The Tax Administration Act takes effect

INTRODUCTION

The Tax Administration Act, No 28 of 2011 (‘TAA’), which was promulgated on 4^th July 2012, took effect on 1^st October 2012, except for certain specific provisions dealing with the imposition of interest payable to the Commissioner: South African Revenue Service by taxpayers, and, also, by the Commissioner to taxpayers.  The rules regulating the payment of interest will be changing, such that, in future, interest will be compounded on a monthly basis, both in respect of interest payable by a taxpayer on the late payment of tax, and, also, in respect of refunds payable by SARS to taxpayers.

TRANSITIONAL RULES

Chapter 20 of the TAA contains a number of transitional provisions seeking to ensure the smooth transition from actions which were commenced under the administrative provisions of various fiscal statutes, but which had not yet been completed by 30^th September 2012.  

Chapter 20 of the TAA provides that any tax number allocated to a taxpayer prior to the TAA taking effect will continue to be applicable until SARS allocates a new number to the taxpayer under the TAA.

Section 259 of the TAA provides that the Minister of Finance must appoint a person as a Tax Ombud within one year of the commencement date of the TAA, namely 1^st October 2012.  

The National Treasury has indicated that it is intended to appoint a Tax Ombud before the end of this year.

All SARS officials are required to subscribe to an oath or solemn declaration of secrecy, which was previously contained in section 4 of the Income Tax Act, No 58 of 1962 (‘the Act’), or section 6 of the Value-Added Tax Act, No 89 of 1991, as amended.  The fact that those officials may have been administered the oath under another fiscal statute will be regarded as having taken the required oath under section 67(2) of the TAA.

Section 261 of the TAA confirms that those persons appointed as the public officer under a tax act, who held office immediately prior to the commencement of the TAA, will be regarded as the public officer appointed under the TAA.

Those persons who were appointed as chairpersons of the Tax Board or members of the Tax Court will continue in office until their appointment is terminated or lapses.

Section 264 of the TAA confirms that those rules of the Tax Court issued under another tax act prior to the commencement of the TAA, will continue in force as if they were issued under section 103 of the TAA.  It is envisaged that the rules governing objections and appeals will be reviewed after SARS has followed a consultative process, where after those rules will be promulgated under the TAA.

SARS officials who were authorised to conduct audits under a tax act before the commencement of the TAA, will be regarded as the official envisaged in section 41 of the TAA, which allows for a senior SARS official to grant a SARS official written authorisation to conduct a field audit or criminal investigation.

Section 269 of the TAA provides that those forms issued under the authority of any tax act prior to the commencement of the TAA, and in use before the date of commencement of that Act, will be considered to have been prescribed under the authority of the TAA to the extent consistent with that Act.  Similarly, any rulings and opinions issued under the provisions of a tax act repealed by the TAA, and enforced prior to the commencement of the TAA, which have not been revoked, will be regarded as having been issued under the authority of the TAA. 

Section 270 of the TAA provides that the TAA applies to an act, omission or proceeding taken, occurring or instituted before the commencement date of the TAA, but without prejudice to the action taken or proceedings conducted before the commencement date of the comparable provisions of the TAA.  This section, therefore, seeks to ensure that those actions commenced prior to the TAA and not yet completed by the date of its commencement, must be continued and concluded under the provisions of the TAA as if taken or instituted under the TAA itself.

PUBLIC NOTICES

The TAA envisages various notices being published in the Government Gazette dealing with certain aspects of the TAA.  Thus far, four public notices have been gazetted under the provisions of the TAA.

Section 1 of the TAA defines “this Act” as including the regulations and the public notice issued under the TAA.  Thus, the public notices issued pursuant to the TAA, are to be regarded as part and parcel of the Act itself.  The four public notices which have been issued deal with specific aspects of the TAA. 

RECORD KEEPING

Section 30 of the TAA sets out the manner in which records, books and account documents referred to in section 29 of the Act, must be kept or retained.  

The TAA requires that records are kept in the original form, in an orderly fashion, and in a safe place, or, where retained in electronic form, in the manner to be prescribed by the Commissioner in a public notice, or in a form specifically authorised by a senior SARS official in terms of section 30(2) of the Act.  

