Having noticed the recent references to engagement letters in the West Country Practitioner’s diary I have offered to put my head above the precipice.

A while back I volunteered to chair a working party which set out to update the professional bodies’ guidance on tax engagement letters.

The working party comprises representatives of all the major tax and accounting bodies. This means that my objectives as Chairman have been to gain maximum benefit from everyone’s involvement, to ensure that the guidance we provide is acceptable to all the bodies and especially that it will be helpful to our members and that our output will be commercial, client friendly and uptodate guidance and specimen letters.

This is not the first time that the professional bodies have collaborated on such a project. I have, for example, sat on a similar working party focused on the Guide to Professional Conduct for those working in tax. This group was responsible for the current version of this guidance. The group has recently been reconstituted and I’m back again. It’s not that I’m a glutton for punishment but I have long had an interest in such matters and seem to be the first to volunteer on behalf of ICAEW.

Ambitious plans

At the first meeting of the engagement letter working party we all agreed to do more than simply update the previous ‘standard’ guidance.

There was general agreement around the table that, over the years, ‘standard’ engagement letters had grown longer and longer. As such they were rarely read properly and many people have either created their own – and may or may not have included all the key elements - or encouraged clients to sign the letters without reading them.

This is a dangerous route to follow as evidenced by the number of professional indemnity cases that involve disputes over the adviser’s responsibilities and the terms of the letter of engagement. We decided that we needed to reduce the length of ‘standard’ engagement letters and to encourage members to tailor them to suit their own circumstances where appropriate. We also wanted to create a generic ‘pro-forma’ which could be adopted by smaller practitioners with minimal modification.

It quickly became apparent that rewriting a number of specimen engagement letters and providing guidance as to the rationale for all key elements was an ambitious task. Having started however we weren’t going to turn back even when we realised why the professional bodies have not attempted this for many years.

We collated a large number of pro-forma engagement letters, mostly from smaller firms and sought to produce a best of breed, fully uptodate and to provide guidance as to the rationale and benefit of including each of the terms and topics addressed.

The process has been very time consuming and all members of the working party have plenty of other things to occupy their time. Most are in practice with chargeable time pressures or are part of the in-house team at one or other of the professional bodies and responsible for many other activities besides this working party. Incidentally, for those ardent critics who believe the Institutes are run by and for the benefit of the biggest firms, only one member of the working party works for a Big 4 firm.

I have a strong belief that guidance from the professional bodies should be more than merely prescriptive. It should recognise the realities of commercial life and, so far as possible, be something I respect. Specimen engagement letters should be in a format I would be prepared to issue to my clients if I were still in public practice. I was delighted that the other members of the working party agreed that we would aim for the letters to satisfy these criteria.

Structure of the letters

One of the first things that probably strikes most people is the length of traditional engagement letters. One reason for this is that they combine what should be the adviser’s standard terms and conditions with a detailed list of the services to be performed and those that are excluded. And, as mentioned above, additional bits and pieces have been added over the years seemingly without anyone asking whether the consequential monster was fit for purpose.

The working party agreed to reduce the length and complexity of engagement letters. To do this we decide to separate out the distinct parts and to provide constructive guidance to our members as to the key elements that they should consider as regards the terms and conditions they choose to apply when providing tax services to clients.

Our new guidance suggests that the most useful approach to adopt is firstly to establish your standard terms and conditions. These will then be one of two enclosures that accompany a simple covering letter of engagement. The other enclosure will set out clearly the scope of the work you will perform for the client and their responsibilities in this regard. If you intend to provide more than one service for the same client, you might enclose a separate schedule for each service; alternatively you might choose to combine them. As drafted they are generally between one and two pages in length.

The covering letter itself will summarise the basis on which fees will be charged, an estimate or quote if you have provided one, and a small number of other general points. In particular the letter will define who is your client, who is responsible for your fees and whose instructions you will take – eg: when acting for a couple, a family, a group or a partnership.

