In a judgment dated 14 October 2009, the High Court of England and Wales held in R (on the application of Prudential plc & Another) v Special Commissioner of Income Tax & Another  EWHC 2494 (Admin) that legal advice privilege applies only to legal advice given by a lawyer and not to legal advice given by a non-lawyer; in this case, an accountant.
Although it is expected to be appealed, the decision means that taxpayers who receive advice on tax law from accountants and other non-lawyers continue to have less protection than those receiving such advice from lawyers, with the result that non-lawyers’ advice is vulnerable to disclosure.
In the meanwhile, clients using non-lawyers for tax advice should consider whether their lawyers should also be involved to ensure communications are privileged. Similarly, law firms that use or employ non-lawyers (e.g., patent agents and trade mark agents) will need to have procedures in place to organise legal advice through lawyers. Interestingly, many firms of accountants now employ lawyers to advise on tax but, while the advice of such lawyers benefits from privilege, that of their accountant colleagues does not unless it is appropriately organised.
Under Section 20 of the Taxes Management Act 1970, HM Revenue & Customs (HMRC) were empowered, with the consent of the Special Commissioners (as they then were), to serve a notice (a Section 20 notice) requiring a taxpayer, or a third party, to deliver documents in that person’s power or possession, which, in the Inspector’s reasonable opinion contained, or might have contained, information relevant to the taxpayer’s liability to tax. (With effect from 1 April 2009, Section 20 notices were repealed and replaced by “information notices” by Schedule 36 to the Finance Act 2008.)
HMRC applied for Section 20 notices to be issued to Prudential for the disclosure of documents concerning a disclosed tax avoidance scheme. Prudential contested the notices before the Special Commissioners (as they then were) on the grounds that the notices sought material covered by legal professional privilege (LPP and the LPP challenge) and that did not, on any reasonable view, contain information relevant to a tax liability (the relevance challenge).
Prudential claimed that it was not obliged to comply with the Section 20 notices because common law LPP rules applied where accountants gave skilled professional advice on tax law. Prudential argued that this was neither an extension to LPP nor the creation of a new right, but an application of LPP in the modern context. As regards the relevance challenge, Prudential argued, first, that HMRC’s information request unlawfully departed from its previously published practice and, second, that the information sought was irrelevant to the determination of the proper tax treatment of the transactions carried out.
The Special Commissioners dismissed Prudential’s objections, as a result of which Prudential applied to the High Court for judicial review of HMRC’s and the Special Commissioners’ decisions.
The High Court (Mr Justice Charles) dismissed both challenges. Charles J concluded that Prudential had advanced a “compelling” and “unanswerable” case and accepted that accountants have the expertise to advise on tax law in the way that lawyers do in cases that establish LPP. However, he determined that precedent prevented him from developing the law in the way Prudential sought.
After reviewing in some detail case law on the scope of LPP as well as academic writings on the subject, Charles J concluded that, in particular, when considering legal advice privilege (one of the two parts of LPP, the other being litigation privilege), a logical application of the underlying principles and purpose that found both parts of LPP includes a consideration of the position and qualifications of the person giving the legal advice [emphasis added] and, therefore, it is permissible, as a matter of logic and principle, to draw a line by reference to that criteria.
The High Court accepted that there was “real strength” in Prudential's arguments that the right to LPP should not depend on the legal qualification of the person giving the advice and that, consequently, a “level playing field” should be created. However, Charles J considered that equality between different tax practitioners could equally be achieved by removing legal advice privilege entirely.
As regards the relevance challenge, the Court dismissed Prudential’s claim that HMRC had departed from its policy or practice on the basis that there was no such policy or practice. The Court noted, in particular, that Tax Bulletin 46, in which HMRC published the practice on which Prudential purported to rely, had been deleted in December 2003.
The High Court also dismissed Prudential’s argument that the material sought by HMRC was irrelevant to the determination of the tax treatment of the transaction carried out. The High Court noted that a similar argument had been raised and rejected by the High Court in R (Morgan Grenfell) v Special Commissioners of Income Tax  1 AC 563. The Court also emphasised that Prudential had to establish that HMRC and the Special Commissioners could not reasonably have held the views that they did. Charles J referred to e-mails which showed that the transaction documents disclosed to HMRC did not include all the facts because the e-mails suggested that steps in the transactions were pre-ordained. On that basis, the Court concluded that HMRC’s and the Special Commissioners’ decisions were not unreasonable.
Some Thoughts on the Decision
As Charles J stated, until R (on the application of Prudential plc & Another) v Special Commissioner of Income Tax & Another, there was no decided case in English law in which the application of LPP to tax advice from accountants about tax law had been specifically addressed and answered. For this reason, it is a significant decision, but also one which Prudential is likely to appeal.
Critics of the decision will, no doubt, raise the point that it maintains lawyers’ unfair advantage over accountants. The policy reason behind legal advice privilege is that a person should be able to make full and frank disclosure of his concerns to his lawyer without the risk of that information losing its confidential nature. Arguably, why should this apply only to lawyers and not to accountants, too? Of course, lawyers like the advantage this gives them but, from a policy perspective, it seems difficult to defend. Clients should not have to worry about the source of advice determining whether or not it is privileged.
Of particular interest is Charles J’s view that a “level playing field” could be created by removing legal advice privilege entirely. Although this may be too far-reaching a proposal, given the current crackdown on tax planning by governments around the world, it is conceivable that the UK Government may consider expressly removing the right to legal advice privilege in the context of investigations into tax avoidance schemes. However, as per Lord Hoffmann in the Morgan Grenfell case, “LPP is a fundamental human right long established in the common law […] It has been held by the European Court of Justice to be a part of Community law [and] the European Court of Human Rights has said that LPP is a fundamental human right which can be invaded only in exceptional circumstances.” Therefore, the extent to which the UK Government can or is willing to remove the right to legal advice privilege is debatable.
In the meanwhile, taxpayers who receive advice on tax law from accountants and other non-lawyers continue to have less protection than those receiving such advice from lawyers, and should therefore consult their lawyers and include them from an early stage in any projects.