Government Notice No 787 contained the public notice issued pursuant to section 30(1)(b) of the TAA.  The public notice in question allows taxpayers to keep records in terms of section 29 in an electronic form, so long as the rules contained in the public notice are adhered to.  

Rule 3.2 of the public notice defines an “acceptable electronic form” as a form in which the integrity of the electronic record satisfies the standard contained in section 14 of the Electronic Communications and Transactions Act.  

Furthermore, it is required that the person required to keep records is able to, within a reasonable period when called on by SARS, to provide SARS with an electronic copy of the records, in a format that SARS is able to readily access, read and analyse, or to send the records to SARS in an electronic form that is readily accessible by SARS, or to provide SARS with a paper copy of those records.

Rule 4 of the public notice requires that the records retained in electronic form must be kept and maintained at a place physically located in South Africa.  Thus, the electronic documents may not be retained outside of the country without SARS’ consent.  

The notice states that a senior SARS official may authorise a person to keep records in an electronic form outside of South Africa where that official is satisfied that the electronic system used by that person will be accessible from the person’s physical address in South Africa for the duration of the period that the person is obliged to keep and retain records under the TAA.  Furthermore, the locality where the records are proposed to be kept will not affect access to the electronic records themselves.  

In addition, the rules require that there is an international tax agreement for reciprocal assistance in the administration of taxes in place between the country in which the person proposes to keep the electronic records and South Africa.  

Furthermore, the form in which the records are to be kept satisfies all the requirements of the rules contained in the public notice, apart from the issue of the physical locality of the storage of those records, and, importantly, that the person concerned will be able to provide SARS with an acceptable electronic form of the records on request, within a reasonable period.  

The public notice also deals with documentation required to be retained regarding the system utilised by the taxpayer.  Where the computer software used by the taxpayer is commonly recognised, the taxpayer is not required to retain systems documentation relating thereto.  Where, however, the software used by the taxpayer is not commonly recognised in South Africa, or has been adapted for the taxpayer’s particular environment, it is necessary to retain the systems documentation set out in rule 5 of the public notice.

Rule 6 of the public notice places a requirement on persons who keep records in an electronic format to ensure that measures are taken for the adequate storage of the electronic records for the duration of the period referred to in section 29 of the Act.  It is necessary to store all electronic signatures, login codes, keys, passwords or certificates required to access the electronic records, and the procedures to obtain full access to any electronic records that are encrypted.

Rule 7 of the public notice requires persons to retain electronic records to have the records available for inspection by SARS in terms of section 31 of the TAA at all reasonable times, and at premises physically located within the country, or accessible from such premises if authority in terms of rule 4.2 has been granted.  Under rule 8 of the notice, the electronic records must be able to be made available for purposes of an audit or investigation conducted by SARS in terms of section 48 of the TAA.

Finally, rule 9 of the public notice provides that any person who keeps records in electronic form, must be able to comply with the provisions of the rules contained in the public notice throughout the period that the person is required to keep the records, in order to comply with section 29 of the TAA.

SARS AUDITS AND TAXPAYER FEEDBACK

Government Notice No 788, also issued on 1^st October 2012, sets out the form and manner of a report to be submitted by SARS to a taxpayer on the stage of completion of an audit, in terms of section 42(1) of the TAA.  It must be remembered that, in accordance with the TAA, a taxpayer is required to be advised as to the status or progress in an audit conducted on their affairs by SARS, which is an improvement in that the Act did not contain any such provision.  

Under rule 2 of this public notice, a SARS official responsible for an audit instituted before but not completed by the commencement date of the TAA, or instituted on or after its commencement date, must provide the taxpayer subject to audit with a report indicating the stage of completion of the audit. 

Where the audit started before the commencement date of the TAA, SARS must provide feedback within 90 days of the TAA’s commencement and within 90 day intervals thereafter.  

Where SARS instituted an audit on or after the TAA commencement date, the report must be submitted within 90 days of the start of the audit and within 90 day intervals thereafter, until the audit is concluded by SARS.

In terms of rule 3, SARS must advise the taxpayer as to the current scope of the audit, the stage of completion of the audit, and relevant materials still outstanding from the taxpayer.

