Are accountants protected by legal professional privilege when required by HMRC to documents relating to their clients’ tax liabilities?Thursday, October 28th, 2010
In a decision given on 13 October 2010 in the case Prudential Plc & Anor, R (on the application of) v Special Commissioner of Income Tax & Ors, the England and Wales Court of Appeal ruled that legal professional privilege applies only to solicitors, barristers and appropriately qualified foreign lawyers.
In November 2007, Prudential was served by HMRC with notices under section 20 of the Taxes Management Act 1970 requiring the disclosure of tax-related documents. Prudential took the view that documents that contained legal advice on tax matters that they had received from legal Counsel, foreign lawyers and the accountants PricewaterhouseCoopers were protected by legal professional privilege (LPP) and should not therefore be disclosed to HMRC. Prudential brought proceedings for judicial review to challenge the notices and to establish the principle that LPP applies to advice received from accountants as well as from legal advisers. Prudential’s arguments were rejected in the High Court in October 2009 but the company appealed against that decision. The importance of the issue raised over the application of LPP to accountants led to permission being given for the Institute of Chartered Accountants in England and Wales, the Bar Council and the Law Society to “intervene” in the appeal by providing written submissions on the arguments.
Legal professional privilege is a ‘common law’ principle and, as such, is not defined in legislation. However, over several centuries the courts have restricted its application to legal advice given by qualified legal professionals, i.e. barristers and solicitors.
The statutory powers that enable HMRC to require the production of tax-related documents were defined in 2007, when Prudential first instituted proceedings, in section 20 of the Taxes Management Act 1970. Those provisions have since been repealed and are now to be found in Schedule 36 of the Finance Act 2008. For the purpose of this report, it is preferable to refer to the relevant paragraphs in the current legislation.
- Paragraphs 1 to 3: HMRC may issue an “information notice” requiring a taxpayer or a third party to provide information or produce a document that is reasonably required for the purpose of checking the taxpayer’s tax position. Such a notice must have prior approval from the appropriate tax tribunal.
- Paragraph 23: An information notice does not apply to information or any part of a document that is subject to LPP.
- Paragraphs 24 and 25: An information notice does not apply to information or documents which, in the case of auditors, are protected by specific legislation or, in the case of tax advisers, involve communications on the tax affairs of the adviser’s clients.
- Paragraph 26: The exceptions for auditors and tax advisers does not apply to information or documents that an adviser gives to assist a client prepare or deliver information or documents to HMRC. This means that correspondence and notes of conversations and meetings that belong to the adviser are protected but not any guidance given to a client on the preparation and delivery of accounts, returns or other documents sent to HMRC.
The exceptions provided in the legislation for auditors and tax advisers in paragraphs 24 and 25 fall well short of the blanket LPP exception for legal advisers in paragraph 23. The Appeal Court felt it was relevant to the case that the tax legislation makes specific and limited provisions for tax accountants and tax advisers.
In deciding that LPP does not apply to any professional other than a qualified lawyer, namely a solicitor, barrister or appropriately qualified foreign lawyer, the Court of Appeal raised a range of questions that would have to be answered if it were to be extended to accountants, such as how “accountant” would be defined, and what other tax advisers would be included. The court was of the view that such questions could only be answered by Parliament and, at present, Parliament’s intentions are as currently defined in the Finance Act 2008.
This decision, of course, may yet be appealed to the UK Supreme Court.