Case analysis – Prudential plc v Special Commissioner of Income Tax


In this important case the UK Supreme Court (replacing the House of Lords) has determined (by a majority of 5:2) that the taxpayer was required to produce documents to the inspector of taxes and that those documents were not covered by Legal Advice Privilege (LAP) where the advice was given by accountants in relation to a tax avoidance scheme.  The essential question in the case was whether LAP extends, or should be extended, so as to apply to legal advice given by someone other than a member of the legal profession (in this case to tax advice given by PwC), and, if so, how far the LAP thereby extends, or should be extended.

While the case does not deal with GST or VAT, it is an important decision because it had the potential to impact on the ability of the Revenue to obtain documents from taxpayers. It is established that the Revenue cannot obtain privileged documents (save for some exceptions, including where the privilege has been waived) – the extension of privilege to tax advice (which would include advice on GST) by accountants would greatly extend the scope to which taxpayers could refuse to disclose documents to the Revenue.

While the majority of the Lords found that LAP did not extend to the advice provided by PwC, the minority (Lords Sumption and Clarke) gave powerful dissenting judgments.  The majority essentially took the view that the issue was best left to Parliament. Nevertheless, the majority appeared to struggle with identifying why LAP should not extend to the PwC.  As noted by Lord Hope (at [79]):

A search for a principled answer might well lead one to the conclusion that there was no good reason at all for holding that the tax advice of chartered accountants should be treated differently from similar advice given by a barrister or a solicitor, as Lord Sumption’s powerfully reasoned judgment so ably demonstrates. He starts from the position that the English law has always taken a functional approach to legal advice privilege, and that all one needs to do is recognise as a matter of fact that much legal advice falling within the principles governing legal advice privilege is given today by people who are not lawyers.

In Australia, Accountants have been pushing for legal privilege to be extended to tax advice. On 15 April 2011 the Assistant Treasurer released a discussion paper which explores this issue and sought submissions from interested parties.  I believe the submissions are still being considered.

The Facts and the history of the proceedings

In about 2004 the taxpayer instructed PwC to advise them in connection with certain overseas holdings.  As part of that advice, PwC identified that a marketed tax avoidance scheme they had prepared could be adapted for their benefit.  The taxpayer implemented the scheme, the aim of which was to give rise to a substantial tax deduction in a subsidiary company of the taxpayer, which could then be set off against the profits of the taxpayer. The Revenue served notices on the taxpayer seeking disclosure of documents relating to the scheme.  The taxpayer refused to disclose certain documents on the basis that it was entitled to claim LAP. The taxpayer sought judicial review of the validity of the notices on the ground that they related to the provision of legal advice in connection with the transactions.

The application first came before Charles J who rejected in [2009] EWHC 2494, on the ground that, although the disputed documents would have attracted LAP if the advice had been provided by a member of the legal profession, no such privilege extended to the advice (even if identical in nature), provided by a professional person who was not a qualified lawyer.  The Court of appeal upheld the decision in [2010] EWCA Civ 1094, essentially for the same reasons.

The essential question before the Court was whether LAP should attach to communications passing between chartered accountants and their client in connection with expert tax advice given by the accountants to their client, in circumstances where there is no doubt that LAP would attach to those communications if the same advice was being given to the same client by a member of the legal profession.

The majority

Lord Neuberger (Lord Walker agreed) found that if the appeal was allowed, the Court would be extending LAP beyond what are currently, and have for a long time been understood to be, its limits.  Further, the extension would be considerable as the issue cannot simply be treated as limited to whether tax advice given by expert accountants is covered by LAP – this is because it would follow that legal advice given by other professional people would also be covered.  In this context, his Lordship found that the for most power formulation of the principle was that favoured by Lord Sumption (in dissent), namely that LAP is confined to cases where legal advice is given by a professional person “whose profession ordinary includes the giving of legal advice”.

His Lordship observed that the argument for the appeal was a strong one (at [40]-[41]):

40. There is no doubt that the argument for allowing this appeal is a strong one, at least in terms of principle, as anyone reading Lord Sumption’s judgment can appreciate.  LAP is based on the need to ensure that a person can seek and obtain legal advice with candour and full disclosure, secure in the knowledge that the communications involved can never be used against the person.  And LAP is conferred for the benefit of the client, and may only be waived by the client; it does not serve to protect the legal profession. In light of this, it is hard to see why, as a matter of pure logic, that privilege should be restricted to communications with legal advisers who happen to be qualified lawyers, as opposed to communications with other professional people with a qualification or experience which enables them to give expert legal advice in a particular field.