Unfortunately, in the past, it happened too often that taxpayers were subjected to an audit and would hear nothing from SARS for a long period of time, and then, suddenly, be requested to supply information within a very short period.  

The new provisions contained in the TAA should alleviate this from happening in future. 

INTERVIEWS BY SARS AND TRAVELLING DISTANCE

Government Notice No 789 was issued pursuant to section 47(4) of the TAA, which deals with the distance to be taken account of in determining whether a person may lawfully decline to attend an interview with SARS.  

This public notice prescribes that a person other than a person described in section 211(3)(a),(b) and (c) of the TAA may decline to attend an interview where that person is required to travel more than 200kms between the place designated in the notice and their usual place of business or residence and back.

Where the person described falls within section 211(3)(a),(b) and (c)of the Act, the distance is increased to 2500kms, and that relates to companies listed on a recognised stock exchange, a company whose gross receipts or accruals for the preceding tax year exceed R500 million, or a company that forms part of a group of companies of either of the aforementioned entities. 

FIXED AMOUNT PENALTIES

Government Notice No 790 was issued pursuant to section 210(2) of the TAA, which deals with the imposition of a fixed-amount penalty under the TAA.  Rule 2 of that public notice provides that failure by a natural person to submit an income tax return as and when required under the Income Tax Act, for years of assessment commencing on or after 1^st march 2006, where that person has two or more outstanding income tax returns for such year of assessment, will be liable to the fixed-amount penalty as envisaged in section 211 of the TAA.

OUTSTANDING PUBLIC NOTICES

From a review of the TAA, it would appear that other public notices remain to be issued, particularly those dealing with the following sections: 

·         section 81(1), regarding fees for advanced rulings

·         section 103, dealing with rules for dispute resolution

·         section 166(2) and (3), dealing with allocation of payments

·         section 167, pertaining to rules regarding instalment payment agreements

·         section 245, regarding dates for submission of returns and payment of tax

·         section 255, dealing with rules regarding the submission of returns in electronic format

CONCLUSION

The TAA introduces significant changes in the administrative provisions regulating the fiscal statutes in South Africa, and it is going to take time for both taxpayers and SARS to become accustomed thereto.  SARS has published various documents dealing with the introduction of the Act, particularly the SARS Short Guide to the Tax Administration Act, 2011, as well as various other documents dealing with frequently asked questions, and penalties administration and dispute administration.  

Taxpayers will need to familiarise themselves with the provisions of the TAA and the documents published by SARS to obtain a better understanding of how the TAA impacts on their obligations so as to comply with the fiscal statutes of the country.

This article first appeared in Tax ENSight, October 2012

SARS supplementary declaration for companies and close corporations

The Commissioner: South African Revenue Service ("SARS") recently announced that companies and close corporations ("CCs") will, in certain cases, be required to complete and submit a supplementary declaration for companies and CCs, Form IT14SD.

The new form will require companies and CCs to reconcile financial information across various tax types and customs. The IT14SD will require taxpayers to submit reconciliation statements for employees’ tax ("PAYE"), income tax, value-added tax ("VAT") and customs.


Most companies and CCs which are not currently reconciling financial information for the various taxes should proceed to do so, so that they will be in a position to supply the information that will be required by SARS.


It will be important for taxpayers, who are required to submit the Form IT14SD, to reconcile the turnover reflected as per the Annual Financial Statements ("AFS"), to the turnover reflected on the VAT returns. SARS is also seeking a reconciliation of the input tax as per the VAT returns and the expenditure as reflected in the AFS.


SARS will require taxpayers to submit details of salaries as per the AFS and to reconcile that to the figures submitted via the PAYE process.


In addition, information will be required by importers and exporters regarding customs information submitted to SARS and information contained in the AFS.


SARS has indicated that where companies and CCs submit their returns electronically, and that taxpayers who are identified for verification, an initial verification letter will be displayed on the taxpayer’s e-Filing profile and e-Filing will automatically make the Form IT14SD available on the taxpayer’s profile. Those taxpayers who do not submit tax returns electronically, will receive an IT14SD via the mail and will be required to complete the form and submit it to SARS.


