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Just a word of warning.....
..... about fees related to tax savings.
The ICAEW (and I guess it's the same for the other institutes) require additional "safeguards" to be in place where such fees are charged, as there is an obvious threat to independence.
I acted as an expert witness last year in a situation where the safeguards had not been put in place, and where a fee not too dissimilar to £21,000 ultimately had to be repaid by the accountant as a result. He too was relying on software to show the tax saving - but the software didn't take into account the "end game " - ie what happens to all the profit that is retained in the company whilst the DLA is being paid out.
It's not wrong to price in this way, just an area where one has to be very careful.
Not outrageous at all
If the client agreed to pay £21,000, how can it be "outrageous"? Indeed, the facts point to a very different conclusion:
Fact 1 = Most accountants could do what Nino did, but research shows tha over 90% of accountants aren't as proactive as they should be.
Fact 2 = The reason they are not proactive enough is because there is not enough time in the budget because the fees they charge are too low
Fact 3 = Research published on accountingweb shows that once an arms length salary charge is deducted for partners, over 50% of partners make an economic loss - again because their prices are too low
Fact 4 = The time cost is completely irrelevant because it is totally arbitrary.
Fact 5 = As Ron Baker says, we should "charge by the year not by the hour" - ie our fees should reflect the years it has taken us to acquire the skills of senior professionals, not the hours it takes us to use what we have learned
Fact 6 = There is now well established value based market price for tax planning fees - with most switched on firms charging 25% of the tax saved (literally hundreds of firms of all sizes are charging this - and their clients are happy to pay)
Fact 7 = ICAEW code of ethics specifically says in para 240.1 "When entering into negotiations regarding professional services, a professional accountant in public practice may quote whatever fee deemed to be appropriate. The fact that one professional accountant in public practice may quote a fee lower than another is not in itself unethical." So there is nothing in the rules that says one accountant must charge an unprofitably low fee just because lots of other accountants are doing so.
Fact 8 = Most importantly, Nino's client was happy to pay the fee presumably because the tax saving was massively higher than the fee. So they were so much better off than if they had been served by an accountant who charged low fees and as a result had no time to provide the sort of proactive input that made all the difference to the client here.
So where is the problem?
Clients deserve excellent proactive service - which Nino is clearly giving (unlike the over 90% of partners who don't have enough time in the budget to be truly proactive).
Accountants deserve to be excellently well rewarded - which Nino is being (unlike the over 50% of partners who make a loss).
You ask "where is the problem"?
The problem (or at least the potential problem) is that the fee is related to the tax allegedly saved. So the accountant has a conflict of interest - it is in his interests to flex the tax savings upwards to increase his fee.
You quote part of the ICAEW Handbook - but not the bit that says you must put safeguards in place where you have such a conflict. People need to have the whole picture.
As I said before, it is not wrong to charge fees this way, just potentially very dangerous.
And I will say that we routinely pick up clients from firms who price in this way. This form of pricing, whilst excellent for short term profits, leads to a loss of the fundamental relationship of trust a year or two down the line when the client discovers they have paid four times the going rate. So the client leaves. By that time he doesn't give a toss about pro-activity. He wants pro-activity, but at reasonable cost!
its all about the client ....
I too was sceptical about the enormous fees for an incorporation, particularly fees such as 21000. But I feel that we have been under pricing ourselves for many years.
If you are having a lease drawn up by a solicitor, do you think they charge by the hour for drafting it from scratch? I imagine they use a template that has been created over the years they have been practicing, and tweak it to reflect the clients circumstances.
The whole purpose of us being in practice is to operate a profitable business that rewards us for our years of training. I personally wouldn't like to think that I was charging too much, but equally I don't want to be under valued. The op will probably gain more clients as a result of his proactive approach, not lose them.
Offensive
I've reported one of the posts as offensive.
The person (and you know who you are) is brain washed into time based billing mentality. They are trying to manipulate readers that accountants must work long hours to justify a fee rather than use their knowledge. This mindset is unethical and encourages accountants to waste client’s money.
You are entitled to your opinion
Anyone can do here and I presume Bob is referring to me.
With regard to time based billing we are not brain washed at all. This practice commenced over 50 years ago and in all that time have operated on the simple principle of charging what the job is worth, not the hours on the clock. For example, do you give the client the advice and suggest one option is for them to form the company themselves and highlight the savings that they could make by doing so? We do. We put our client's interests ahead of ours, on every case, as one should per the code of ethics.
It is all professional accountants duty to give the correct advice on a particular situation to their clients and the point I was making was that this knowledge isn't rocket science and therefore why should it demand a premium price.
I am not trying to manipulate readers at all. We would never put a second on a client's file to try and justify a fee. I agree that anyone padding a file is unethical.
Of course, fees are a matter between the two parties concerned but I agree with "You ask where is the problem" how are you dealing with the self interest threat?
£21000 for incorporating a business. Who's wasting client's money Bob?
