Case Comment: R (Prudential plc & Anor) v Special Commissioner of Income Tax & Anor  UKSC 1
25 Friday Jan 2013
This appeal concerned an issue which has caused vexation amongst professional services firms for some time: namely, why is it that legal advice given by non-lawyers (such as accountants giving tax advice) cannot attract legal professional privilege (LPP), when exactly the same advice would be privileged if given by a solicitor or barrister? In its judgment, handed down on Wednesday 23 January, the Supreme Court recognised that as a matter of “pure logic”, there was no reason to distinguish the two: however, by a 5-2 majority dismissing Prudential’s appeal, the court held that it was not willing to extend the boundaries of privilege to include anyone other than the legal profession, and any such change would be a matter for Parliament to decide.
In essence then, the judgment leaves the law on privilege where it is. The message for commercial parties is therefore clear: for legal advice on matters such as tax structures to be privileged, that advice must come from a lawyer. The court’s judgment has the merit of promoting certainty: for example, parties to litigation currently afoot will not need to reconsider their disclosure lists, and the current practice in the large accounting firms of giving advice on sensitive tax matters through the lawyers, following input from accountants, will continue. There were other sensible policy reasons why the majority (Lords Neuberger, Hope, Walker, Mance and Reed) felt unable to change the law, and indeed most practitioners may take the view that the court had little choice but to find as it did.
However, the judgment is perhaps most interesting for the dissenting opinions given by Lords Sumption and Clarke, who were in favour of extending privilege to cover legal advice given by professionals other than lawyers, in order to reflect what their Lordships saw as the reality of modern practice. Having traced the historical development of LPP back to the 1500s, Lord Sumption proposed a wider test for LPP based on “functionality” (in other words, looking at the function being performed and not merely the status of the advisor); and expressed a strong opinion (discussed further below) that in his view, the Supreme Court should be intervening to protect and shape “fundamental human rights at common law“, such as privilege, rather than leaving such issues to Parliament.
The facts of the appeal, and the procedural history, are described in our Case Preview. In brief, Prudential took legal advice from accountants at PWC in relation to a marketed tax avoidance scheme: the tax inspector sought disclosure of documentation relating to the scheme; Prudential resisted disclosure on the grounds that the advice was protected by LPP, and sought judicial review of the statutory disclosure notices served by the Commissioner for Income Tax under section 20 of the Taxes Management Act 1970.
At first instance (Charles J) and before the court of Appeal (Mummery, Lloyd and Stanley Burnton LJJ) Prudential were unsuccessful, despite the services of Lord Pannick QC as leading counsel. Before the Supreme Court, reflecting the significance of the appeal to the professions, there were interventions in support of the appeal by the Institute of Chartered Accountants, and in support of the respondents by the Law Society, the Bar Council, the Legal Services Board and the AIPPI (the trade body for IP practitioners).
The majority of the Supreme Court agreed with Charles J and the Court of Appeal, and adopted very similar reasoning. In the leading judgment for the majority, Lord Neuberger agreed with Charles J that there was a “compelling, and indeed unanswerable case that in modern conditions accountants have the expertise to advise on tax law” (41) and thus, by logic, their advice should be capable of attracting legal advice privilege (LAP), the sub-head of LPP with which these proceedings were specifically concerned. By contrast, the traditional reasons why LAP had remained the preserve of lawyers – for example, the duties owed by lawyers to court – were “weak” (42): properly construed (and here the majority adopted Lord Sumption’s historical analysis), LAP was a right of the client and not the lawyer (46), and so viewed from the client’s perspective, there was no reason why a client should be obliged to disclose a piece of tax advice received from PWC when it would not have to disclose the same advice if received from Freshfields (to use the examples cited by Lord Clarke).
It was clear, then, that the majority were attracted by Lord Sumption’s wider “functionality” test, to the effect that LAP should be extended to include legal advice given by a professional who “has as an ordinary part of its function the giving of skilled legal advice on the subject in question” (114). This could include accountants giving tax advice, and indeed could include other “members of a properly regulated professional body” (148, Lord Clarke).