SARS has advised taxpayers that the new Form IT14SD can be submitted either through e-Filing, via SARS branches or by post.


It is important that taxpayers who are not currently reconciling the information regarding the various taxes to the information contained in the AFS undertake to do so, with a view to the requirement that such information must, in future, be submitted to SARS.

• beric croome - executive Edward Nathan Sonnenbergs. This article first appeared in taxENSight November 2011  Free image from ClipArt

South African Revenue Service: Scam Alert Notifications

The South African Revenue Service (“SARS”) website, namely, www.sars.gov.za, contains various warnings to taxpayers about scams used by criminals to obtain banking details of taxpayers, or other means of obtaining personal information illicitly from taxpayers.

SARS indicates, on its website, that taxpayers must not supply their banking details to anyone via the telephone, sms or e-mail, as SARS will never request banking details telephonically, via sms or via e-mail.

The website contains details of a series of phishing/scam e-mails and letters, which were purportedly sent by SARS to taxpayers whereas such letters and e-mails were, in fact, submitted by persons who have nothing whatsoever to do with SARS.

Taxpayers must remember that under the provisions of the Income Tax Act, Act 58 of 1962, as amended (“the Act”), SARS is empowered to audit a taxpayer’s affairs, but in order to do so, must make prior arrangements with the taxpayer in terms of section 74B of the Act.  The law requires that the Commissioner must give the taxpayer reasonable prior notice of a requirement to submit information to SARS, or to conduct an audit.

Furthermore, any person arriving at business premises, contending to be a SARS official, is required, upon request, to furnish a copy of an authorisation letter as envisaged in section 74A of the Act.

The Act specifically defines an “authorisation letter” as a written authorisation granted by the Commissioner, for any person designated by the Commissioner for such purpose, to an officer to inspect, audit, examine or obtain information as contemplated in section 74B of the Act.  Where a person arrives at business premises without prior notice, demanding access on the basis that they are an official of SARS, such person can lawfully be ejected from the premises and refused access to those premises.  The only occasion whereby a SARS official may arrive at business premises, without prior notice, is where the High Court has authorised the issue of a search and seizure warrant in terms of section 74D of the Act.

Dear Taxpayer...
not all letters with the SARS logo are genuine

It would appear that a number of taxpayers have received letters purporting to be from SARS, which, from close examination, indicate that the letters in question were not issued by SARS but by the fraudsters. It would appear that letters advising a taxpayer that a VAT sales enquiry was to be undertaken, did the rounds in Limpopo Province during the course of June 2011 and, more recently, in the Sandton area during July 2011.

From a review of the letter relied on by the perpetrators of the fraud, it is apparent that the letter is deficient, inter alia, in the following respects:

·         Reference is made to the “South African Revenue Services”, which should, in fact, be to the “South African Revenue Service”.

·         Reference is made to the “Special Investigations Unit”, which unit does not appear to exist at SARS.

·         The letter also refers to a “Regional Controller”, which is not a designation of an official employed by SARS.

·         Letters of audit normally refer to the rights which taxpayers have in their dealings with SARS.

It is unclear what the perpetrators of the fraudulent letters hoped to achieve by advising a business that it is intended to subject that business to one or other tax audit.

Taxpayers who receive letters, purporting to be from SARS, which do not contain the details usually reflected thereon, should report the matter to SARS with a view to establishing if the letter was, in fact, issued by SARS or not.

More importantly though, taxpayers need to be aware that they do have certain rights in dealing with SARS, and are fully entitled to establish the bona fides of any person alleging to be an official from SARS, who wishes to have access to the business premises.  It must be remembered that a person who holds himself or herself out as an officer of SARS, engaged in carrying out the provisions of the Act, is guilty of an offence. Perpetrators of these frauds can be fined or imprisoned upon convictions of this offence.

As indicated above, SARS is required, by law, to make a prior arrangement with the taxpayer to conduct an audit, at the taxpayer’s premises, and cannot arrive without prior notice.  The only exception, where SARS may arrive without prior notice is where the High Court has issued a search and seizure warrant or, alternatively, where there is a criminal investigation and a search warrant has been issued under the Criminal Procedure Act No. 51 of 1977, as amended, which is executed by the South African Police Service.

