Letter of engagement top tips
After the initial meeting or first contact with a client the first task is the issue of the letter of engagement. Jennifer Adams offers some tips in creating your own bespoke letter.
For a practitioner just setting up in business the creation of letters of engagement may seem an arduous task (see Neophyte's blog).
The majority of the main accounting and tax institutes produce template letters, for example the ACCA.
Many of the tax and practice management software providers include them in their packages, automatically pre-populating names and addresses already loaded but invariably you have to pay for the privilege.
When I first set up in practice I too was faced this problem and after researching into the practices of other practitioners it was clear that it would not be an easy Friday afternoon task. Based on that (exhausting) experience there follows a checklist of points with relevant links to help you if you are faced with the task of producing (or reviewing) engagement letters.
The Institute stance
For some time the ACCA was the only body that obliged members to issue letters. Happily this is no longer the case, for example the AAT has a policy document which states that a letter must be produced.
A fact sheet dated February 2015 published on the ICAEW website states: “This helpsheet does not establish new rules or standards but provides guidance and support to members in practice”. Even so, the Institute places such importance on letters that it gives a template online for members use. Whether policy or not most of the separate Institute's review their guidance on a regular basis such that they are relatively current (for example the CIOT dated 11 April 2016).
Professional insurance companies
The professional insurance company Collegiate Underwriting advises that, as with other insurance providers, it takes the issue of such letters into account when calculating insurance premiums, not least when considering indemnity claims. Indeed, when I contacted my own insurance provider on a separate matter one of the first questions asked was whether my firm had the client's signed letter.
With MTD on the horizon there have been rumblings that HMRC will not consider an agent to be 'good' unless a letter is in place (see article: 'Will your firm pass HMRC's new test?')
I decided to write my own as my clients were a varied non-standard lot and used the AAT template as a basis. My tax software provider did not have a template. Check the website of your own and of other institutes for helpsheets and templates. Look at other accountants’ websites – some load their letters
Remember that some clients may not be regular users of an accountant’s services so may not understand technical terms. Keep it as basic and understandable as possible
Decide how to introduce to clients. If sent by post will they be returned? As previously stated a number of firms place the 'standard terms' common to every client on their website and issue separate bespoke Letters. Paul Scholes suggested putting “the interesting stuff” up front and placing terms in a web document with a hyperlink to it in the specific letter sent to each client. My firm’s practice is given at the end of this article
Decide when to issue – it depends upon the circumstances and the client relationship. The ideal is for no work to be undertaken until signed but you might want to meet with the client personally and go through the letter with the tax return getting both signed at the same time.
PatriciaRr asked whether to include a clause to limit the liability for non-audit letters. In response to the question runningmate thought not, because: “I don't want clients to see it as a green light to claim up to £x and partly because it would give me a false sense of security if the limit were invalidated by s2 Unfair Contract Terms Act 1977.” In my own 'standard terms' document I include the clause, “We are required by our professional body to hold professional indemnity insurance - details of which can be obtained from our office.”
Remember to ensure that the client has a copy. If sent by post I include a copy to be returned signed and a stamped addressed envelope – otherwise they sign via 'legal e-sign'.
How often to prepare?
Tax rules and client requirements seem to change on a daily basis but the institutes recommend issuing new letters at least annually and definitely when additional work is undertaken or type of work altered.
SteveOH said his firm has a two page engagement letter, accompanied by a 'schedule of services'. For subsequent years he sends the client an updated letter referring to the original schedule sent. If the assignment changes (for example should the client become VAT-registered), they get a new schedule - “For most of my clients, and for most years, all they receive from me is the one-and-a-bit page engagement letter.” Personally I don’t send an annual letter as it would take up too much time plus most of my client work remains the same year on year – see below.
I have learnt and built upon my template over the life of my practice as circumstances dictated. Initially I used the AAT template and have created a 'pack' of three documents. One of the documents is a three page 'standard terms of engagement' – inter alia, the headings include:
Anti money laundering
Limitation of liability
Standard fees method (monthly STO unless otherwise agreed)
Termination of contract
A separate two page 'schedule of services' tailored to each differing type of client is included - companies, trusts, sole traders, partnerships, landlords and 'one offs'.
Finally an actual letter (again standardised) with the client's name and address confirming the date of agreement, a paragraph drawing the client's attention to the liability point in the standard terms and also to the separate schedule of services. There is also a paragraph confirming that the agreement is a continuing one as from the date of the letter, thus ensuring that I don't have to rework the letter annually unless there is special/additional work undertaken not detailed in this first letter.
A solicitor advised me that his firm's letter included the paragraph: “Should you not return the signed letter, your continuing instructions will, in any event, indicate your agreement to be bound by the schedule of services and standard terms and conditions' – this I also include in my letter.