Abolish legal privilege for tax advice, says accountant

Dodwell was speaking at a debate on legal privilege held by Pinsent Masons, the law firm behind Out-Law.com, in conjunction with The Times. Dodwell argued that the reason that a taxpayer would want to claim tax advice was privileged would be to prevent HM Revenue and Customs (HMRC) from seeing the advice because it could give evidence of a tax avoidance motive.

The debate entitled "Legal Professional Privilege – only for the privileged?" was chaired by former judge of the Upper Tribunal and former President of the First-Tier Tax Chamber, Sir Stephen Oliver QC, and held at Pinsent Masons' offices in London on Monday evening. The debate was introduced by Frances Gibb, Legal Editor at The Times.

Sir Stephen Oliver outlined legal privilege, describing it as "one of the building blocks of the rule of law".

Legal professional privilege (LPP), or legal advice privilege, as it is sometimes called, attaches to confidential communications and evidence of those communications, between a client and its lawyers which were created for the purpose of giving or obtaining legal advice.

The debate followed a Supreme Court ruling in January 2013, in a case concerning insurance company Prudential, who had argued that tax advice given by accountancy firm PwC in relation to a tax scheme should attract LPP and therefore should not have to be disclosed to HMRC.

In a majority judgment, the Supreme Court ruled that LPP should only apply to communications between lawyers and their clients and not to accountants or other professionals. Any extension of LPP is a matter for Parliament, not the courts, it said.

Lord Sumption disagreed with the majority judgment. He said "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." He said: "It does not depend on the adviser’s status, provided that the advice is given in a professional context."

In the debate, Tom Adam QC of Brick Court Chambers, who, led by Sir Sydney Kentridge QC,  had represented the Law Society as an intervener in the Prudential case, said that Lord Sumption's dissenting judgment was right in identifying anomalies in the current position, but wrong in holding that the courts should rectify those anomalies through the common law. 

A ruling that the common law was making a general extension of legal advice privilege beyond its universally understood boundaries so as to cover advice about the law from non-lawyers would lead to a considerable amount of uncertainty as to what advice, and whose advice, was privileged under the new regime, he said. He said that this would create a large amount of satellite litigation. If this was to be done at all it should be done through the precision of statute, not by the courts, he said.

Adam said that extending the common law in this way could also have unintended consequences in respect of the impact on the scope of investigatory powers created by a substantial body of existing legislation. He also pointed out that such challenges had been made to the scope of legal advice privilege in other common law jurisdictions, such as Canada, and in none of these jurisdictions had the common law been extended. Any extensions of LPP to non-lawyers in other jurisdictions had been made by legislation not by the courts.

Tim Johnston of Brick Court Chambers, who also acted as counsel for the Law Society in the Prudential case, argued that, as a matter of constitutional law, the common law could not be extended as Prudential had argued. He said that Parliament had specifically amended privilege legislation in the past to include patent attorneys and they had debated and rejected arguments that privilege should be extended to accountants. On this basis, he argued that the judges could not go against the will of Parliament and extend privilege to other professionals.

Jonathan Fisher QC, a barrister from Devereux Chambers argued that the Prudential decision "ignores the practicality of what is going on in the real world". He suggested that with Alternative Business Structures (ABSs) now permitted, it would not be too long before lawyers and accountants would be operating in the same firm with files supervised by a lawyer simply in order to obtain legal privilege for the advice given. He expressed concern about Bill Dodwell's suggestion that LPP should be removed for tax advice. He made point that, when pushing boundaries, taxpayers should be free to take advice on risks without fear of disclosure. If the advice is disclosable, they may be dissuaded from taking advice and, because tax is complex, they might risk stepping over the line, with tax evasion being a criminal offence.

ABSs allow law firms to have non-lawyers in professional, management or ownership roles, something that was not previously permitted.

Mike Truman, an accountant and chartered tax adviser and the editor of Taxation magazine, said that he had some sympathy for the suggestion that privilege should be abolished altogether for tax advice but that if it was to be extended to accountants this could be done by extending the common law. He said that the Prudential case was an example of "high principle… overruled by weak fears". He argued that the whole purpose of the common law was that when the need arises it departs from "the well travelled path".

James Bullock, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com, queried whether the fact that advice from lawyers had the protection of LPP made any difference in practice. He referred to some research carried out by International Tax Review, where heads of tax at a number of multinational companies told the magazine that the Prudential decision would not make them choose lawyers, rather than accountants for tax advice. One head of tax was quoted in the magazine as saying that most corporates do not undertake tax planning expecting to hide advice behind privilege. 

Several members of the audience raised the issue of lawyers working for accountancy firms, who are not allowed to hold a practising certificate and therefore, as the law currently stands, their advice cannot be legally privileged.

In a straw poll of the audience, a clear majority agreed that the Supreme Court had made the right decision but a small majority thought that there should be parliamentary debate to remove the anomaly for tax advice. Barrister Graham Aaronson QC, who helped the Government to develop the General Anti-Abuse Rule (GAAR), asked from the floor for the audience to be asked whether the Supreme Court decision in Prudential left the law in a satisfactory state. Only a handful of the audience thought it did.

James Bullock concluded the debate by calling for a Ministry of Justice or Parliamentary consultation on whether the law should be changed.