Taxpayers receiving suspicious letters, purporting to be from SARS, need to be on their guard before making arrangements with the perpetrators to audit their affairs, or before they start disclosing personal particulars or banking details to such persons.  Should taxpayers have any doubt whether a letter requesting access to the business records is, indeed, from SARS, legal advice should be sought.

Dr Beric Croome is a Tax Executive at EDWARD NATHAN SONNENBERGS INC. This article first appeared in ENS Tax Ensight August 2011. Image from SARS.

National Treasury Suspends Intra-group Relief Contained in Section 45 of the Act

On Thursday, 2 June 2011, National Treasury released the Draft Taxation Laws Amendment Bill, 2011 ("DTLAB"), Explanatory Memorandum on the DTLAB 2011, Draft Taxation Laws Second Amendment Bill, 2011 ("DTLSAB"), as well as a Media Statement on the DTLABs 2011.

The DTLAB comprises 183 pages of significant changes to the fiscal laws of South Africa.

The one change that requires specific comment is Government's proposal to suspend the intra-group relief available in section 45 of the Income Tax Act, Act 58 of 1962, as amended ("the Act"), with effect from 3 June 2011.

Most of the proposals contained in the DTLAB were announced in the 2011 Budget presented to Parliament by the Minister of Finance on 23 February 2011.

From an examination of the 2011 Budget Review, published by National Treasury, it is clear that no mention whatsoever was made of the proposal to suspend section 45 of the Act. It has become customary that most of the changes contained in the Tax Bills are announced in the Budget documentation so that taxpayers know what changes they are likely to face and, more importantly, the likely date on which those changes may take effect.

Section 45 forms part of the so-called "group restructuring rules", which were introduced into law by section 44 of the Second Revenue Laws Amendment Act No. 60 of 2001. This section has undergone significant amendments over the years as the authorities have sought to refine the provisions and curtail the perceived abuse thereof.

The corporate restructuring rules were introduced into the Act with effect from 1 October 2001, that is, the date on which capital gains tax took effect in South Africa, to enable groups of companies to restructure their affairs without adverse tax consequences arising. 

There were similar measures in place since 1988 to allow for companies to restructure their affairs without incurring tax liabilities where a qualifying group of companies restructured its affairs.

The Media Statement issued by National Treasury on 2 June 2011, refers to the fact that the DTLAB contains a number of new anti-avoidance measures and contained a separate annexure dealing with the suspension of intra-group roll-over relief currently contained in section 45 of the Act. The DTLAB specifically provides that section 45 will not apply in respect of any asset disposed of on or after 3 June 2011 and before 1 January 2013. Thus, section 45 has, for all practical purposes, been suspended for a period of 18 months to allow the National Treasury to investigate the perceived abuse of the section.

National Treasury, in its Media Statement, points out that the section 45 intra-group roll-over relief was originally intended to facilitate transfers amongst companies which constituted a group as defined in the Act. Thus, the purpose of section 45 was to ensure that the tax system did not pose a barrier to intra-group transfers, whether the transfer took place by way of an exchange of shares, debt or cash, or as a dividend. National Treasury makes the point that intra-group relief is a common feature of most advanced tax systems around the world.

National Treasury is concerned about the way in which section 45 is being used, as taxpayers have, in its view, sought to use it as a means of acquiring businesses and that the section involves what is referred to as "debt push-down structures". National Treasury contends that section 45 allows for the use of excessive debt schemes and creates the means whereby taxpayers utilise so-called "funnel schemes", whereby debt proceeds are indirectly linked to tax-free preference share dividends.

Left: In light of the suspension of intra-group relief, big corporations are reviewing their corporate structures on an on-going basis. 

National Treasury has indicated that section 45 will be suspended for a period of approximately 18 months, during which period the purpose of the section will be re-evaluated, particularly to deal with the concerns that National Treasury has regarding excessive debt. National Treasury has identified the following issues relating to section 45 as part of a larger set of problems and these include:

• The free use of excessive debt to eliminate substantial amounts of operating income for an extended duration.
• The seeming freedom to re-characterise shares as debt (or debt as shares) with little regard for accounting and commercial concepts.
• Excessive tax losses available in the tax system and the potential to move losses amongst entities if a viable business purpose can be asserted.
• The need for section 45 within an intra-group context, as well as the need for the movement of losses within a single domestic group.
• The need to allow for interest deductions stemming from leveraged buy-outs, regardless of the form of that acquisition.

