Prudential plc & Anor, R (on the application of) v Special Commissioner of Income Tax & Anor [2013] UKSC 1

The Supreme Court held, by a 5-2 majority, that legal advice privilege does not attach to tax advice given by accountants. Prudential could not resist HMRC's statutory notices for documents recording PwC's advice; any extension of the privilege beyond lawyers is for Parliament.

Facts

In 2004 the accountancy firm PricewaterhouseCoopers (“PwC”) devised a marketed tax avoidance scheme, which it disclosed to HMRC under Part 7 of the Finance Act 2004. PwC identified that the scheme could be adapted for the Prudential group of companies, which then implemented it through a series of transactions designed to generate a substantial tax deduction in Prudential (Gibraltar) Ltd capable of being set against profits ordinarily chargeable to UK corporation tax.

Mr Pandolfo, the inspector of taxes, wished to examine the transactions. He served notices under section 20B(1) of the Taxes Management Act 1970 (“TMA”) on Prudential (Gibraltar) Ltd and Prudential plc, giving them the opportunity to make specified classes of documents available. Prudential disclosed many documents but refused to disclose certain documents (“the disputed documents”), claiming legal advice privilege (“LAP”). With the authorisation of the Special Commissioners under section 20(7), the inspector served notices under section 20(1) and (3) on 16 November 2007 requiring disclosure.

Prudential sought judicial review of those notices. It relied on R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21, [2003] 1 AC 563, in which the House of Lords held that section 20 could not be used to compel production of documents protected by LAP, a “fundamental human right” which could be removed by statute only expressly or by necessary implication. Prudential’s difficulty was that the legal advice in question had been given by accountants, not lawyers.

Charles J dismissed the claim ([2009] EWHC 2494 (Admin)), holding that although the documents would have attracted LAP had the identical advice come from a lawyer, no privilege extended to advice from a professional who was not a qualified lawyer. The Court of Appeal (Mummery, Lloyd and Stanley Burnton LJJ) upheld that decision substantially for the same reasons ([2010] EWCA Civ 1094; both decisions reported at [2011] QB 669). Prudential appealed to the Supreme Court, which heard the appeal with interventions from the Law Society, the Bar Council, the Institute of Chartered Accountants in England and Wales, AIPPI UK and the Legal Services Board.

The statutory background

Section 20B(8) TMA provided that a notice did not oblige “a barrister, advocate or a solicitor” to deliver documents subject to a claim to professional privilege; section 20B(9)-(11) made separate and narrower provision for “auditors” and “tax advisers”, protecting relevant communications which were the adviser’s own property. Those provisions were substantially re-enacted in paragraphs 23 to 26 of Schedule 36 to the Finance Act 2008, paragraph 23 protecting “privileged” information by reference to legal professional privilege, with separate provisions for auditors and tax advisers.

Issues

Lord Neuberger framed the specific issue as whether a company served with a statutory notice may refuse to comply on the ground that the documents are covered by LAP where the legal advice was given by accountants in relation to a tax avoidance scheme, and the general question as “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, and, if so, how far LAP thereby extends, or should be extended”.

The narrower question was therefore whether LAP attaches to communications between chartered accountants and their client in connection with expert tax advice, in circumstances where LAP would undoubtedly attach if the same advice had been given by a lawyer. A subsidiary question was whether, if the extension were logically justified, it was nevertheless a matter for Parliament rather than the courts.

Arguments

For Prudential, Lord Pannick QC (supported by Ms Robertson QC for the ICAEW) argued that LAP is a common law right created by the judges which should be applied, and if necessary extended, in accordance with the principles underlying it. Since LAP is justified by the rule of law and exists for the benefit of the client, there was no principled basis for restricting it to advisers who happen to be qualified lawyers. Reliance was placed on modern practice (most tax advice is now given by accountants), on section 330 of the Proceeds of Crime Act 2002, on the Human Rights Act 1998 (articles 8 and 14), and on the Legal Services Act 2007, under which the giving of legal advice is not a reserved legal activity.

