UK: Supreme Court Confirms Privilege Does Not Extend To Accountants

Last Updated: 25 March 2013
Article by Rachel Couter and Hannah Parry

The Supreme Court yesterday confirmed that legal advice given by an accountant will not be protected by legal advice privilege (R (on the application of Prudential plc and another) v Special Commissioner of Income Tax and another [2013] UKSC 1).

Privilege – a quick recap

Privilege entitles a party to withhold evidence from production to a third party or the court.  If a document is privileged that privilege is absolute and absent consent or waiver production cannot be required.

Privilege is a common law creature and has been developed by the courts to ensure a person can seek legal advice candidly, secure in the knowledge that those communications cannot be used against them.  This, the theory goes, promotes the broader public interests of legal compliance and administration of justice.

Legal advice privilege ("LAP") is one sub-set of privilege and applies to confidential communications passing between a client and lawyer acting in a professional capacity for the purpose of seeking or giving legal advice.

In Prudential, the Court was asked to consider whether LAP covered legal advice provided to it by accountants.  The Prudential said it did, the taxman said it didn't.  

Prudential – the Facts

In very broad summary, following legal and tax advice from its accountants Prudential implemented a scheme aimed at reducing its overall fiscal liabilities.  Prudential was required under tax avoidance legislation to disclose the scheme to the Inland Revenue (now HMRC).  HMRC promptly served notices seeking disclosure of certain categories of documents relating to the scheme pursuant to its powers under the Taxes Management Act 1970 (now superseded by schedule 36 of the Finance Act 2008). 

Prudential refused to disclose a number of documents on grounds that LAP applied to them and subsequently sought judicial review of the validity of notices issued by HMRC compelling disclosure of the disputed documents.   

First instance and Appeal

Both the High Court and Court of Appeal rejected the application:  although it seemed likely that the disputed documents would attract privilege if they had been produced by a lawyer, because they had been produced by accountants the documents fell outside the privilege regime.  The boundaries to LAP had been clearly set in prior case law and both Courts felt bound by those authorities.

Supreme Court

The majority of the Supreme Court (Lord Sumption and Lord Clarke dissenting) agreed.  In the majority's opinion LAP did not cover legal advice given by professionals other than lawyers.  This was the scope of the rule as generally understood and assumed to be and the Court was not convinced that it could or should extend it.  This was because:

(a) the consequences of extending the rule to other professionals were hard to assess and would likely lead to uncertainty. This would be highly undesirable particularly in circumstances where the status quo was clear, well understood and easily applied;

(b)  whether or not to extend LAP raised policy issues which should be decided by Parliament;

(c)  Parliament has already enacted legislation which assumed LAP only applied to lawyers. This made it even less appropriate for the Court to extend the law.

Certainty v uncertainty

Of primary concern to the Court was that if LAP was held to cover advice from a wider category of "professionals" there would be many (identified and unidentified) difficulties in applying the rule.  Prudential had suggested that privilege should attach where a professional advisor gave legal advice in circumstances where such advisor was qualified to give such advice, ordinarily gave such advice and was appropriately regulated in doing so.

Lord Neuberger listed, for example, town planners, pensions providers and engineers.  He considered these may or may not be members of a profession for that purpose and may or may not be suitably qualified to give legal advice on areas within their expertise.  Extending privilege meant that discerning whether or not the individuals had the competence, authority or oversight could require a significant fact finding exercise.    Moreover if, as Prudential submitted, LAP was only to cover non-legal professionals if their profession was one which ordinarily included the giving of legal advice - this would be fraught with difficulties.  If part of the advice was legal and part non-legal – how would that be dealt with? What did it mean to ordinarily give legal advice in the course of business?

In contrast to this, the present position was simple, effective and efficient.  Was the legal advice from a lawyer?  If so, then it's probably privileged subject to a few clear exceptions.   The client knows where it stands, the advisor knows where he or she stands and third parties know where they stand.

It's up to Parliament

The Court further considered that an extension of LAP would potentially have a wide ranging impact which could not be second-guessed by the Court.  On the other hand, Parliament could debate, investigate and enquire as to the appropriateness of any extension of privilege and give it proper consideration through full consultation.  All of which would be subject to democratic accountability. 

Parliament's already decided

Moreover, Lord Neuberger considered that Parliament had already looked at the scope of LAP in the context of HMRC's powers to obtain documents and had nonetheless restricted LAP to communications with lawyers.  This, it said, made it even less appropriate for the Court to step in.   Legislation had also specifically extended LAP to apply to limited categories of non-lawyers, for example, patent agents, trade mark agents and licenced conveyancers - if Parliament had wanted to extend it further it could have done so. 

The minority view

In their dissenting judgments, Lord Sumption and Lord Clarke considered that whilst certain legislation and case law assumed LAP would only attach to lawyers' advice as a matter of policy, LAP would and should cover legal advice given by non-lawyers.  There was no justification, particularly in this day and age, to make any distinction on the basis of the identity of the provider of legal advice.  The test should primarily look at the nature of the advice and not the provider.  To suggest otherwise was illogical.   LAP is a creature of common law and can be redefined by the Courts.  If the scope of LAP was considered to be too broad then Parliament should curtail it.

The day to day

It is relatively rare to see a judgment which has so much sympathy with the losing arguments.  The dissenting judgments suggested a more radical reformulation of the rules on privilege which arguably would be more appropriate in the 21st  century landscape where lawyers are not the only ones properly giving legal advice.  The majority, however, preferred the status quo.

But what does the judgment mean for professionals and entities seeking advice and their advisors? 

In reality, the case probably confirms what most considered to be the case, namely, unless your advice is from a lawyer it will not be protected by privilege and might have to be disclosed to third parties in the future.    

As a practical measure, if there are particularly sensitive questions, or areas which need to be discussed or disclosed when seeking advice, it may be worth doing this through a lawyer or at least considering the implications properly before doing so. 

For their part, non-lawyer advisors will have to be more alive to the fact that the advice may be seen by regulators or others, and by the same token, more aware that clients may be reluctant to provide information with complete candour if there is a risk of future disclosure.  The extent of instructions and any caveats to those will have to be clearly set out in any advice given.

In the meantime, whether or not Parliament has the inclination to look at this in more detail remains to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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