Is there an arguable common law basis for accountants privilege?

This article looks at the English Supreme Court decision in R (on the application of Prudential Plc) v Special Commissioner of Income Tax) [2013] UKSC 1. The case involved an argument that the advice of accountants ought to enjoy a form of common law privilege independent of statute. The case was lost but largely due to a marked Judicial reluctance to do anything new rather than because the argument was unsound on a first principles basis.

The subject of legal privilege, and now increasingly accountant’s privilege, is always dear to the professional’s heart. On 23 January 2013 the United Kingdom Supreme Court issued a judgment on whether advice from PWC in a tax transaction could be classified as legal professional privilege on the grounds that it was legal advice. That Judgment is R (on the application of Prudential Plc) v Special Commissioner of Income Tax) [2013] UKSC 1.

From a lawyer’s perspective the knee jerk reaction is how could such a contention possibly succeed? This case shows, however, that appearances can be deceiving. The argument very nearly did succeed. In the judgment their Lordships reasoning does highlight the lack of a principled justification for the (distinction between?) the broad legal privilege but comparatively cramped and limited accountant privilege.

The factual background is in 2004 the appellant, the Prudential Group, sought advice from PWC about a scheme. Having received advice from PWC the Prudential Group implemented the scheme, which involved a series of transactions, which we would call an arrangement. The scheme produced a substantial tax deduction for the Prudential Group.

An inspector from the United Kingdom Revenue Authorities was interested in investigating the transactions and sought documents. The advice given by PWC was withheld. The inspector insisted that it be provided and the Prudential Group brought judicial review proceedings seeking orders that they did not need to disclose the advice because it was legal advice.

In terms of the legal background, the United Kingdom like New Zealand has an Act which provides for the management of the tax system. In the United Kingdom the relevant Act is the Taxes Management Act 1970 (TMA)[1]. In New Zealand it is the Tax Administration Act 1994 (TAA). The TMA like the TAA has provisions empowering the Commissioner’s staff to make legally compulsory requests for information: s 20 and s 17 respectively. In the United Kingdom the taxpayer does not need to provide legally privileged documents when such a request is made.

The United Kingdom provision does not explicitly exclude documents which are legally privileged. However it has been held in R (Morgan Grenfell & Co Ltd) v Special Commissioners [2002] UKHL 21 that because legal professional privilege is such a fundamental human right, in order for a provision like s 20 of TMA to require the provision of legally privileged documents there must be explicit wording or necessary implication. By necessary implication it is meant that such a result is arrived at from the language used and logic, not simply as a matter of interpretation.

Section 20 of the TMA also contains an explicit exclusion for tax advisor documents. The exclusion is expressed as follows:

“(9) Subject to subsection …(11) .. below, a notice under s 20(3)…(a)….., and (b) does not oblige a tax adviser to deliver or make available documents which are his property and consist of relevant communications.”

Thus critically, the argument advanced by Prudential Group was not that the advice fell within the scope of the tax advisor exception. Their argument was put more boldly and was that the advice attracted legal professional privilege because it was legal advice. Hence the judgment revolves around the issue of whether the concept of legal professional privilege should be expanded to include items that have the characteristics of legal advice but do not emanate from lawyers.

At first instance the claim was rejected. The Judge reasoned that while the advice would have been protected from disclosure if it was legal advice, in the sense of coming from a law firm, the advice in question did not attract such protection because even though identical in nature to legal advice, it came from a person who was not a lawyer.

The United Kingdom Court of Appeal upheld the judgment essentially the same grounds and the Prudential Group then appealed the matter to the Supreme Court (formerly the House of Lords).

In terms of legal professional privilege the parties were all agreed that it attaches to communications between client and advisor and entitles the client to object to the production of that communication. The communication does not need to be shown to revenue authorities or any other party, unless the client waives the privilege, a statute provides that the privilege can be overridden, the document in question was prepared for a nefarious purpose or one of the miscellaneous exceptions apply like those surrounding probate. (Unsure what this is saying exactly).

Within legal professional privilege one can distinguish between litigation privilege and legal advice privilege (LAP). The latter privilege applies to all communications passing between a client and their lawyers where the communication is advice. Encompassed by that privilege is advice which relates to the rights, liabilities, obligations or remedies of the client under any private or public law.

In R (Morgan Grenfell & Co Ltd) v Special Commissioners their Lordships set out the key principles of legal professional privilege and they are no different to the principles which apply here (what is here, accoutants privilege?). 

The issue in the case was the scope of LAP, which advisors it applies to. The question was whether LAP ought to apply to communications between a charted accountant and their client in relation to expert tax advice where undoubtedly the same communication if emanated from a lawyer would be LAP.

The argument supporting the view that PWC’s advice was legal advice was that LAP exists for the benefit of the client and that there is no principled basis for restricting legal advice to advice coming from lawyers as opposed to accountants. The argument was simply a matter of logic that if the subject matter of the communication meets the description of legal advice then it is difficult to see why it should not be covered.

