Is tax advice given by an accountant covered by legal professional privilege?
09 February 2016
Posted by: Author: PwC South Africa
Author: PwC South Africa
Does SARS have the power, in investigating a taxpayer’s affairs or in the context of a disputed tax assessment, to demand that it be allowed to scrutinise documents generated by his professional advisers that record tax advice that was sought and given?
This depends on whether those documents are privileged in the legal sense of the word, for neither SARS, nor a court, nor any other person, has the right (unless a court order determines otherwise) to be given sight of another person’s documents that are covered by legal professional privilege.
Legal professional privilege is thus the basis on which a person can lawfully refuse to disclose, to any other party or to a court, legal advice that had been sought and given to him in confidence by a lawyer, and such privilege provides a person with the assurance that he can make full and frank disclosure to his lawyer of information or documents that could be damaging if they were to come to the knowledge of outsiders.
It is difficult to imagine that any legal system could function without some rule of this kind. As Binns-Ward J said in South African Airways v BDFM Publishers (Pty) Ltd ZAGPJHC 293 at  –
‘The right of a person to a guarantee of confidentiality over communications with that person’s legal advisor is an indispensable attribute of the right to counsel and the adversary litigation system.’
The law recognises several categories of privilege, of which the most significant in this context are legal professional privilege, which is sub-divided into litigation privilege (which, as the name suggests, is confined to advice given and documents generated in the course, or in anticipation, of litigation), and legal advice privilege, which applies to legal advice in general.
Legal advice privilege
As Binns-Ward J noted in A Company v Commissioner for the South African Revenue Services  ZAWCHC 33(footnotes omitted), there is –
‘a general rule of our common law which states that communications between a legal advisor and his or her client are protected from disclosure, provided that certain requirements are met. The requirements are:
i. the legal advisor must have been acting in a professional capacity at the time;
ii. the advisor must have been consulted in confidence;
iii. the communication must have been made for the purpose of obtaining legal advice;
iv. the advice must not facilitate the commission of a crime or fraud; and
v. the privilege must be claimed.’
Advice on matters of tax falls within the scope of legal advice, because tax liability is imposed by law. Issues such as whether an amount is subject to income tax or capital gains tax, what expenditure is tax deductible, and whether a tax minimisation scheme is permissible depend on the legal interpretation of the relevant taxing statute.
What is covered by the expression 'legal advice'
The courts have given a wide interpretation to the expression legal advice in the context of legal advice privilege. In Balabel v Air India  Ch 317, the House of Lords held that –
‘Legal advice is not confined to telling the client the law: it must include advice as to what should prudently and sensibly be done in the relevant legal context.’
Thus, for example, advising a client on how to structure his affairs in the most tax-effective way is legal advice that will be covered by legal advice privilege if the other requirements for privilege, noted above, are present.
Legal professional privilege in the context of disputes between SARS and taxpayers
Disputes between taxing authorities such as SARS and taxpayers often test the cutting edge of the law relating to legal professional privilege.
For example, SARS would dearly love to be able to compel a taxpayer to disclose the documents recording the planning of a tax avoidance scheme by the taxpayer’s advisers or the planning behind the tax structure of a proposed business deal.
Such documents might, for example, contain admissions of an incriminating sole or main purpose of tax avoidance that would otherwise be difficult or impossible for SARS to prove, and could be the basis for SARS to invoke the statutory general anti-avoidance rule or to strike down the arrangement as a sham or disguised transaction.
SARS’s desperation to penetrate the veil of secrecy behind which legal advice on tax issues is sought and given appears from the decision of the Cape Town High Court in A Company v CSARS  ZAWCHC 33,2014 (4) SA 549 (WCC), in which SARS sought to compel the taxpayer to produce for scrutiny a 'fee note' (that is to say, an invoice for professional fees) that had been rendered by the taxpayer’s attorneys.
SARS was of the view (see para  of the judgment) that the content of the invoices might confirm that the taxpayer or other companies in its group had knowledge of the flow of funds involved in certain structured finance arrangements. It may be inferred that SARS wished to have written evidence of such knowledge to provide a basis for contending that the taxpayer had been engaged in an unlawful tax scheme.
