Got it covered?

Tax enquiry fee protection insurance promises big benefits for your firm and clients, but with enquiries occurring on average every 20 years for individual taxpayers, is it worth it?

Iwona Tokc-Wilde, journalist

Many smaller practitioners look to maximise their income in every possible way, so they push tax enquiry fee protection insurance to try and improve client take-up rates. But clients are increasingly resistant to paying for something that they may not need.

‘More and more small business clients are not interested,’ says Kevin Drew, managing director at accountancy firm Ascentant. ‘They are being squeezed by dwindling revenues, increases in bottom-line costs and the impending rates rises, so they prefer to take the chance.’

Many balk at the price their accountant proposes to charge. Insurers normally charge practices a flat premium per client type, either for a voluntary scheme where clients are added individually, or for blanket cover for all clients. The practice can then charge their clients whatever they like. While some just add enough to cover their costs, most add an arrangement or administration fee to the premiums they pay the insurer. Others base their uplift figures on factors such as client size or value.

Darren Diamond, director at accountancy firm Liberty Williams, says: ‘The fee protection costs the accountant about £14-£24 per small company and about £10-£20 per individual, yet many firms charge clients £300 or more a year and use it every chance they get. The client also has to pay the excess, normally £100.’

Diamond adds: ‘I’ve had clients move across from other accountants who have said the insurance wasn’t worth having and that they could have just paid for the work as there was not much difference [between the cost of the insurance and the fee for dealing with the enquiry].’

Others mention bad experiences with previous insurers. ‘One client had paid for the cover for five years, then had a tax avoidance scheme investigated. The insurance company wouldn’t pay out even though the client wanted to defend the scheme, having obtained a legal opinion on the matter,’ Diamond says.

Insurance premiums are also likely to rise again. Insurance premium tax (IPT) will increase from 10% to 12% from 1 June 2017, the third hike in just 18 months. This is likely to affect both regulated practices that act as insurance intermediaries, and non-regulated practices that offer fee protection to their clients as a service, rather than insurance, and that are insured against clients making use of the service. In the latter case, IPT is payable on the amount of premium due to the insurers for the cover that underpins the fee protection scheme.

Clients can often get cheaper cover elsewhere, on top of other benefits. Members of the Federation of Small Businesses (FSB), where full annual membership starts at £142.50, get the protection automatically. Some other associations and business networks either also include the cover in their membership packages or, as in the case of the National Farmers Union, offer assistance with ongoing HMRC enquiries.

Besides, why pay extra for something that, in all likelihood, should not happen? ‘If an accountant does everything right, statistically a client should only get an enquiry every 20 years or so,’ says Graham Wilde, chartered tax adviser and director at TaxNetUK. ‘When tax goes digital,’ he adds, ‘HMRC might be even less inclined to open formal investigations, as they will have direct access to client information and be able to monitor a business and detect “errors” in real time.’

Wilde does not sell tax enquiry fee cover to his clients. ‘I’ve had only one enquiry in the last six years, which I was expecting. It was January and the client didn’t have the final figures ready so the return was based on estimates,’ he says.

‘Taxpayers without insurance often try to conduct an enquiry themselves to save on costs, which can prove a false economy’

Salisbury-based firm John Curtis Accountancy has opted for ‘whole practice’ cover and invites its clients to participate in the service. The take-up rate in recent years has been around 65%. ‘We’ve had five enquiries in the last five years, two of which should never have been opened, as HMRC were using incorrect information,’ says director John Curtis. ‘I consider this to be a very low level of enquiries, but what’s happened in the past isn’t necessarily an indication of what may happen in the future.’

Ramping up

While the claim by insurers that ‘tax enquiries are at record levels’ may be exaggerated, there is some evidence that the new powers HMRC has been given in recent years are helping the agency close the country’s annual £36bn tax gap (or uncollected tax revenue). Its reinvigorated compliance activities brought in £26.6bn in 2014/15, up from £18.6bn in 2011/12.

The investigations are also becoming longer. According to law firm RPC, taxpayers under enquiry by HMRC’s Charities, Savings and International and Pensions units waited an average of 303 days for enquiries to close during tax year 2015-16, compared to 243 days the previous year. And the longer the investigation, the higher a taxpayer’s professional fees are likely to be. According to the FSB, dealing with a full HMRC investigation can cost £5,000.

‘Taxpayers without insurance often try to conduct an enquiry themselves to save on professional costs, which can prove a false economy,’ points out Charlie Owen, associate partner at Russell New. ‘In such situations, HMRC quickly obtains the upper hand and, while inspectors are obliged to adhere to a strict code of conduct in their behaviour during enquiries, it’s not unheard of for them to act beyond their powers. Professional support can help keep a check on this.’

Charging less is an obvious way to encourage higher client take-up rates. ‘All that I’m looking to do is to cover the cost of the annual premium,’ Curtis says.

Liberty Williams has every single client covered. ‘The cost of the insurance to me is £14 per company per year. All our clients have it included in their standard fees package,’ Diamond says. ‘I don’t claim on the insurance unless we have a full-blown enquiry; we can sort out many HMRC letters with a simple reply and by disclosing some basic information.’

Owen does not expect the vigour with which HMRC pursues taxpayers through enquiries to diminish any time soon. ‘With the introduction of Making Tax Digital, HMRC is hopeful errors and omissions on tax returns will become less likely. However, given the complexity of tax law, many enquiries centre on interpretation of the law and around highly technical points rather than errors or omissions on tax returns. It’s likely that resources saved from investigation of basic errors on tax returns will enable

HMRC to focus increasingly on more complex areas where the tax at stake may be higher.’