Headaches for UK tax advisers seem to be multiplying, in both frequency and
strength. They face an increasingly combative HMRC, as illustrated by the recent
YouTube broadcast targeting offshore account holders and the tough stance
announced against attempts to avoid the 50% tax rate. At the same time, the
price of unsuccessful tax planning is more likely than ever to be a negligence
claim by a client.
Given this background the decision of the High Court in Prudential v
Pandolfo, confirming that legal advice privilege (LAP) will not attach to advice
given by accountants, is all the more unwelcome for the profession, which has
long objected to the unfairness of this situation. The decision may be appealed,
but in the meantime, what are the legal and risk management implications of the
ruling for tax accountants?
Privilege: the Legal Environment
The Prudential case does not change the position of an accountant with
regards to privilege. While it reaffirms that LAP is not available in respect of
an accountant’s advice, it does not prevent an accountant from asserting, on his
client’s behalf, LAP in respect of documents created for the purpose of
obtaining legal advice from a lawyer (who may be in-house or external).
Further, the ruling does not prevent a tax accountant, when acting in the
preparation and presentation of tax litigation, from asserting litigation
privilege as distinct from LAP in respect of documents that he or she has
created for the dominant purpose of giving legal advice or obtaining evidence
and information for use in litigation.
Neither does the case impact upon those statutory provisions which limit the
scope of disclosure obligations that arise in specific contexts. For example,
the Taxes Management Act 1970 section 20(B) provides that a tax adviser is not
obliged to make available, in response to a section 20 notice, documents owned
by him in which he gave advice about his client’s tax affairs (although this is
subject to important exceptions).
Risk management implications
Negligence claims against tax advisers arise not only when tax advice is
technically wrong, but also when there has been a failure to advise properly
about risk, and in particular the risks that a particular scheme may be
challenged by HMRC and may fail. Unless the professional has documents
evidencing that he has given adequate advice, he will be at a disadvantage,
particularly if time has elapsed before clients bring a claim.
From a professional risk management perspective it is imperative that the
advice given, on technical tax aspects (including the options available) and on
the risks to the client, is documented, along with the client’s response.
Technical advice should normally be given in writing to ensure that the client
obtains an adequate understanding of the issues.
Accountants should not overlook the risk that clients will claim that they
have been exposed to an expensive HMRC enquiry because of the content of advice
for which no privilege could be claimed. To mitigate this difficulty, it is
worthwhile considering certain steps. For example:
* Ensure that the client is aware of the position regarding LAP, for example by
making it clear in the engagement letter that the tax planning advice given by
the accountant may have to be disclosed to HMRC in the event of an enquiry or
subsequent litigation, and indicating that lawyers may be instructed to advise
in certain circumstances, including where it is desired to obtain the protection
* Consider whether it is necessary for the client to seek legal advice on a
particular matter in order to obtain the protection of LAP.
l Any record of advice should be carefully drafted to avoid inaccurate and
careless phrasing which may create misplaced suspicion or misunderstanding on
the part of HMRC.
* Where feasible, consider recording non-privileged opinions relating to the
prospects for a scheme succeeding and the risks of HMRC challenge in a separate
document from advice setting out the legal basis of a proposed scheme. There may
be circumstances in which only the latter will be required to be produced in
response to disclosure obligations.
Given the interventionist intentions of HMRC with regards to what they see as
unduly aggressive tax planning schemes, it is important that tax professionals
protect the interests of their clients, but they should be careful that they do
not leave themselves open to claims for negligence.
James Roberts is partner, Andrew Forysth, associate director, and James Carter,
associate, in the accountants’ liability team of Barlow Lyde & Gilbert
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