Tax Accountant Advice Does Not Attract Solicitor Client Privilege in the UK

Subject to limited exceptions, communications involving legal advice between a lawyer and his or her client are privileged. As a result, a client can generally be confident that communications with his or her lawyer will not be disclosed to third parties such as the Canada Revenue Agency. However, a question arises as to whether tax advice provided by an accountant should also be privileged.

As discussed by Ian Gamble in his post of January 28, 2013, the UK Supreme Court recently declined to extend “legal advice privilege” (or “solicitor-client privilege” as it is referred to in Canada) to accountants in the UK. In that case, a large accounting firm provided planning advice to a client, which implemented the plan through a series of transactions. The company was audited in respect of the transactions and it refused to provide certain documentation with respect to advice it received from the accounting firm on the basis that legal advice privilege should be extended to such communications. The auditors obtained authorization from the Special Commissioners to have the documents disclosed, and the company’s judicial review application was rejected at each level of review on the basis that legal advice privilege does not extend to advice provided by accountants.

The UK Supreme Court reasoned that while it may seem illogical that privilege would extend to tax advice provided by a lawyer and not to the same advice when provided by an accountant, privilege has been established on a case-by-case basis and is not bound by logic. The Court concluded that if legal advice privilege was extended to tax accountants, uncertainty, inconsistency and unnecessary expenditure would ensue because the courts would be required to decide whether such protections should also be granted to communications with other professionals. The Court explained that this uncertainty is one that should be dealt with by Parliament and not the courts.

The question of privilege extending to tax accountants was considered by the Canadian courts in Tower v. M.N.R., 2002 FCT 929, rev’d for other reasons at 2003 FCA 307. In that case, the Federal Court of Appeal came to the same conclusion as the UKSC, however, it followed a different path of analysis.

The taxpayers and their accountant argued that their relationship should attract privilege either because (1) the relationship was akin to that of “solicitor and client”, or (2) because the relationship met the four-part test to establish privilege on a case-by-case basis, that is, (i) the communication was made with the assumption it would not be disclosed, (ii) the confidentiality is necessary to the full and satisfactory maintenance of the relationship between the parties, (iii) the relationship is one in which the community believes ought to be carefully fostered, and (iv) the harm that would result in the disclosure of the communication outweighs the benefits.

The Trial Court determined that privilege should not extend to accountants on the basis that the relationship was akin to that of solicitor and client because the purpose of protecting solicitor and client communications is to protect the administration of justice by allowing individuals to prosecute actions and prepare defences. The Court reasoned that an accountant is not a part of that process.

The Court also concluded that privilege did not apply on a case-by-case basis because it is necessary that income tax records be produced in order for the Canada Revenue Agency to verify an individual’s tax return. It explained that clients are aware that these records would need to be produced if a requirement is made. The Federal Court of Appeal agreed.

It appears clear that if tax accountants are to find success in extending privilege to their communications, it will have to be through legislation rather than through the courts as done in the United States (26 USC Sec. 7525).

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Note: Advice provided by an accountant may still attract privilege where the accountant is acting as agent between a lawyer and client. In such instances, it is important to ensure that the relationship is properly documented and that appropriate care is taken both by the accountant and the client to ensure that privilege is not accidentally waived. It may also be worth considering whether advice from an accountant may attract “litigation privilege”, a discussion of which can be found here.