However, there were two principal reasons why the majority felt unable to adopt the minority’s formulation, however tempting it seemed as a matter of pure principle:
- Uncertainty / loss of clarity. In essence, the court’s concern was where and how the line would be drawn. If the courts were obliged to enquire in each case into the professional status of town planners, pensions advisers, engineers, actuaries, architects and surveyors amongst other professions, it would lead to uncertainty, inconsistencies and increased costs (55 to 56). Further regard would then have to be given to individual pieces of advice: technical / commercial advice would need to be “disentangled” (60) from legal advice.
- Changing the boundaries of privilege was a policy issue for Parliament to decide. Extending LAP could have significant long term consequences, which Parliament (with its powers of inquiry and democratic accountability) was better placed to assess (62). Lord Neuberger felt that the court should only step in to move the common law from a generally understood position, if there was a “pressing need, in terms of the rule of law, injustice or even practicality” to do so (67). There was no evidence that the current system was failing in this way. Further, Parliament had on a number of occasions legislated on LAP (including in the Taxes Management Act itself) and found that it should extend to lawyers only, and in such circumstances the courts should be slow to override the apparent intentions of Parliament.
The issues in this appeal are clearly finely balanced. From the perspective of commercial parties, for whom the emphasis is on certainty, there is much to be said for the reasoning of the majority. Privilege is a complex issue which causes commercial parties considerable difficulties in practice, particularly when (a) national rules of privilege are inconsistent, and (b) the boundaries are shifted (as per, for example, the ECJ’s decision in the Akzo Nobel case (2010, C-550/07 P, to the effect that in-house lawyers are not sufficiently independent to attract LAP in the context of EU antitrust investigations). Fundamental changes to the rules risk undermining what Lord Hope described as the “inestimable advantages of clarity and certainty“: for example, one downstream consequence for parties to civil litigation would be a significant increase in the number of interlocutory applications to the courts under CPR 31.19 seeking rulings on whether particular documents are privileged or not, leading to delays and increased costs.
On the other hand, there are reasons to be sceptical about this ‘floodgates’ argument. Following the House of Lords’ decisions in the Three Rivers litigation, questions of purpose already arise in the law of privilege, of which Lord Sumption’s concept of functionality is a natural development. It would be tempting – particularly for those professions for whom LAP is an anomaly which imposes a professional disadvantage – to see the majority’s judgment as an example of the lawyers looking after their own, and there may be calls for the issue to now be referred to the legislature. However, it is questionable, even if there was sufficient momentum to sustain such a referral, whether it lead to the rule change favoured by the Institute of Chartered Accountants, given the preponderance of lawyers in Parliament. In short, it seems the status quo will be here to stay for some time.
Wider implications: the role of the judiciary in policy making
For those interested in constitutional checks and balances, the judgment raises some interesting wider questions about judicial compromise and the interaction between the roles of the judiciary and the executive in formulating and developing public policy – a subject which has been frequently debated on the pages of this Blog since the creation of the new court in 2009 (see for example the comments made by the current President when serving as the Master of the Rolls, referring to the UKSC as “the first taste of a constitutional court“.)
The majority in Prudential felt unwilling to take what would have amounted to a far-reaching policy decision. However, for Lord Sumption, the “function of the courts, and in particular of this court, [is] to ensure that changes in legal, commercial or social practice are properly reflected in the way that the law is applied” (128). Since the common law is the domain of judges, the Supreme Court should not shy away from taking decisions of public policy, particularly where those decisions involve fundamental rights. Instead, it should seize the opportunity to move the common law on with the times, since:
“[…] we are not here concerned with social or economic issues or other issues of macro-policy which are classically the domain of Parliament. Nor are we concerned with legal principles derived from statute. Legal professional privilege is a creation of the common law, whose ordinary incidents are wholly defined by the common law. In principle, therefore, it is for the courts of common law to define the extent of the privilege. The characterisation of privilege as a fundamental human right at common law makes it particularly important that the courts should be able to perform this function. Fundamental rights should not be left to depend on capricious distinctions unrelated to the legal policy which makes them fundamental.” (131).
All of this hints, intriguingly, that a new generation of judicial decision makers may see their roles in the constitution as subtly different – perhaps bolder and more ‘supreme’ in nature – than their predecessors in the judicial House of Lords.