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Solicitors and AML obligations

Are solicitors obliged to file SARs for underpaid tax?

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If a solicitor has a suspicion that a client has not submitted tax returns and has underpaid tax then are they obliged to file an SAR under their AML obligations?

A couple are getting divorced and the husband has stated on submitted paperwork that his wife did not submit tax returns. The wife’s solicitor has advised there is nothing to worry about since she has no duty to report.

I would have assumed that they have the same duties as us, does anyone know please?

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16th Apr 2019 19:50

The information has come to the solicitor in connection with legal proceedings (the impending divorce) and so is privileged from disclosure, see s330(6)(b) & (10)(c) PoCA 2002.
David

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16th Apr 2019 20:01

This is the distinction between legal professional privilege and non-legal privilege (which doesn't really exist). If I remember rightly there was a case that tried to create the equivalent of legal professional privilege for accountants (relating to legal advice on taxation), but it failed.

David has given the statutory source for this, but it is a long standing common law privilege. (I have no idea how long)

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to johnhemming
16th Apr 2019 20:51

johnhemming wrote:

If I remember rightly there was a case that tried to create the equivalent of legal professional privilege for accountants (relating to legal advice on taxation), but it failed.

There was indeed. The core issue was whether taxation advice given in advance of a transaction was within HMRC's information powers. After all, those powers extend to matters that affect a taxpayer's tax; as taxpayers are taxed on what they do, not what advice they receive, of what relevance is the advice?

I don't recall whether "tax advisors' privilege" was the main argument, or just one of the things that was holed below the water line en route to defeat.

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By Matrix
16th Apr 2019 20:20

Thanks both, this makes sense now.

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16th Apr 2019 21:14

It is a little more complicated. I referred to the statutory privilege in s330 PoCA 2002 (known as 'PoCA privilege'). PoCA privilege clearly applies here.
But there are actually two types of privilege which could be relevant - 'PoCA privilege' and 'Common law privilege'.
'Common law privilege' is ONLY available to lawyers - and only then in specific circumstances. There is a myth that anything you tell your solicitor is 'privileged' from disclosure. That's not the case. The police can usually obtain, for example, conveyancing files from solicitors as these are not 'privileged'.
The 'Common law privilege' applies, broadly speaking where the lawyer is asked to give LEGAL advice (as opposed to performing a transactional service) or there is civil or criminal litigation underway or contemplated (for example a divorce or a criminal prosecution).
There was a case in which PricewaterhouseCoopers sought to have 'common law privilege' protect them from disclosing to HMRC the advice they had given to a client. They lost (as PwC were not lawyers). The case was Prudential plc & Anor, R (on the application of) v Special Commissioner of Income Tax & Anor [2013] UKSC 1.
The second type of privilege is 'PoCA privilege'. This ONLY concerns reporting of money laundering suspicions under MLR 2017 & s330 PoCA 2002. It is available to lawyers and to accountants, auditors & tax advisors who are (or their firm is) a member of a recognised professional body.
It applies where (i) the person / firm with the reporting responsibility is giving LEGAL advice (for example advising on tax penalties, but not when completing a routine tax return), or (ii) the client is seeking LEGAL advice from the person / firm with the reporting responsibility, or (iii) where litigation (civil or criminal) is underway or contemplated.
So in this case the solicitor was excused an obligation to report both under 'PoCA privilege' and under 'Common law privilege'.
If you're interested, one of the earliest recorded cases on 'Common law privilege' was in 1577.
David

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to davidwinch
17th Apr 2019 06:49

Thanks David.

Take an average tax advisor.

On the basis that we don't advise clients to commit crimes when undertaking tax planning, PoCA privilege seems to have limited application - or are you saying that a misdemeanour that comes to light during e.g. an acrimonious divorce should not be reported? That runs counter to my understanding based on threads on that issue in here.

I have been brought up to believe that I cannot give legal advice. Maybe I need to revisit my understanding of what that means.

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to Tax Dragon
17th Apr 2019 09:11

Hi TD
A couple of points. We need to consider separately (i) litigation PoCA privilege and (ii) legal advice PoCA privilege (although they often overlap).
Litigation privilege is easier to understand. If, say, a lady comes to you & says, "I am getting a divorce & I need an accountant on my side", then litigation PoCA privilege applies (assuming you are a member of an appropriate professional body). It does not matter whether she goes on to ask you for legal advice, accountancy advice or even whether she should dig up her favourite rose in the garden. So even if she goes on to tell you her husband (or herself) is as criminal as Al Capone you are not going to report it under MLR.
The point is that this information came to you in connection with legal proceedings or contemplated legal proceedings (in this case divorce proceedings).
In the same way, it is an everyday occurrence for me to be contacted by a solicitor saying my client has been charged with drug dealing, fraud, tax evasion, etc. & can you look at the figures? I am not going to report any suspicion I may have that he actually did it, because it's covered by litigation PoCA privilege.
Moving on to legal advice privilege. Lawyers define legal advice as "advice which relates to the rights, liabilities, obligations or remedies of the client either under private law or under public law".
So if, for example, you are giving tax planning advice you are likely to be giving legal advice and PoCA privilege applies to information that comes to you in that connection.
Similarly if a new client comes to you & says, "I've been trading self-employed for 4 years - do I have to tell HMRC about it?" then he is asking you for legal advice. So, whether or not he ultimately takes your advice, you are not going to report it because PoCA privilege applies.
On the other hand if someone comes to you & says "Can you prepare my accounts & tax return?" they are not asking for legal advice, they are asking you to perform a computational service - so if you turn up something which looks suspicious you have the well known reporting obligations.
In the same way a lawyer doing routine conveyancing or probate work will be providing a transactional service and not giving legal advice. So information they receive in this connection is not covered by PoCA privilege (or common law privilege).
I hope that helps.
David

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to davidwinch
17th Apr 2019 09:47

Yes. Hugely helpful, thank you.

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