advice they receive on their rights, liabilities and obligations under the law (including tax) they should obtain the advice from a qualified lawyer.
  • Given that legal advice privilege permits a party to withhold potentially relevant matters, it needs to be kept within clear confines. Convention over many years has limited the definition of a “legal adviser” for this purpose. Ultimately, this proved fatal to the appellants’ appeal; as did the accountants’ inability to precisely define whose advice should attract legal advice privilege.
  • Legal advice privilege is different (but related) to the protection afforded to confidential documents created for the dominant purpose of actual or anticipated adversarial proceedings (“litigation privilege”).
  • Once litigation is a real likelihood, documents created for the dominant purpose of the litigation attract litigation privilege such that they are protected from inspection by a third party.
  • Litigation privilege generally covers a wider set of people than legal advice privilege (for example, clients, lawyers and expert witnesses such as accountants) but a narrower range of documents.
  • Where legal advice privilege (or litigation privilege) applies a taxpayer can withhold documents in their possession from the UK revenue authority. However, the revenue authority is interested in seeking information about certain tax avoidance schemes designed by accountants and the documents in a taxpayer’s possession that evidence their motive in setting-up a certain tax structure. 
  • If in doubt, seek the assistance of a good qualified lawyer.

Dispute

The UK revenue authority served “information notices” on the appellant companies (“the appellants”) seeking documents in their possession with respect to what was said to be a tax avoidance scheme, including documents prepared by the appellants’ accountants.  

In short, the appellants challenged the information notices, by way of judicial review, on the basis that they were not required to disclose confidential communications in their possession if those documents evidenced legal advice from their accountants with respect to tax law.  

Issue

Simply put, the specific issue before the courts was whether at common law legal advice privilege applied to confidential communications between a client and an accountant seeking or giving legal advice on tax law with respect to a tax avoidance scheme. It was not disputed that the advice from the accountants in question was advice on the law as properly understood.  

More generally, the courts had to consider the status of a “legal adviser” for the purpose of legal advice privilege.  

First Instance and Court of Appeal

The appellants’ challenge failed in the courts below. It did so primarily on the basis that those courts felt constrained by previous case law that restricted legal advice privilege at common law to advice given by a “qualified lawyer” (“the qualified lawyer argument”). It would be fair to state that the first instance judge expressed some sympathy for some of the appellants’ arguments, but rather alarmingly mooted the possibility that the appellants’ arguments:  

“..could lead to a conclusion that to achieve parity between the client(s) of different professionals who are all by reason of their qualifications giving legal advice, the right given to clients of lawyers to refuse to disclose the legal advice they have been given (and related confidential communications) should be removed”.

That appears to have been enough for the Law Society of England & Wales to engage a leading firm of litigation lawyers and intervene in the court proceedings. The ICAEW (Chartered Accountants) and the English Bar Council, among others, also intervened in the appeal.  

The three judges of the Court of Appeal unanimously and decisively dismissed the appeal on two primary grounds. First, “the qualified lawyer argument”. Second, in any event, if legal advice privilege was to apply as the appellants argued that was a matter for legislation. Our “Legal Alert” in October 2010 summarises the Court of Appeal’s decision [click here for link].  

Supreme Court’s reasons

The leading judgment of the Supreme Court acknowledges the strength of logic in the appellants’ submissions that legal advice privilege should be extended to accountants giving advice on tax law because that was plainly legal advice. However, as a matter of precedent and policy, that argument was a step too far for the majority of the judges. What underpins the majority decision is a three-fold policy. These are set out in the leading judgment given by the recently appointed and much respected President of the Supreme Court (Lord Neuberger). They are as follows.

  • Need for certainty and clarity

Extending legal advice privilege to legal advice given by professionals other than qualified lawyers would undermine the clear and coherent basis for the privilege and lead to uncertainty. Who would be regarded as a “professional adviser” and in respect of what aspects of their advice? Which accountants, brokers, bankers, surveyors, pension advisers etc? An important passage from Lord Neuberger’s judgment (which lawyers will welcome) reads as follows (para. 59):  

“So long as LAP is limited to advice from members of the legal profession, the strong, and justified, presumption will be that LAP does apply in connection with any communications in that context, because lawyers normally only give legal advice. However, where members of other professions give legal advice, it will often not represent the totality of the advice, and there may well be difficult questions to resolve, as to whether, and, if so, in respect of which documents, LAP could be claimed”. (bold added)

If the appeal had been allowed this would have invited more disputes with the revenue authority concerning the disclosure of documents.

