Financial Services Tax – UK Update from Dechert’s Tax Group - February 2013: Privilege and Prudence

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Legal advice privilege has seized the focus of attention yet again, as a result of the UK Supreme Court’s decision in Prudential delivered on 23 January 2013. In overview, Prudential sought to withhold documents including communications with PricewaterhouseCoopers from HMRC on the basis of legal advice privilege even though the advice — while concerning law — was given by accountants. A majority of the Supreme Court decided that legal advice privilege does not protect such communications and indeed only covered advice given by legal professionals, even where they do concern legal matters.

Legal advice privilege is an age-old concept in English law, and rests on the notion that if lawyers are to advise their clients competently, they will require knowledge of all pertinent facts. Thus in order to be more than merely illusory, the right to legal advice has to entail the right to speak freely to one’s legal advisor without repercussions. What has always been less established is the extent of legal advice, and in particular the thorny issue of what the privilege attaches to: the subject matter or the source. Legal advice privilege operates as an absolute shield to inquiry into privileged communications: a privileged advice note, for instance, could not be used as evidence in court or during an HMRC investigation. The decision in Prudential is therefore of great significance as demonstrated by the fact that the Law Society, the Bar Council and the Institute of Chartered Accountants were all given permission to make representations during the judicial passage of the case.

Legal advice privilege covers confidential communications between a lawyer and the client in a “relevant legal context” — whether involving a contentious or non-contentious matter. The privilege is strictly two-way: thus for instance an expert’s report relating to an issue the lawyer and the client are discussing would not fall under legal advice privilege (but may qualify for litigation privilege). The communication also needs to be confidential, i.e. once it is communicated to third parties, the privilege is broken. The result is that, for instance, documents passing between the lawyer and his client are immune to HMRC’s grasp, but documents passing to third parties who are unable to give privilege, such as non-legal advisers, are not.

The contentious question that remained unsolved over the centuries was what the privilege attached to. Was a statement privileged because it concerned legal advice (as the Institute of Chartered Accountants of England and Wales, intervening in Prudential, argued), or did it attach to the fact that the advice was given by a legal professional, as a majority of the Supreme Court ultimately decided? The fact that two of the seven Supreme Court judges dissented from the judgment illustrates the complexity of the issue. The dissenters (but also Lord Neuberger, who sided with the majority) suggested that the distinction drawn by the law is unreasonable in today’s world, but refused to engage in judicial law-making, leaving the issue for Parliament.

Pending any future Parliamentary action, the Supreme Court’s decision has clear practical implications for those who seek advice on a matter of tax law. Because legal privilege requires the advice to come from a lawyer, clients who wish to take the benefit of it will have to ensure that the advice originates with a lawyer, rather than, for instance, a tax accountant. Given HMRC’s current attitude to tax avoidance this is clearly a crucial consideration.

Case: R (Prudential plc and anor) v Special Commissioner of Income Tax and anor [2013] UKSC 1.