For HMRC, Mr Eadie QC (supported by Sir Sydney Kentridge QC for the Law Society, Mr Thanki QC for the Bar Council and Mr Edenborough QC for AIPPI UK) argued that it has been universally assumed that LAP is confined to lawyers’ advice; that extension would involve a nuanced policy decision with unpredictable and wide-ranging consequences best left to Parliament; and that Parliament has legislated on the assumption that LAP is limited to lawyers and has considered and rejected extension to tax advisers. It was also argued that there is a good principled reason to restrict LAP to lawyers, based on their relationship with the courts, judicial involvement in their discipline, and their duties to the court.

Judgment

The appeal was dismissed by a majority of five to two. Lord Neuberger gave the lead judgment (Lord Walker agreeing); Lord Hope, Lord Mance and Lord Reed gave concurring judgments. Lord Sumption dissented, with Lord Clarke agreeing with him and adding a short dissenting judgment.

Lord Neuberger (majority)

Lord Neuberger accepted that LAP applies to communications between a client and its lawyers in connection with legal advice, that it exists for the benefit of the client alone, and that it is a common law creation of great antiquity. He considered it unnecessary to decide whether allowing the appeal would extend LAP or merely identify its true breadth, because the key point was that “it is universally believed that LAP only applies to communications in connection with advice given by members of the legal profession”.

He identified seven sources supporting that universal belief: high judicial statements (Sir George Jessel MR in Slade v Tucker (1880) 14 Ch D 824 and Wheeler v Le Marchant (1881) 17 Ch D 675; Lord Atkin in Minter v Priest [1930] AC 558); decisions refusing to extend LAP to trade mark agents, patent agents and personnel consultants (Dormeuil Trade Mark [1983] RPC 131; Wilden Pump Engineering Co v Fusfeld [1985] FSR 159; New Victoria Hospital v Ryan [1993] ICR 201); textbooks; official reports (the Law Reform Committee’s 16th Report (1967) Cmnd 3472 and the Keith Report (1983) Cmnd 8822); the Government’s rejection in 2003 of the Director General of Fair Trading’s proposal; statutory extensions of privilege to patent attorneys, trade mark agents and licensed conveyancers; and the terms of section 20B TMA and Schedule 36 to the Finance Act 2008.

Lord Neuberger frankly acknowledged the strength of Prudential’s case in principle. He said it was “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”, and he regarded the principled arguments for confining LAP to lawyers (their relationship with the courts, disciplinary history, duties to the court) as “weak, but not wholly devoid of force”, noting that the extension of LAP to foreign lawyers further undermines them.

Nevertheless, invoking Oliver Wendell Holmes Jr’s observation that the life of the common law has been experience rather than logic, he held that a rule which is valid today may retain limitations explicable only by history, and that the courts should not always modify such limitations. He gave three connected reasons for leaving the matter to Parliament:

I reach this conclusion for three connected reasons, which together persuade me that what we are being asked to do by Prudential is a matter for Parliament rather than for the judiciary.

First, uncertainty: Lord Sumption’s formulation (a profession which “ordinarily includes the giving of legal advice”) was the most powerful available, but it would create an unacceptable risk of uncertainty. It was unclear whether town planners, engineers, pension advisers, actuaries, auditors, architects or surveyors would qualify; courts might have to “delve into the qualifications or standing, and maybe into the rules and disciplinary procedures, of a particular group of people” to decide whether they were a profession for this purpose. Difficult questions would arise where legal advice was only subsidiary to other advice, and about disentangling mixed documents; he illustrated the point by reference to Three Rivers District Council v Governor and Company of the Bank of England (No 6) [2005] 1 AC 610 and advice on presenting a case at a planning inquiry.

Secondly, policy: the implications were difficult to identify or assess and should be considered through the legislative process with its powers of inquiry, consultation and democratic accountability. Extension might only be appropriate on a conditional or limited basis — as the Keith Committee had recommended, subject to an override where privilege would unreasonably impede ascertainment of facts and excluding in-house advisers — conditions which Parliament, not the courts, could impose.