  • Role of Parliament and policy

If legal advice privilege is to be extended to legal advice given by other professionals that was a policy issue best left to Parliament. For example, balancing the delicate competing interests between taxpayers (in withholding disclosure) and the revenue authority (in obtaining disclosure).

  • Legislation to date

Tellingly, the appellants and the accountants could not point to a single example in the UK in which legal advice privilege had been extended to other professionals, except by statute; for example, patent agents, trade mark agents and licensed conveyancers.

Dissenting judgments

Without meaning to do a disservice to the two strong dissenting judgments, in short they focus on the substance (“function”) of advice given by accountants with respect to tax law, rather than the status of the adviser. The two dissenting judgments variously describe the distinction between different professions performing the same function as “arbitrary” and “capricious”. These comments are, presumably, not made lightly and they will resonate with many accountants (and some other professionals); particularly, in the context of a client’s fundamental right to obtain confidential legal advice.  

Some comment

Not unexpected – substance does not always trump form

The dismissal of the appellants’ appeal is not unexpected; the strength of the two dissents, perhaps, is. It is worth noting that of the eleven judges who heard the case, nine were in favour of limiting legal advice privilege at common law to qualified lawyers. For now, insofar as the status of the legal adviser is concerned, legal advice privilege is so limited.  

Obtaining tax advice

Given that the vast majority of tax advice in the UK is given by professional advisers other than lawyers, this suggests that taxpayers and clients do not select their tax advisers on the basis of seeking to attract legal advice privilege. However, going forward, certain taxpayers (for example, some high net worth individuals and multi-national corporations) may take a further look at involving their lawyers in order to enhance a claim to legal advice privilege with respect to certain communications created in a tax matter.  

Involvement of lawyers

Many accountants already employ inhouse lawyers. Confidential legal advice disseminated by in-house lawyers to their “client” should generally attract legal advice privilege. There are some exceptions.  

Tax advisers or accountants who involve external lawyers in their advice on tax law should be able to attract legal advice privilege, provided that the advice between the client, the adviser or accountant and the lawyers remains confidential.

The “brave new world” of legal services in UK

Given the evolving nature of how legal services are being delivered in the UK, it is perhaps a tad disappointing that the Supreme Court did not address this issue in more detail. The fact is that multi-disciplinary practices (MDPs) and alternative business solutions (ABSs) are a reality in the UK and will complicate how clients obtain legal advice; in this context, there is arguably some considerable force to the two dissenting judgments.  

Overseas interest

The Supreme Court judgment should be of considerable interest to some other common law jurisdictions and should be highly persuasive. For example, in Hong Kong, where seven retired or current judges of the Supreme Court (or its predecessor, the House of Lords) are visiting non-permanent judges of the Court of Final Appeal. Given the Hong Kong appellate courts’ long-held traditional approach to the scope of legal advice privilege, the UK Supreme Court’s judgment is likely to be followed should the issue arise in the foreseeable future in Hong Kong. The policy considerations would largely be the same.

Interestingly, without deciding the point, one of the judges (Lord Reed) hints that the policy underpinning the Supreme Court majority decision is likely to be applicable in Scotland and would involve a “policy decision” by the courts there.  

Some jurisdictions have legislation in place that gives varying degrees of limited statutory protection to tax advisers; for example, certain federal laws in the United States, in Australia and New Zealand.  

Legislative change?

Whether accountants lobby the UK Parliament for a similar limited statutory protection or bide their time and make another judicial challenge remains to be seen. In the current climate of “main street” public unease about some corporates not paying their “fair share” of business taxes and huge levels of public debt, one can foresee some resistance to legislating for a statutory (albeit limited) protection for tax practitioners; the ultimate beneficiaries probably being certain companies or entities seeking to devise tax avoidance schemes.  

Postscript

It is worth noting that over time the composition of the Supreme Court changes, as do governments. The Supreme Court is not a slave to its own precedent. In the past it has taken bold moves to change the common law. Witness the abolition of an expert witness’s limited immunity from being sued in negligence; Jones v Kaney [2011] 2 AC 398. That immunity had survived for centuries but a majority of five judges in that case, led by the then President (now retired), saw fit to abolish it without the need for public consultation or legislation; therefore, demonstrating that it is apparently easier for the Supreme Court to “take away” long entrenched common law protections than it is to “extend” them. Some expert witnesses may ruefully ask whether the Supreme Court as constituted in the Prudential case would have come to the same decision in Jones v Kaney or why did the need for legislation not weigh as heavily in that case?  

The changing composition of the Supreme Court and the nature of how legal services are delivered in the UK will not be lost on the accountancy profession. Neither will the two forceful dissents. Given the powerful competing interests at stake (revenue collection and legitimate tax avoidance) this is probably not the end of the matter.