The counterclaim was there existed an embedded assumption that legal professional privilege only applied to advice from lawyers and therefore any change was a policy matter best left to Parliament. That position was presented as follows:

  • The weight of judicial opinion is very strongly imbedded with the assumption that legal professional privilege only attaches to communications between lawyers and their clients.
  • The Courts have consistently refused past attempts to enlarge the scope of what was LAP..
  • Text books have confined LAP to communications between clients and lawyers.
  • Law reform reports have considered LAP to attach only to communications between clients and lawyers.
  • There is an implication in the way Parliament has expressed itself in the TMA and subsequent Acts that makes it clear Parliament intended LAP to apply only to communications between lawyers and their clients.
  • Acceding to Prudential Group’s argument would have a flood gates effect nnd there would be no principled way to prevent the argument applying to sources other than accountants as well.  

Lord Neuberger, Lord Hope, Lord Mance, Lord Reed and Lord Walker dismissed the appeal. All could see the force of the logic behind the argument for the expansion of LAP  but considered no change should be made to the status quo.

Lord Neuberger and Walker accepted that, in the words of Oliver Wendell Homes, Jr, “[t]he life of the [common] law has not been logic. It has been experience.”

Between all 5 of their Lordships the following reasons were given for refusing to extend the concept of LAP to legal advice emanating from accountants.

Firstly, it was considered that any such change should come from Parliament. In this regard there was nervousness about the consequences. Part of that uncertainty revolved around the question of where such a liberating approach would end in terms of the categories of people providing legal advice. For example, would it extend to town planners, actuaries and auditors? These issues of scope could lead to what is clear and certain law becoming vague and uncertain.

Finally their Lordships reasoned that the way in which Parliament has enacted the rules in the TMA and in other areas, creates a clear assumption that legal advice privilege attaches only to the legal advice of lawyers. Therefore it is implied that Parliament ought to be the one to change the rules.

Additonal to the above conclusions Lord Mance added the point that part of the reason why the present rules of privilege developed is because it can normally be assumed that lawyers are dealing with legal matters. The implication being that because of this assumption there was no need to dig around looking at the particular facts to determine whether the particular document contains the necessary factual ingredients to be classified as legal advice.

His Lordship referred to the New Zealand situation where Parliament has enacted a specific code to deal with privilege claims of accountants. Those rules are contained in ss 20B to 20G of the TAA. There had been a review of legal privilege in the United Kingdom by the Keith Committee and it has been recommended changes are adopted in the United Kingdom which in some way mirror our system and create a category of statutory privilege for accountants.

In R (Morgan Grenfell & Co Ltd) v Special Commissioners there was a spirited dissent by Lord Sumpton.  He considered the law to be that legal professional privilege attaches to any communication between a client and his legal advisor which is made: (i) for the purpose of enabling the advisor to give or the client to receive legal advice, (ii) in the course of a professional relationship and (iii) in the exercise by the advisor of a profession which has as an ordinary part of its function the giving of skilled legal advice on the subject in question.

Lord Sumpton considered that armed with that extant legal definition of legal professional privilege and the fact the privilege is the clients not the advisors, provided the advice was given in a professional context then the advice will attract legal professional privilege. That is even so where the advice does not emanate from a lawyer. He considered that in the context of tax advice the lawyer and the accountant are performing the same function and therefore the same legal consequences ought to flow.

Lord Sumpton considered his view to be utterly consistent with the rationale for the privilege. The source or root of the confidence attached to the communications covered is  the professional obligations of the advisor. In this regard his Lordship drew heavily on the European civil law and the French articulation of the justification for the rules of professional confidence.

Following a very comprehensive review of the authorities and rationale for the rule of legal professional privilege Lord Sumpton summarised his conclusions on the law by saying:

“Once it is appreciated (i) that legal advice privilege is the client’s privilege, (ii) that it depends on the public interest in promoting his access to legal advice on the basis of absolute confidence, and (iii) that it is not dependent on the status of the adviser, it must follow that there can be no principled reason for distinguishing between the advice of solicitors and barristers and on the one hand and accountants on the other. The test is functional. The privilege is conferred in support of the client’s right to consult a skilled professional legal advisor, and not in support of his rights to consult the members of any particular professional body.”

On that basis his Lordship would have allowed the appeal. His analysis does make it difficult to see why there should be fussy restrictive rules surrounding accountants privilege in this country. In some senses it can be seen as anti-competitive.

There is nothing to stop a similar argument being run in New Zealand. Just because there exists a code for accounting privilege does not mean that the in principle argument cannot be run. However the existence of such a code would most likely be the basis for a New Zealand Court rejecting the argument and suggesting that it is up to Parliament to make any changes.

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