Thirdly, Parliament had legislated on the footing that LAP is confined to lawyers, and had extended privilege by statute to other professions in three instances which would have been unnecessary if Prudential were right. He rejected Lord Pannick’s reliance on Morgan Grenfell: there, the question was whether legislation had impliedly cut down a privilege which undoubtedly existed at common law; here, the generally accepted position was that the privilege claimed did not exist, and the statutes showed that Parliament, like the courts and commentators, so understood the law.

He also rejected the arguments based on the Human Rights Act (referring to Van der Mussele v Belgium (1984) 6 EHRR 163, AM & S Europe Ltd v Commission (Case 155/79) [1983] QB 878 and Campbell v United Kingdom (1993) 15 EHRR 137), on section 330 of POCA, and on the Legal Services Act 2007.

Lord Hope

Lord Hope agreed that a search for a principled answer might well support Lord Sumption’s view, and said he would find it hard to distinguish between accountants and lawyers as to standards of training or discipline. But adopting a functional test would change the ambit of the privilege and forfeit the “inestimable advantages of clarity and certainty”. Accepting Sir Sydney Kentridge’s point that change would need evidence that something was not working properly, he concluded: “We do not need to go down that road, and it seems to me that the wiser course is not to do so. If there are reasons of public policy for making the change, the matter should be left to Parliament.”

Lord Mance

Lord Mance emphasised that “LAP has developed and been accepted on a general basis in respect of lawyers because they are lawyers and their business is normally dealing with legal matters”, so no occasion had arisen to define particular privileged activities. Extension to other professions would require difficult distinctions between privileged and non-privileged activities. He drew on comparative material — the New Zealand statutory “tax advice document” privilege created by the Taxation (Base Maintenance and Miscellaneous Provisions) Act 2005, requiring disclosure of “tax contextual information”, and the Australian Law Reform Commission’s support for that model — to show that legislatures and law reform bodies considering the issue had thought qualifications necessary to ensure the revenue obtained a full understanding of the facts. He attached considerable importance to Parliament having maintained the distinction between lawyers and tax advisers.

Lord Reed

Lord Reed applied Lord Diplock’s analysis in Dorset Yacht Co Ltd v Home Office [1970] AC 1004 of the inductive and deductive stages of deriving legal principle. In every decided case in which LAP was upheld, the relationship was that of client and professional lawyer; that characteristic being absent here, the court faced a policy choice whether to extend. He stressed that “it is therefore highly desirable that the privilege should, as far as possible, be based upon a principle which is clear, certain and readily understood”, and that regard must be had to measures taken or not taken by the executive and legislature. He added observations (expressly not pre-empting a Scottish case) on Scots law, tracing the privilege from Creditors of Wamphray v Lady Wamphray (1675) Mor 347 and Mackenzie’s writings, noting that the Scottish authorities do not foreclose the possible application of the privilege to accountants but that the general understanding, textbooks, law reform materials and legislation (including section 75 of the Legal Services (Scotland) Act 2010) proceed on the basis that it applies to lawyers.

Lord Sumption (dissenting), with Lord Clarke

Lord Sumption would have held (para 114):

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 traced the history of the privilege from Berd v Lovelace (1577) Cary 62 through the Duchess of Kingston’s Case (1776) 20 St Tr 355 and Wilson v Rastall (1792) 4 TR 753 to Lord Brougham LC’s judgment in Greenough v Gaskell (1833) 1 My & K 98, arguing that English law had taken a functional approach ever since the privilege ceased to be founded on the adviser’s honour. The extension to salaried and foreign lawyers (Alfred Crompton Amusement Machines Ltd v Customs and Excise Commissioners (No 2) [1972] 2 QB 102; Lawrence v Campbell (1859) 4 Drew 485) reflected that approach and was not anomalous. He rejected the arguments based on accountants’ professional rules and on lawyers’ relationship with the court, noting that solicitors’ and attorneys’ professional standards were low when the modern principle was worked out.

