Tax Advice Given by Accountants Not Protected by Privilege

by Bennett Jones LLP

Legal advice privilege applies only to lawyers and does not extend to tax advice provided by accountants, the United Kingdom Supreme Court (formerly the House of Lords) confirmed in its first judgment of 2013: R (on the application of Prudential plc and another) v Special Commissioner of Income Tax, [2013] UKSC 1 (Prudential).

Legal advice privilege, also known as solicitor-client privilege, protects documents and other forms of communication from having to be disclosed. By successfully invoking legal advice privilege, a person is entitled to resist the disclosure of information or the production of documents that would otherwise have to be disclosed to others, for example to the other side in legal proceedings.

The UK Supreme Court rejected an argument that legal advice privilege should be extended to tax advice provided by accountants, and confirmed that only tax advice provided by lawyers is protected against disclosure. The tax advice provided by the accountants had to be disclosed to the tax authorities. Had the same advice been given by a lawyer, the advice would not have had to be disclosed.

In Prudential, PricewaterhouseCoopers (PwC) provided tax advice to Prudential's group of companies in an effort to minimize the tax Prudential was required to pay. The advice attracted the attention of a government tax inspector who requested release of specific classes of documents from Prudential. Prudential released some but not all of the documents requested, claiming legal advice privilege for some of them. The tax inspector applied for and received authorization from the UK tax authorities to require Prudential to release the disputed documents. Prudential appealed the authorization and the case went forward on judicial review, appeal and then to the UK Supreme Court. At each level, Prudential lost and the courts found that had the advice come from a lawyer the advice would have been protected from disclosure. However, because it came from a non-lawyer, even if it had been advice identical in nature to a lawyer's, that advice was not privileged.

Lord Neuberger for the majority reviewed the elements of legal advice privilege (the other common legal privilege being litigation privilege) and stated that legal advice privilege

... 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” – Three Rivers (No 6), [2005] 1 AC 610, para 38, per Lord Scott. (At para 19)

The justice then set out seven reasons not to expand the scope of legal advice privilege beyond advice given by members of the legal profession:

  1. clear judicial statements of high authority for over 100 years; 
  2. three more recent cases where courts have declined to extend legal advice privilege to advice from other professionals (trademark agent, patent agent or personnel consultant);
  3. textbook authority on privilege and evidence that legal advice privilege is limited to advice from legal professionals;
  4. official reports including Report of the Law Reform Committee that legal advice privilege is limited to advice from legal professionals;
  5. the fact that the executive branch of the government rejected a 2001 proposal that legal advice privilege be extended to legal advice from accountants (proposal made by the Director General of Fair Trading);
  6. legislation in Parliament that has maintained the distinction of legal advice privilege for advice from legal professionals only; and
  7. the House of Commons Public Bill Committee that reviewed legal advice privilege and accountants in 2008 but did not change the distinction between lawyers and accountants in provisions of the Tax Management Act.

Lord Neuberger quoted Lord Sumption regarding the scope of legal advice privilege, that it is "... confined to cases where legal advice is given by a professional person 'whose profession ordinarily includes the giving of legal advice'" (at para 38). Lord Neuberger found this formulation most powerful, based on its simplicity and consistency with which the courts have justified legal advice privilege. Increasing the scope of legal advice privilege was a policy decision likely to lead to profound uncertainty, thus outside the court's purview and squarely within Parliament's.

Lord Sumption and Lord Clarke dissented, calling for extension of legal advice privilege based on functional and policy reasons, while Lord Reed agreed with the majority (and expanded on similar treatment of legal advice privilege in Scottish courts). Lords Hope, Walker and Mance were also included in the majority in this five to two decision.

Prudential follows closely what has been the law in Canada for many years. In some circumstances in Canada it may be possible to shelter the input of accountants under the umbrella of legal advice privilege by properly structuring the relationship among the company, its lawyers, and the accountants, but the protection is generally limited and care must be taken.

In Canada, accountants have from time to time attempted to have legal advice privilege extended to their tax advice as well, with little success. While not binding in Canada, the Prudential decision is highly persuasive authority that the current Canadian position is to be maintained: tax advice provided by accountants is not as confidential as the tax advice provided by lawyers. It also stands as a strong warning against any assumption that privilege will extend automatically to members of other professions who give legal advice (whether or not they are qualified to do so).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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