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Fee protection - Consider your options. By Dan Martin

5th Apr 2006
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HM Revenue & Customs' clampdown on tax evasion over recent years has led to a growing number of firms and individuals turning to professional expenses insurance to cover the costs involved with tax investigations. For accountants, offering the service ' also known as fee protection - to clients can provide a valuable profit generator but taking on the wrong type of policy could prove damaging.

Over the past decade, the concept of tax investigations has been transformed. HMRC has got tougher on non-compliance and the introduction of self-assessment in 1996 added a 'random enquiry' element meaning almost anyone now faces the prospect of investigation. Pre-SA, the Revenue had to provide a reason for investigation. That is no longer the case.

The figures demonstrate the facts - it is estimated that 250,000 inquiries into self-assessment tax forms are conducted every year, while David Harnett, policy director at the Revenue, pledged last year that his department aims to close by £3.5bn a year the £30bn gap in the Exchequer caused by tax evasion and avoidance.

For accountants, the impact has been as equally extensive as that faced by their clients. Whereas 10 years ago most believed it was unnecessary to provide protection because they always ensured clients complied with tax laws, HMRC's new random approach means it is probable some clients will be investigated sooner or later.

"Since SA was introduced, much of the stigma surrounding investigation has disappeared', says Roy Murray, general manager at Professional Fee Protection (PFP). 'It's not considered to be the dirty thing it once was."

The benefits
The benefits to accountants' clients are clear. With fees resulting from an investigation often amounting to thousands of pounds, insurance against them is obviously welcome. For accountancy practices multiple benefits are on offer.

A major reason for taking out fee protection is expectation. Many professional accountancy bodies recommend firms in the very least make clients aware of its existence and in these days of random investigations many practices also find clients actually come to them requesting the service.

"Many accountants now offer tax protection as a standard as clients are now more switched on to aspect enquiry disputes,' says Diana Robertson, marketing development manager at Qdos Consulting. 'Especially after the merger of HM Revenue and Customs, many clients are actually asking their accountant if the practice has fee protection."

Many accountants offer the service will find it helps to attract new customers.

Christina Brennan, marketing coordinator at Abbey Tax Protection, says customers report that as well as providing an additional revenue stream for the practice, fee protection has provided "valuable assistance with client acquisition and retention."

For many clients, the service may be something they have not considered but once adopted and alerted to the consequences of investigations, many will see it as beneficial extra service.

Depending on the policy, fee protection can also provide accountants with more control over the tax investigation process.

As Pat Mackereth, business partnerships managers at Leicestershire-based CCH Fee Protection, comments: "Clients have the comfort of knowing that should they experience enquiries or disputes with the tax authorities they will be dealing with a familiar trusted face and not a stranger."

Doing your research
As with any financial product, carrying out extensive research into the services available is essential to ensuring the right policy is adopted. Although all of the products are broadly similar ' most cover up to around £75,000 of fees ' accountants should ensure they adopt a policy most suited to their needs.

Typical cover includes HMRC in-depth investigations and self-assessment enquiries, VAT disputes and DWP investigations. Most insurers also offer extended cover to 'aspect' enquiries and appeals before the Commissioner and VAT tribunals. But accountants should always check for the limitations.

When putting together a quote, insurers will ask detailed questions about the size of the practice, the number of previous investigations clients have faced and the average cost. Several different schemes are available according to how many clients will adopt the policy.

Most of the time accountants must put more than a set number of clients on the insurance scheme but some providers do offer no minimum cover programmes. These are most suitable for smaller practices.

Accountants looking to market their insurance scheme more widely and make large profits are targeted by schemes which allow them to pick their own pricing structures for different sizes and types of clients.

'Some accountants on our books make a loss at lower end of their client list. It's a way of making sure everything is covered,' Murray says.

"But it's worthwhile from their point of view to get as many clients on board as possible. They know smaller clients wouldn't take on the insurance at the same price as bigger clients pay."

Practices can also in many cases insure themselves against investigation or buy the insurance at a wholesale price and retail it back to their clients. These latter types of schemes however are only available to practices directly regulated by the Financial Services Authority and with a designated professional body licence.

Even when settled on a policy they believe most suits their requirements, accountants must remember to read the details of policies for what may not be covered.

'Always check the scope of cover on offer," Qdos' Robertson advises. "For instance, it's a fact that there has been an increase in corporation aspect enquiries so accountants should check whether the provider's cover include aspect enquiries, income tax and corporation tax."

Another bone of contention for many is to what extent the insurer will get involved when investigations occur.

"Accountants should always make sure they will be the ones doing the work," PFP's Murray warns. "With one or two products on the market this is not always guaranteed."

Some providers allow the accountant to represent the client in an investigation themselves or use the services of a consultant. If flexibility is a concern, accountants should ensure they check how restrictive policies are.

Some providers also specify the accountant taking out the policy has to be the accountant who prepared the returns being investigated. This may mean some new clients are not covered by the insurance should an enquiry occur.

Around 75% of tax enquiries into individuals are settled with no more tax to pay. But accountants cost remains. For clients, fee protection provides a valuable defence against bills worth thousands of pounds, while accountants benefit from knowing their clients feel protected as well as some additional income.

Admittedly, fee protection is not suitable for all practices but most should seriously considering adopting it as a value added service.

Essential questions

CCH Fee Protection suggests accountants should ask the following questions of a fee protection provider:

1. How long has the supplier been in the fee protection business?

2. Who is the principle underwriter?

3. Is the supplier recommended by any professional bodies and if so who?

4. Is the supplier financially stable?

5. Is the supplier FSA authorised?

6. How many employees have a tax/VAT background?

7. Is a consultancy service available?

8. Is there an indemnity limit per claim/in aggregate?

9. How many practices does the supplier cover?

10. Is there a maximum/minimum number of clients that can be covered for each practice?

11. Can clients be excluded?

12. What type of enquiries/investigations are covered or excluded?

13. Is there a minimum contract?

14. What is the deadline for notifying claims?

15. What marketing help is available?

16. Is there information available on existing clients who may be contacted?

Read on:

Part two: Fee protection - Marketing matters


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