Inland Revenue relights the debate over legal privilege

When can disclosure be dangerous? The Revenue and lawyers are at loggerheads. By Joanne Harris

Legal privilege is something that lawyers take for granted. It is a long-enshrined fact of legal practice, confirmed by the highest courts, that what you discuss with your client remains confidential.

Increasingly, however, legal privilege is coming under fire. In August, Freshfields Bruckhaus Deringer was forced to defend its relationship with the Bank of England in the House of Lords, and it made a last-ditch effort to protect the confidentiality of correspondence between firm and client in the Three Rivers case. Luckily for Freshfields, the Law Lords decided in the firm’s favour, and the legal profession breathed a collective sigh of relief. The Lords’ reasoning is expected later this autumn.

But the moment of calm has proved short. New reporting requirements have once again brought the question of a lawyer’s exclusive right to legal privilege to centre stage. Accountants want recognition that some work they do is equivalent to legal advice and lawyers want to retain their rights.

On 6 October, the Inland Revenue announced that it is to amend disclosure rules in the Finance Act 2004 to ensure that all tax avoidance schemes are reported to the authorities.

The amendment means that although lawyers need not make a disclosure if they believe legal professional privilege applies, clients must report such a scheme. Accountants, in contrast, have to make the disclosure themselves.

The Law Society and the Institute of Chartered Accountants of England and Wales (ICAEW) both intervened in the discussions prompting the amendment. The Law Society obtained counsel’s opinion and published detailed guidance for the profession on 20 September.

In this guidance, the society’s position is clear. It states: “The Law Society is of the view that, in many cases, information that solicitors would be required to disclose under the tax avoidance regulations would be subject to legal professional privilege. Such information would not have to be disclosed to the Inland Revenue.”

However, the Inland Revenue has come to a very different view. It also consulted counsel and in a letter sent in August by the Paymaster General to Ian Young, chair of the ICAEW’s tax faculty, the Revenue said: “There’s nothing in the disclosure regime that prevents lawyers from complying with the rules in the same way as accountants and other advisers.”

The resulting amendment appears to be very much a compromise option. For the Revenue, it ensures that disclosure will be made while placating the Law Society, and, to an extent, the accountants.

Tax lawyers have welcomed the move. Kevin Ashman, a corporate tax partner at Lovells, said: “The new regulations preserve the fundamental human right of a client to consult with his lawyer in confidence.”

The Law Society also offered a cautious welcome to the amendment. It said: “We agree that, in principle, putting the disclosure obligation on the client does not necessarily infringe privilege and that, therefore, the regulations would probably be workable on this basis.”

Meanwhile, the Home Office has also been concerning itself with privilege, this time in an informal money laundering consultation. Both the ICAEW and the Association of Chartered Certified Accountants (ACCA) have published responses to the consultation on money laundering, which concluded at the end of September.

The two organisations have called for an end to what they consider “discrimination” against accountants in the way that the UK money laundering regulations have been applied.

As The Lawyer reported on 13 September, the ICAEW sought the opinion of Brick Court Chambers’ David Anderson QC to bolster its case that accountants should, according to EU law, be accorded equal rights to lawyers.

The Law Society riposted with an opinion of its own, which sources said came from Sir Sydney Kentridge QC, although the society denies that Kentridge was instructed.

The danger for legal privilege, as it currently stands, is that if it is extended to accountants, auditors and tax advisers as the money laundering consultation suggests, it may then need to be extended
to other professionals.

In its response, ACCA points out: “If the exemption is extended to the three ‘new’ categories of adviser, the Government should consider additional suitable provision to exempt insolvency practitioners from the basic reporting rule.”

ACCA stresses that it believes legal privilege protection should be given only to members of approved professional bodies, because of the “high standard of regulatory control” they exercise.

The accountants’ principle argument is that legal privilege gives lawyers an unfair competitive advantage. Modern businesses can increasingly choose between going to a lawyer and going to an accountant for broadly the same advice, and the accountants want that recognised.

“Where lawyers and accountants have equal competence in an area of work, they should be allowed to serve the interests of their client and the public interest with equivalent rights and controls to provide a level of competitive conditions,” argues Felicity Banks, head of business law for the ICAEW.

The accountants’ bodies stress that equivalent work in areas such as financial and tax advice is where they want legal privilege. They recognise the rights of lawyers to legal advice privilege in litigation – the variety of privilege contested in Three Rivers.

But it is clear that the ICAEW, ACCA and other accountants’ bodies all feel strongly that reporting requirements need equalising.

Whether the Home Office agrees is yet to be seen. Although the money laundering consultation period is over, some responses were delayed. The report is due towards the end of this month.

Whatever the consultation says with regard to money laundering, the chances are that the next time new reporting requirements for financial schemes become law, the debate will be renewed.