All members of the working party, and especially those of us who have advised (as lawyers or experts) on professional negligence issues, are agreed that engagement letters can be an effective loss-avoidance tool. Well drafted letters do more than simply fulfil a professional obligation. They can genuinely help to manage client expectations and to resolve concerns about what is and what is not covered by fee quotes and estimates. These are the sort of issues we have attempted to address in our redrafts and guidance.

Recurring and non-recurring work

An increasing number of members are prepared to work for a fixed annual fee but there is often confusion as to exactly what services that fee covers. For example, to what extent is dealing with HMRC enquiries covered by the standard annual fee for tax return related work?

This is important both as regards the fees that our members can earn but also to manage client expectations. It can be counter-productive to try to secure an additional fee for work that the client reasonably expected would be covered by the amount previously agreed at the start of the year.

Having said that we wanted to ensure that our members were best placed to secure additional fees for any ad-hoc and advisory services that did not recur each year. Our solution has been to adopt a standard approach on each schedule of work. We have firstly summarised the recurring compliance work that will be carried out each year and which we would expect to be covered by any fixed fee arrangement.

In each case we have then identified the most common items of ad-hoc and advisory work that you might be asked to undertake for the client in connection with the related recurring work. The approach we have adopted enables you to seek an additional fee for such work as it is evidently not part of the recurring compliance work that you undertake each year.

Range of services covered

We are producing specimen letters to cover the most common recurring compliance services that our members provide:

• Personal tax – individuals, sole traders and couples




• Trusts and estates




• Partnerships




• Limited Liability Partnerships




• Companies and associations liable to corporation tax




• Payroll services




• Benefits in kind returns and payments of Class 1A NIC




• VAT and other indirect taxes

We have also produced two other specimen letters for when members are asked to provide non-recurring services to new clients:

• HMRC enquiries




• Ad hoc tax advisory services

Integration

Of course the accounting bodies, (as distinct from the tax bodies) represented on the working party, publish guidance on engagement letters covering services other than just tax.

There will be an inevitable delay in integrating the forthcoming guidance on tax engagement letters into the more comprehensive guidance that accountants require. Our work has been a necessary precursor to this.

Timescale

We recently completed the main tasks inherent in this exercise and have put a number of points to Counsel. His responses will enable us to finalise the tax engagement letters and guidance for consideration by the various professional bodies’ Governing Councils. They will then be published on the various websites.

Although the new proformas and guidance have been produced for the members of the various professional bodies I have no doubt that they will become more widely available in due course. In the past a number of commercial publishers have produced their own proformas and guidance. Historically these were often ‘inspired’ by those originally issued by the professional bodies. As I noted above it has been many years since these have had a thorough review. I have seen some variations that had been developed beyond the updates previously issued by the professional bodies. Equally I have seen many that seem to be based on the originals but with various different approaches to the necessary updates. I am hopeful that our efforts will be welcomed and that commercial publishers will, in time, update their own offerings – in so far as this may be appropriate.

Final thoughts

I am well aware that by offering this insight into the evolution of the updated guidance on engagement letters I may be setting myself up for complaints, criticism and corrections. Despite the best efforts of the entire working party and the subsequent reviews by the various bodies, by the time we publish the final updates, odd oversights will inevitably become apparent. Someone will look at everything with a fresh pair of eyes and offer an alternative view liberally sprinkled with ‘constructive criticism’ of the Professional Bodies. Someone always does. So be it.

Still, I hope that this insight will help reduce the prospect of anyone taking pot shots. Alternative views are inevitable – and were regularly apparent within the working party. There have been compromises as we wanted to avoid anyone feeling the need to reinvent the wheel. That is to everyone’s benefit.

Everyone on the working party has worked hard to create commercial, helpful and uptodate guidance on engagement letters and we hope that that our efforts will be well received and worth the wait.

For the moment though I must ask you to contain your curiosity just a little while longer!

Mark Lee FCA CTA(Fellow) is The Accountants' Business Coach [1] and founder of the Tax Advice Network [2]. He is a past Chairman of the ICAEW Tax Faculty and acts as an expert witness in professional negligence related matters. He can be reached on 0845 003 8780 or Mark@BookMarkLee.co.uk [3]