He held that recognising the claim would not extend the common law but merely recognise as a fact that much legal advice is now given by non-lawyers; that Morgan Grenfell showed the difficulty of arguing that statutory provisions expressly reserving privilege in some circumstances impliedly override it in all others; and that “the truth is that Parliament was not intending to deal with the advice of non-lawyers at all”. Relying on Lord Slynn’s reasoning in Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70, he distinguished between legislation that merely assumes a state of the common law and legislation workable only if the assumption is correct. He considered floodgates fears extravagant, since the legal element in the work of surveyors, investment bankers and auditors is incidental, whereas tax advice is itself the service routinely sought from accountants. He concluded (para 131) that “[f]undamental rights should not be left to depend on capricious distinctions unrelated to the legal policy which makes them fundamental”, and would have allowed the appeal and remitted the case to the High Court to decide whether the material would have been privileged had a lawyer performed the accountants’ functions, with a direction to quash the notices if it would.

Lord Clarke agreed, illustrating the point with two clients, A and B, receiving identical tax advice from a law firm and from PwC respectively, and concluding: “In my opinion, the only principled answer to that question is yes.” He observed that the earlier cases denying privilege to trade mark and patent agents contained no principled analysis, and expressed the hope that Parliament would consider the whole issue as soon as reasonably practicable. He would expect Lord Sumption’s criterion to be satisfied only where the advisers are members of a properly regulated professional body.

Implications

The decision confirms, for England and Wales, that legal advice privilege is confined to communications with members of the legal profession (including, as Lord Neuberger noted, barristers, solicitors, CILEX members and, by extension, foreign lawyers), and does not attach to legal advice given by accountants, even where the advice is identical to that which a lawyer would give and even though the client is the holder of the privilege.

Importantly, the majority did not hold that the restriction is justified in principle. Lord Neuberger described the principled arguments for confining LAP to lawyers as weak, and Lord Hope accepted that a principled analysis might well favour extension. The ratio rests instead on institutional competence: the risk of uncertainty in a sensitive area, the policy character of the question (including the possibility that any extension should be conditional or qualified, as the Keith Committee and the New Zealand legislation illustrate), and the fact that Parliament has repeatedly legislated on the assumption that LAP is limited to lawyers and has extended privilege by statute in selected instances.

The judgment also clarifies the limits of Morgan Grenfell. The “necessary implication” principle protects an existing, undoubted common law privilege from implied statutory abrogation; the majority held it does not assist a party seeking recognition of a privilege which is generally understood not to exist, where statutory assumptions point the other way. Lord Sumption’s contrary analysis of the same authority is a dissent and does not represent the law.

Practically, the decision matters most to accountants and other non-lawyer advisers giving tax and similar advice, and to their clients: such communications remain vulnerable to compulsory disclosure under information powers (now Schedule 36 to the Finance Act 2008), subject only to the narrower statutory protection afforded to tax advisers’ own working papers and relevant communications. Clients seeking absolute confidentiality for legal advice will need to obtain it from lawyers. Conversely, HMRC and other regulators retain access to non-lawyer advisers’ advice.

The decision also signals the majority’s general approach to common law development: where a well-understood rule has a limitation which appears outmoded, the court will consider whether modification is better left to Parliament, having regard to whether the limitation has caused problems and whether Parliament has assumed, approved or disapproved it. Lord Neuberger left open that in another case such considerations “could be overcome if the court was satisfied that there was a pressing need”; no such need had been demonstrated here. Lord Reed expressly reserved the position in Scots law, noting that the Scottish authorities do not foreclose the question but that a similar policy judgment would have to be made. Both dissenters, and Lord Clarke expressly, invited Parliament to consider the matter.

Verdict: The appeal was dismissed by a majority of five to two (Lord Neuberger, Lord Hope, Lord Walker, Lord Mance and Lord Reed; Lord Sumption and Lord Clarke dissenting). Legal advice privilege was held not to extend to communications in connection with tax advice given by accountants, so Prudential could not resist the section 20 notices; any extension of the privilege to non-lawyers is a matter for Parliament. The dissenters would have allowed the appeal and remitted the case to the High Court.

Source: Prudential plc & Anor, R (on the application of) v Special Commissioner of Income Tax & Anor [2013] UKSC 1