It must be remembered that South Africa does not impose tax on a group basis and, thus, section 45 alleviated the adverse tax consequences that would otherwise arise where business assets are moved from one company in a group to another.

To summarily to suspend section 45 of the Act, without prior notice in the Budget documentation, by way of a Media Statement, is extremely draconian.

It is questionable also whether this proposal be enacted is valid under the Constitution of the Republic of South Africa, Act 108 of 1996, as amended. Numerous companies have prepared agreements to transfer businesses in terms of section 45 of the Act and the costs they incurred would now appear to have been wasted as a result of this immediate suspension of section 45. It is unfair that businesses should be expected to carry these costs in light of the manner in which section 45 has been suspended. The proposal undermines the rule of law insofar as the tax system is concerned, and cannot be supported.

In addition, corporates are reviewing their corporate structures on an on-going basis and, no doubt, many companies in South Africa were in the process of evaluating the most appropriate manner to rationalise their businesses in South Africa. 

The manner in which section 45 has been suspended in the proposals relating thereto create great uncertainty for taxpayers in South Africa and does not bode well for foreign investors who own groups of companies in South Africa, who are currently in the process of reviewing the manner in which those operations are structured. Investors in a country require certainty as to the legal framework within which they are required to operate. 

The manner in which section 45 has been amended, effectively by way of a press release, seriously undermines the certainty to which both domestic and foreign investors have come to expect in South Africa. This cannot bode well for future economic growth and development and job creation in South Africa.

It is hoped that Parliament will recommend that the proposals contained in the DTLAB, insofar as section 45 are concerned, should be removed from the DTLAB and that the matter should be investigated further before the section is summarily suspended. 

If National Treasury and the South African Revenue Service ("SARS") have concerns about the manner in which section 45 is being utilised by taxpayers, the authorities should rely on the General Anti-Avoidance Rule ("GAAR") contained in sections 80A – 80L, which was introduced in November 2006, and not merely suspend the section whilst the matter is investigated further. The GAAR was introduced after much discussion and debate to replace the anti-avoidance rule contained in section 103(1) of the Act. 

However, it would appear that the Commissioner: SARS is reluctant to rely on the GAAR to attack a perceived abuse of the tax system by taxpayers. This also raises the question of whether the GAAR serves any purpose in the Act, with no cases yet having been reported dealing with the application of the GAAR.

This article first appeared in taxENSight, June 2011 edition. Free Image from ClipArt.

United Kingdom Court of Appeal Rules on Legal Professional Privilege and Accountants

In South Africa, taxpayers may lawfully refuse to supply information to the Commissioner: South African Revenue Service ("SARS"), which is subject to legal professional privilege. The concept of legal professional privilege originated in the English law of evidence and has been in existence for hundreds of years, having first having been adjudicated in the case of Stradling v Morgan (1560)1 Plowd 199, 75 ER 305. Legal professional privilege has played an important part in the law of evidence but has become more than merely a rule of evidence and has more recently been regarded as a basic right to ensure the proper administration of justice.

Left: The judge has ruled on professional privilege.

In principle, legal professional privilege applies where a person seeks legal advice from an attorney or advocate on a professional basis, the so-called "advice privilege" or where advice is sought in anticipation of litigation from an attorney or advocate acting in a professional capacity, the so-called "litigation privilege".

In Heiman, Maasdorp and Barker v Secretary for Inland Revenue and Another [1968] 30 SATC 145, the taxpayer contended that privilege prevented the disclosure of the information required by the Commissioner. That case, which was decided in 1968, held that the Commissioner's powers to seek information did not trump the taxpayer's right to claim privilege. More recently in Jeeva v Receiver of Revenue, Port Elizabeth 1995 (2) SA 433 (SE), SARS sought an order from the High Court forcing the taxpayer to disclose information which would otherwise have been protected by legal professional privilege. In Jeeva the court refused to accede to the SARS request and thus upheld the taxpayer's right to claim privilege on the information requested by SARS.