41. This is especially true at the present time when, as Lord Pannick pointed out, almost all qualified lawyers specialise in limited fields, and when the provision of legal advice is no longer a service limited to professional lawyers, as (in terms of practice) is demonstrated by the specific example of tax advice…

Notwithstanding this view, his Lordship was not prepared to extend LAP to the PwC advice, for three reasons.

First, the consequences of allowing the appeal were hard to assess and would likely lead to uncertainties.  At [59]-[60], his Lordship observed as follows:

59. Consider cases such as (i) a town planner instructed to try and obtain planning permission for a development or to advise whether it was needed or what had to be done to get it, (ii) a pension consultant asked to advise on whether a payment could be made, or a contribution should be demanded, by trustees of a pension scheme, (iii) a valuation surveyor asked to advise on rental value under a rent review clause or for rating purposes, or (iv) an auditor asked as to the appropriate treatment of a receipt or debt. In each such case, the issue on which advice is sought may well involve a point of law on which the professional concerned is well qualified to advise. In each case, it could very well be open to argument whether LAP attached to such advice.

60. So long as LAP is limited to advice from members of the legal profession, the strong, and justified, presumption will be that LAP does apply in connection with any communications in that context, because lawyers normally only give legal advice. However, where members of other professions give legal advice, it will often not represent the totality of the advice, and there may well be difficult questions to resolve, as to whether, and, if so, in respect of which documents, LAP could be claimed. For instance, it is unclear whether LAP would apply where the legal advice is only subsidiary, and, if so, how one determines subsidiarity; and, in a case where LAP could be claimed, there may be difficulties in deciding how to deal with documents (which may frequently be the majority of documents concerned with the giving of advice in the case) which contain legal and non-legal advice.

Second, the issues raised in the appeal should be left to Parliament to address, being issues of policy into which the courts should generally be reluctant to tread.  Thirdly, Parliament had on a number of occasions legislated relevantly in the field and on each occasion thought it appropriate to extend LAP on the basis that it was limited to advice given by members of the legal profession.

Lords Hope, Mance and Reed also found that the appeal should be dismissed, for similar reasons.

The minority

Lord Sumption gave the leading judgment of the minority.  His Lordship’s views are summarised in the following paragraph (at [115]):

In my opinion the law is that legal professional privilege attaches to any communication between a client and his legal adviser which is made (i) for the purpose of enabling the adviser to give or the client to receive legal advice, (ii) in the course of a professional relationship, and (iii) in the exercise by the adviser of a profession which has as an ordinary part of its function the giving of skilled legal advice on the subject in question. The privilege is a substantive right of the client, whose availability depends on the character of the advice which he is seeking and the circumstances in which it is given. It does not depend on the adviser’s status, provided that the advice is given in a professional context. It follows, on the uncontested evidence before us, that advice on tax law from a chartered accountant will attract the privilege in circumstances where it would have done so had it been given by a barrister or a solicitor. They are performing the same function, to which the same legal incidents attach.

The majority appeared to agree with his Lordship, insofar as the appeal raised a point of principle.  Unlike the majority, his Lordship was prepared to allow the appeal, rather than leave the matter to Parliament.

Lord Clarke agreed with Lord Sumption. His Lordship noted that the majority and minority judgments were at one on the point of principle, as observed at [141]:

The striking feature of the judgments of Lord Neuberger and Lord Sumption, and indeed of Lord Hope, is to my mind that they agree what the common law is or should be if the issue is treated as one of principle. As I see it, that principle can readily be seen by taking a simple example. Suppose that two individuals, A and B, have the same problem, the solution to which depends upon an application of the legal principles of taxation law to the same, or substantially the same, facts. Suppose that A seeks advice from, say, Freshfields, and that B seeks advice from, say, PricewaterhouseCoopers. Each asks the same question and gives an account of what are substantially the same facts to the person from whom the advice is sought. Each is receiving legal advice. The question for decision in this appeal is whether the information given and the advice received are privileged as legal advice. Are both A and B entitled to claim the privilege and refuse to disclose to HMRC the information and the advice?

Having found that the only principled answer to this question was “yes”, his Lordship found that it was impossible to see how LAP could properly be denied in the case of advice given by an accountant to give advice on the law of tax and that the Court should make that declaration.

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