The taxpayer in this case claimed that these fee notes were privileged in that they revealed the nature of the legal advice that had been sought and given. The court had to decide whether the fee notes were documents that fell within the scope of legal advice privilege.
In his judgment, Binns-Ward J accepted (at para ) that –
‘… the character of the advice sought by the client may be inferred, in the sense of conveying not only that advice was sought, but also the substance of the client’s evident concern in an identifiable legal context.’
and he went on to rule that certain stipulated portions of the fee notes were privileged and did not have to be disclosed to SARS.
The Catch-22 where a taxpayer pleads legal advice privilege
It is of course a common knee-jerk reaction for a taxpayer, where SARS demands to have sight of documents relating to his tax-planning arrangements, to contend that they are immune from scrutiny because they are covered by legal advice privilege.
How can a court determine whether the documents are indeed covered by privilege except by doing the very thing that the taxpayer claims is not permissible, namely looking at the documents?
The Tax Administration Laws Amendment Act of 2015 has addressed this problem by inserting a lengthy new section 42A into the Tax Administration Act 28 of 2011.
The new section 42A lays down in detail the process to be followed where a taxpayer or other person claims legal professional privilege in respect of documents that SARS wishes to scrutinise. Inter alia, the process involves the following steps:
- the taxpayer must identify, specifically and in detail, each item of the material (normally a document) requested by SARS which he claims is covered by legal professional privilege;
- the taxpayer must specify the circumstances in which he obtained the material (for example, that the document contains legal advice requested by him from his attorney); and
- the taxpayer must identify the author of the material and the capacity in which the author produced the material (for example, in his capacity as the taxpayer’s attorney).
If SARS disputes that the material is covered by privilege, then –
- SARS must arrange for a practitioner from a panel established in terms of section 111 of the Tax Administration Act (who does not act either for SARS or for the person claiming privilege) to take receipt of the material;
- the person asserting privilege must seal the material and hand it over to that practitioner;
- the practitioner must, within 21 days, make a determination, stating his grounds, as to whether privilege applies; and
- if the party claiming privilege or SARS is not satisfied with that determination, then application may be made to the High Court within 30 days for a court order that resolves the dispute.
This new section 42A is a well-considered and well-drafted provision which provides a time-effective and straightforward process for an independent person to determine whether privilege applies and, if that determination is not accepted by SARS or the taxpayer, for the issue to be decided by the High Court.
Does privilege attach to tax advice given by an accountant?
The elephant in the room in South Africa remains the question of whether legal professional privilege applies to legal advice, including tax advice, given by an accountant.
In the United Kingdom, this issue arose four-square in the Prudential case, reported as R (on the application of Prudential plc and another) v Special Commissioner of Income Tax UKSC 1.
In this case, Prudential had taken legal advice from accountants at PricewaterhouseCoopers in regard to a tax avoidance scheme. The fiscal authorities in the UK demanded disclosure of documentation relating to the scheme and Prudential refused to make disclosure on the ground that the advice was protected by legal professional privilege.
In a 25 000-word judgment which resulted in a split decision in which the seven judges were divided 5:2 on the issue, the majority judgment of the Supreme Court of the United Kingdom held that legal professional privilege does not apply to legal advice given by an accountant, inter alia because this issue is so complex that it should properly be decided by parliament.
In South Africa, there has not been a reported judgment in which SARS has demanded of a taxpayer’s accountants that they disclose documents containing tax advice given by them and in which the court has had to rule on whether legal advice given by an accountant is covered by legal professional privilege.
It is completely uncertain which way a South African court would rule on this issue.
Until it is judicially resolved, accountants would do well to assume that tax advice given by them is not covered by legal professional privilege, and that – at least in matters where the risk of disputation with SARS is high – they should channel their tax advice to clients through their attorneys or counsel, or (though this has a less secure legal basis) the advice is given by their in-house lawyer.
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This article first appeared on pwc.co.za.