In S v Safatsa 1988 (1) SA 868 (A), the Supreme Court of Appeal ruled that legal professional privilege is a fundamental right which is necessary for the proper functioning of the legal system in South Africa. Based on the cases and the common law in South Africa, legal professional privilege can be claimed by a taxpayer only where the taxpayer has sought legal advice from an attorney or advocate on a professional basis. Legal professional privilege does not extend to advice supplied by an accountant, even though the accountant may be rendering advice on the tax laws of South Africa. This distinction is questionable when reference is made to the provisions of the Constitution of the Republic of South Africa, Act 108 of 1996, as amended ("the Constitution") and the comments made in S v Safatsa.

The question of whether legal professional privilege should be extended to accountants was considered by Charles J in Prudential Plc and Others v Special Commissioner of Income Tax and Others [2009] EWHC 2494 (ADMIN) where it was decided that it was not possible to extend legal professional privilege to accountants advising clients on tax matters in the United Kingdom.

Prudential being dissatisfied with the decision of Charles J, noted an appeal against his decision and, as a result, the case proceeded to the Court of Appeal. Judgment was delivered in that case on 13 October 2010.

In the lower court, Charles J decided that he was unable to go against the precedent set by the higher courts whereby legal professional privilege applied only to legal advice supplied by barristers and solicitors in a professional capacity. Thus, the case proceeded on appeal and the court allowed for The Institute of Chartered Accountants in England and Wales, the General Council of the Bar and the Law Society to intervene in the matter because of the importance of the issues raised in the dispute between Prudential and Her Majesty's Revenue and Customs ("HMRC").

Lord Justice Lloyd, at paragraph 2, summarised the issues facing the court in Prudential Plc and Another v Special Commissioner of Income Tax and Another [Institute of Chartered Accountants in England and Wales and others intervening] [2010] EWCA Civ 1094 as follows:

"In the present case, the Claimants and Appellants (whom I will call Prudential) seek to establish that the principle extends further than has yet been recognised. They assert (and it is not really in dispute) that, nowadays, on many if not most occasions on which a person seeks advice about fiscal liabilities, which often involves a consideration of, and advice about, the relevant law, that person does so by approaching accountants rather than lawyers. They contend that the rationale which lies behind the LPP rule requires that a client's communications with his advisers should be just as much protected from disclosure if the advice, being legal advice is sought from and given by an accountant as if the advice given is sought from and given by a solicitor or barrister."

In the case of R (Morgan Grenfell and Co.) v Special Commissioner of Income Tax [2002] UKHL 21, Lord Hoffmann stated as follows:

"LPP (legal professional privilege) is a fundamental human right long established in the common law. It is a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice."

In view of the importance of whether legal professional privilege applies where legal advice is sought from and given by accountants to clients, the court granted permission to the Institute of Chartered Accountants in England and Wales, the Bar Council and the Law Society to intervene in the appeal. The court therefore canvassed the question of legal professional privilege thoroughly and, particularly, whether it should be extended to legal advice, particularly in the tax arena, supplied by accountants to clients.

The dispute between Prudential and HMRC arose from the fact that HMRC requested that Prudential produce certain documents. The United Kingdom fiscal legislation precludes the production of documents protected by legal professional privilege. Certain of the documents in question had been prepared by accountants for Prudential and Prudential sought to extend the application of the legal professional privilege to the documents prepared by its accountants.

HMRC asserted that the notices issued under the United Kingdom fiscal legislation sought the production of documents pertaining to legal advice on tax matters received from counsel, from foreign lawyers and also from a leading firm of accountants. Prudential argued that it was not obliged to disclose any documents relating to any advice obtained on the fiscal legislation, whether that advice was supplied by United Kingdom lawyers, foreign lawyers or accountants.

