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Supreme Court of the United Kingdom Rules That the UK “Legal Advice Privilege” Does Not Extend to Tax Advice Rendered by Accountants

Posted in Federal Taxation Developments

In R (on the application of Prudential PLC & Another) v. Special Commisioner of Income Tax & Another, [2013] UKSC 1, a 7 Judge panel of the UK Supreme Court, by 5-2 decision, reflected by a judgment given on 23 January 2013,  held that the U.K “legal advice privilege”  does not extend to legal advice rendered by someone other than a member of the legal profession unless there is a specific statutory exception enacted into law by the Parliament.  

The specific issue before the Supreme Court is whether, following receipt of a statutory notice from an inspector of taxes to produce documents in connection with its tax affairs, a company is entitled to refuse to comply on the ground that the documents are covered by the legal advice privilege (LAP) where the legal advice was given by accountants in relation to a tax avoidance scheme. The more general question raised by this issue is whether LAP extends, or should be extended, so as to apply to legal advice given by someone other than a member of the legal profession, and, if so, how far the LAP thereby extends, or should be extended.

Similar to 26 U.S.C. §7602, under §20 of the U.K. Taxes Management Act of 1970 (“TMA”), the inspector of taxes may issue a written summon to produce information “relevant to . . . (i) any tax liability to which that person is or may be subject, or (ii) the amount of any such liability”. Section 20(3) extended this power to require “any other person” to “deliver . . . or . . . make available” such documents to an inspector. By virtue of TMA, § 20(7), an inspector needed the consent of the special or general commissioners before serving a notice under either subsection.

Under case law precedent, R (Morgan Grenfell & Co Ltd) v. Special Commissioner of Income Tax [2002] UKHL 21, [2003] 1 AC 563 (“Morgan Grenfell”)  the provisions of  TMA §20 could not be invoked to force anyone to produce documents to which LAP attached.  There were other pertinent sections of the TMA and subsequent legislation that pertained to the LAP and ability to summons communications and other records involving an attorney and client.

Summary of Facts

 In 2004, PricewaterhouseCoopers (“PwC”), devised a marketed tax avoidance scheme (“the scheme”). In accordance with the requirements of Part 7 of the Finance Act 2004, PwC disclosed the scheme to Her Majesty’s Revenue and Customs (“HMRC”) .At about that time the Prudential group of companies instructed PwC to advise them in connection with certain overseas holdings, and PwC identified that the scheme could be adapted for their benefit. Thereafter the Prudential group implemented the scheme, which involved a series of transactions (“the Transactions”).  The aim of the scheme was to generate a substantial tax deduction in Prudential (Gibraltar) Ltd, a subsidiary company of Prudential plc, to be used to reduce the profits of that company which profits were ordinarily chargeable to corporation tax in the UK.

The inspector of taxes auditing Prudential group’s tax liabilities,  wanted to look at the details of the Transactions and served notices under TMA § 20B(1) on Prudential (Gibraltar) Ltd and Prudential plc (together “Prudential”) to make available specified classes of documents in relation to the Transactions prior to servicing notices under TMA §§ 20(1) and (3). Prudential disclosed many of the documents requested, but refused to disclose certain documents (“the disputed documents”) on the ground that Prudential was entitled to claim legal advice privilege in respect of them. The auditor then served notices under TMA §§ 20(1) and (3) on Prudential (Gibraltar) Ltd and Prudential plc respectively, requiring disclosure of the disputed documents.

Judicial Challenge Raised by Prudential

Upon receipt of the notices (summonses) Prudential filed for judicial review challenging the validity of those notices on the ground that they sought disclosure of the disputed documents which related to the seeking (by Prudential) and the giving (by PwC) of legal advice in connection with the Transactions, were excluded from the disclosure requirements of TMA §20 by virtue of LAP, in accordance with the above-cited decision of the House of Lords in Morgan Grenfell. The trial court denied the request (motion to quash) on the basis that the advice sought was not provided by a qualified lawyer even if the advice were otherwise identical in nature to that advice which a qualified lawyer would render. [2009] EWHC 2494(Admin). The trial court’s decision was affirmed by the Court of Appeal on essentially the same grounds. [2010] EWCA Civ. 1094.

Appeal to the Supreme Court of the United Kingdom

Having failed in its efforts to assert the accountant client privilege as qualifying for denying production under the LAP, Prudential appealed to the Supreme Court.  

In rendering its opinion, which affirmed the lower courts’ decisions, the Supreme Court began its analysis with a recitation of the “legal professional privilege” of which the LAP is a subpart.  

            “Where legal professional privilege (“LPP”) attaches to a communication between a legal adviser and a client, the client is entitled to object to any third party seeing the communication for any purpose, unless (i) the client has agreed or waived its right, (ii) a statute provides that the privilege can be overridden, (iii) the document concerned was prepared for, or in connection with, a nefarious purpose, or (iv) one of a few miscellaneous exceptions applies (e.g. in a probate case where the validity of a will is contested).”

The LPP is “a single integral privilege, whose sub-heads are legal advice privilege and litigation privilege”. This case is concerned with the LAP. The LAP applies to all communications passing between a client and its lawyers, acting in their professional capacity, in connection with the provision of legal advice, i.e. advice which “relates to the rights, liabilities, obligations or remedies of the client either under private law or under public law” (citations omitted).

The Supreme Court of the UK noted the identical rationale for the LAP and our own attorney-client privilege, citing the U.S. Supreme Court’s decision in Upjohn Co. v. U.S., 449 U.S. 383, 389 (1981), to ensure  ”full and frank communication between attorneys and their clients”, which “promote[s] broader public interests in the observance of law and administration of justice” . The foundation for this privilege is that clients are seeking the advice from lawyers, as compared to non-attorneys such as business advisors or other consultants. As with the our attorney-client privilege, the “client” holds the privilege and if the client chooses to divulge the information otherwise privileged there is nothing the lawyer can do.  

The LAP finds its roots in the common law of England with cases going back to the 16th century, i.e.,  Berd v. Lovelace (1577) Cary 62; Greenough v. Gaskell (1833) 1 My & K 98, 102-103.  The litigation privilege developed after the common law version of the LAP.

In this case, Prudential wanted to extend the legal advice privilege to bar disclosure or production of communications passing between chartered accountants and their client in connection with tax advice given by the accountants to their client, in circumstances where there is no doubt that LAP would attach to those communications if the same advice was being given to the same client by a member of the legal profession.  While there were “experts” proffered by Prudential to extend the LAP for tax advice rendered by chartered accountants, counsel for the HMRC argued that it is universally assumed that LAP is restricted to advice given by lawyers. The reasons for this limitation were: (i) the effect of extending LAP would involve a potentially nuanced policy decision, with unpredictable and potentially wide-ranging public and forensic consequences, which is therefore best left to Parliament, and (ii) Parliament has legislated on the assumption that LAP is restricted to advice given by lawyers, and has further considered and rejected a proposal to extend LAP to tax advisers. It was also argued that there is a good principled reason in the modern world to restrict LAP to advice given by lawyers.

After hearing the arguments raised by Prudential and the HMRC, the Supreme Court found the documents to not be privileged and were subject to disclosure.  In support of its ruling the Court felt there was a clear line of high authority over the past century and more that the LAP is to be confined to communications made between the solicitor or barrister and the client. Second, in recent cases, the courts have refused to extent the LAP to legal advice given by a trade mark agent, a patent agent, or a personnel consultant . (citations omitted). While additional rationales for its holding were set forth in the Court’s analysis, what the Court considered “most important” was that Parliament has legislated in a way which plainly implies that it assumes that LAP is limited to advice given by lawyers.