The Supreme Court has refused to extend legal privilege to accountants offering tax advice.
The ruling will be welcomed by lawyers who would have faced increased competition from their accountancy counterparts had the ruling gone the other way.
It is a major win for Blackstone Chambers’ James Eadie QC who picked up the mandate to represent HM Revenue & Customs at the Supreme Court, in place of Devereux Chambers’ Timothy Brennan QC, who led the defence at the Court of Appeal (CoA).
Eadie beats his setmate David Pannick QC, who was instructed by PwC Legal partner Agnes Quashie for the appellant Prudential.
Pannick was instructed to lead the battle to overturn a 2010 CoA ruling and extend legal privilege to accountants providing legal tax advice (13 October 2010).
The case concerns Prudential’s refusal to hand over documents to the tax authorities concerning a marketed tax avoidance scheme. The insurer had informed HMRC of the scheme but said it should not be forced to hand over the documents because, it claimed, such documents were covered by legal professional privilege.
HMRC disputed this and took the point to the Supreme Court. Such is the importance of legal professional privilege that the Legal Services Board (LSB), the Law Society and the Bar Council intervened.
One Crown Office Row’s Philip Havers QC is instructed directly for the LSB, which intervened when the case reached the Supreme Court.
Herbert Smith Freehills partner Heather Gething instructed Sydney Kentridge QC of Brick Court Chambers for the Law Society, while the Bar Council turned to Bankim Thanki QC of Fountain Court, who was instructed by Field Fisher Waterhouse.
Simmons & Simmons instructed Fountain Court’s Patricia Robertson QC for the Institute of Chartered Accountants in England and Wales, which intervened in support of the appellants.
Also intervening was the Association Internationale pour la Protection de la Propriété Intellectuelle UK Group. Gowlings instructed Serle Court’s Michael Edenborough QC for the IP group.
Commenting on the outcome of the case Osborne Clarke partner Peter Clough said tax accountants would be “crying into their soup tonight, and tax lawyers will be dancing in the streets”.
He added: “The case presents a clear-cut choice for clients: if you want confidential tax advice, you’re better off going to a law firm.”
The Supreme Court assembled a panel of seven justices to hear the case, a sign of its significance. The ruling went by a majority of five to two with Lord Sumption and Lord Clarke dissenting.
An HMRC spokesperson said: “This is the latest in a series of important legal rulings which make it very clear that the principle of legal professional privilege applies purely to advice given by qualified lawyers.
“The right to see tax advice provided by accountants plays an important role in our work against tax avoidance, helping to establish the right tax position. Today’s decision is a good one for the majority of taxpayers who follow the letter and spirit of the law. Tax avoiders should not be able to conceal their true intentions or arrangements from us.”
The legal reaction:
Serle Court’s Michael Edenborough QC, who represented AIPPI
“AIPPI UK argued that it would be better if Parliament considered the whole issue, and in particular the international ramifications, rather than leaving the matter to the court, which could only deal with the particular issue raised by the parties. AIPPI UK is seeking to establish international agreement that would protect from forcible disclosure the advice given by specialist IP advisors, be they traditional lawyers or patent or trade mark attorneys.”
Pannone head of dispute resolution Paul Jonson
“The Supreme Court rejected arguments that legal advice privilege (a particular type of confidentiality protected by the courts) should be extended to advice provided by accountants and other non-lawyer professional advisers.
“It therefore remains the case that clients need to be cautious when communicating with their tax accountant for example as such communications may have to be given in their entirety to the authorities such as Her Majesty’s Revenue & Customs.
Taylor Wessing partner Andrew Howell
“This morning’s judgment is no surprise. The Supreme Court majority decided that to extend privilege beyond the legal profession would create uncertainty; and is a matter that should only be decided by Parliament.
“So the anomaly on legal privilege remains. The client can take the same advice from a lawyer or an accountant; but only communications with the lawyer will be privileged from future disclosure.
“There is obvious force in Lord Sumption’s dissenting judgment however. If the key to privilege is the nature of the advice which the client seeks, not the status of the adviser, why should privilege be the exclusive preserve of the lawyer?
“The debate as to the legal profession’s supposed competitive advantage in providing tax advice will no doubt continue.”
Pinsent Masons James Bullock, head of Litigation and Compliance
“Legal professional privilege is a rule of evidence designed to protect individuals against disclosure to the Court. It is therefore about the rights of litigants – not, as some have sought to portray it, about professionals lining their pockets.
“Legal professional privilege should not be used as a marketing tool by any profession.
“The restriction of legal professional privilege to advice given by a practising solicitor or barrister ensures that the advice in question is given by a person who is both professionally qualified and rigorously regulated. That is not to say that other professionals giving advice on the law are not, but in any extension of legal professional privilege that underlying principle needs to be maintained. This is best done by Parliament, following an extensive consultation”
DAC Beachcroft partner Ross Risby
“Accountancy firms and the ICAEW will no doubt be disappointed with the outcome. In their view it maintains an anti-competitive environment where clients are discouraged from seeking tax advice from accountants and, instead, are pushed towards the additional protection that legal advice from a lawyer can provide.
“However, despite the weight of the principled, dissenting approach taken by Lord Sumption and Lord Clarke, the majority decision to maintain the certainty provided by the status quo was the only practicable outcome the Court could have reached.
“To grant Prudential’s appeal could have had drastic knock-on consequences at a time when the Jackson reforms are being introduced to reduce the cost of resolving disputes. Had LAP increased in scope, parties to litigation would inevitably have sought to claim LAP over a wider range of documents. This would have led to disruption, disagreement and increased cost to all parties (including funders and insurers) with an increase in interim applications and satellite litigation.”
CMS Cameron McKenna partner Rupert Choat
“Solicitors and barristers will welcome the judgment because it maintains their special status. The key benefit of this judgment is clarity as to when legal advice privilege exists and when it doesn’t.
“Accountants and other professionals who give legal advice should continue to advise their clients that their advice is generally disclosable to third parties. They will be disappointed, but for now the law is clear. The court has left it Parliament to legislate. As Parliament is well-stocked with lawyers it has to be doubtful whether it will bother.”