The court pointed out that legal professional privilege is a Judge-made rule and Prudential's lawyers argued that it was open to the court to declare the law by ruling that legal professional privilege is available in respect of communications obtained for purposes of giving legal advice, whether or not the adviser is a lawyer. The court reviewed the legal position in the United Kingdom and the manner in which legal professional privilege was extended to patent agents and foreign lawyers. Furthermore, the court referred to the Committee on Enforcement Powers of the Revenue Departments, the so-called "Keith Committee", which recommended "that legal professional privilege should be extended to duly appointed tax agents, who have been admitted members of an incorporated society of accountants or of the Institute of Taxation, and should apply only to advice given by a tax agent. This recommendation by the Keith Committee was not implemented." (at paragraph 50 ii of the judgment).

Justice Lloyd referred to the decisions of the European Court of Human Rights, which held that the interference with the privacy of a person's communications with their lawyer violates Article 8 of the European Convention on Human Rights (see Campbell v UK (1992) 15 EHRR 137 and Foxley v UK (2001) 31 EHRR 25).

Lord Pannick, arguing for Prudential, submitted that Article 14 of the European Convention on Human Rights stated that if privilege only exists where advice is sought from and given by a member of the legal profession that constitutes discrimination and should, for that reason, be extended to apply to advice given by an accountant. The court rejected the argument that limiting legal professional privilege to advice procured from a lawyer was discriminatory. At paragraph 69, the court referred to the restriction of legal professional privilege to advice supplied by lawyers in the following terms:

"It seems to me plain that a rule which limits LPP to communications with a member of a relevant legal profession (a) is in accordance with law and (b) can properly be regarded as necessary in a democratic society in one or more relevant interests, in particular for the protection of the rights and freedoms of others."


Prudential argued that legal professional privilege should be extended to accountants and the court analysed what is meant by the term "an accountant" and how that should be interpreted. The court pointed out that there is no restriction on persons wishing to set themselves up in business as an accountant, even though they may not be registered with a professional body.

After reviewing the principles applicable to legal professional privilege, and the definitional problems pertaining to accountants, the court pointed out that it is for Parliament in the United Kingdom and not for the courts to extend the scope of legal professional privilege.

The court referred to the position of legal professional privilege in other countries and, in this regard, stated as follows:

"We were shown some material about the position in Canada, Australia, New Zealand and the United States of America, and in some other jurisdictions. In New Zealand and the USA there is legislation on the point. In Australia legislation is being proposed. In Canada the application of LPP in relation to accountants appears to have been rejected. We were not shown any examples of LPP applying in relation to accountants except as a result of legislation.

... However, it is noteworthy that no example of the application of LPP in relation to any professional adviser other than lawyers has been found except as a result of statutory interventions. That seems to me to be consistent with the conclusion to which I have come, namely that, even if there is a strong case for applying LPP in such a way, it is not a matter which can properly be achieved by the courts; it requires legislation." (at paragraph 80).

As a result, the court ruled that legal professional privilege does not apply in relation to any professional, other than a qualified lawyer, a solicitor or barrister, or an appropriately qualified foreign lawyer. The court concluded that the human rights argument did not assist in satisfying the court that legal professional privilege should be extended to accountants in the United Kingdom when such accountants render to advice to clients on tax law.

Thus, the court declined the request to expand legal professional privilege to accountants and, furthermore, refused permission for Prudential to appeal to the Supreme Court, that is, the court that succeeded the erstwhile House of Lords.

It does not appear that any case has come before a South African court where a taxpayer has refused to supply information to SARS on the basis that the advice obtained was secured from an accountant. Under the provisions of the Constitution, our courts can take account of decisions handed down in foreign courts insofar as they are relevant to the application of the law in South Africa. It is possible, therefore, that a South African court, if called on to deal with the issues faced by the court in Prudential, would reach a similar conclusion.

However, it remains to be seen what weight the court will place on the Bill of Rights contained in the Constitution, which is different to the Human Rights Act of the United Kingdom. It is clear that under existing statutory provisions, tax advice supplied by an accountant to a client is not subject to legal professional privilege under current law.

It remains to be seen if the legislature will intervene in this regard as has happened in other countries. Clients seeking legal advice on tax matters should, therefore, be aware that where advice is being procured from an accountant, such advice is not protected by legal professional privilege and if called on by SARS, such information would, on the face of it, be required to be supplied to SARS, thus placing attorneys and advocates in a preferential position in advising clients on tax matters.

This article first appeared in tax ENSight, October 2010
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