And there was me thinking it was me Bob was referring to!
I wholeheartedly agree with the most recent poster.
Bob is entitled to his view - but so are we. To suggest that a post that simply espouses an alternative equally valid point of view is offensive simply shows Bob up as being as blinkered. I hope the site moderators will get after him for misuse of the site. Generally speaking, those who shout "my way is the only way" only shout that loudly because they know it isn't!
And Bob - where are the self interest safeguards? In situations such as this the accountant has the upper hand - so he must be sure his client fully appreciates that and understands what is going on - explicitly - in writing. If the client is prepared to enter a bargain on that basis, then that's fine.
Only half the story
Doing something for a long time doesn’t make it right and £21,000 is only half the story.
Maybe the firm has specialism of valuing goodwill or is more aggressive than traditional accountants so the tax saving is higher? Perhaps the client needed high level persuasion or a better explanation before they did it? This firm could be earning fees for being better at communication…after all there are lots of clients not doing what they should be doing and accountants have a responsibility.
Bob
97% of accountants admit that they aren't doing it right!
Much of the debate above is fascinating, but the facts seem to tell a different story....
97% of accountants are failing to give even the most basic of tax planning advice to their unincorporated clients – and as a result are letting their clients down and missing out on the opportunity to earn proper fees.
Yesterday I took a straw poll of 100 partners during a seminar in London. Only 3 out of 100 even claimed to have discussed with every one of their incorporated clients in the last 12 months whether it was now appropriate to incorporate.
Some of the underperforming 97% had no doubt talked to their clients at some earlier point. But quite frankly that is nowhere near good enough. After all, in any year there could be significant changes in one of more of the following key factors that determine whether or not incorporation is right for a client:
- The client’s profits
- The client’s drawing aspirations
- The tax regime (eg the new 50% income tax rate, for example, will soon tip the balance for many)
- The client’s appetite for tax savings (many accountants are telling me that their clients are now more keen than ever to save tax)
- The client’s attitude towards the value of limited liability (in these challenging times the fear of losing their home if they stay unincorporated is greater than ever)
- The client’s attitude towards the extra hassle involved in going limited
However well they know their clients, the 97% cannot possibly know for a fact whether or not there have been changes in all of the above in the last 12 months. But given the unprecedented changes in the economy over the last year, it IS a safe bet that things won’t be exactly the same as the last time they talked to their clients about the issue. Therefore it is our professional responsibility to raise the issue and do the maths with every single unincorporated client in 2009.
Why are 97% failing to do this? Quite simply because there is not enough time in the budget.
And why is there not enough time in the budget? Quite simply because the prices accountants charge are too low.
In contrast, if you follow Ninos Pucacco’s value pricing approach above you will have the time in your budget.
So we have a clear choice.
Charge too little, kid ourselves that we provide great service, but actually let our clients down (as 97% currently seem to be admitting to doing).
Or charge more and actually give our clients great service (as currently only 3% even claim to be doing).
In the first instance we delude ourselves that we are being professional. But ICAEW ethical guidelines make it clear that we are, in fact, being unprofessional (ie in section 240.1 its says “a self interest threat to professional competence and due care is created if the fee quoted is so low that it may be difficult to perform the engagement in accordance with applicable technical and professional standards for that price”.)
In the second instance we are doing the right thing for our clients and for ourselves.
I for one know which of the two approaches represents the kind of professional I want to be.
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Steve Pipe FCA - Author of the White Paper "The Proactive Accountant" and adviser to over 200 leading UK accounting practices.
Change the mentality not the price
Steve - you know better than that, the real issue is being stuck using time based billing mentality.
Putting the price up to create some time doesn’t change the mindset. It probably makes it worse because it accommodates the problem rather than confronting it.
If accountants used value pricing they would have a different mentality to tax planning and mange clients more effectively as part of the project management within the price. This would probably include making sure the client’s bookkeeping was excellent so they had the time AND information to deliver maximum value within the budget.
I’m sure it won’t be long before someone sets up a “where there’s blame there’s a claim tax review service” with:
1) A free offer to review business owners tax position (including Tax Credits) in return for a percentage of the tax saved
2) To represent anyone in a claim against an accountant who has not advised properly. This could include legal and PR.
3) Recommend a new accountant
If a service was launched, would AVN firm sign up to being sent referrals from this service?
Help rather than crucify
Bob - I agree, value pricing is usually the answer. After all, it is what Nino actually did - and it is also what I advocated in Facts 4-6 of my earlier post.
As for your "sue an accountant" service, I would rather help accountants get better than crucify them. I am tremendously proud to be an FCA.
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Steve Pipe FCA - Author of the White Paper "The Proactive Accountant" and adviser to over 200 leading UK accounting practices.
It is never that simple
I have no problem with charging large fees if the advice is in the clients best interest - it is their level of perceived value for money that counts.
But I just wanted to point out that capitalised goodwill is not always tax deductible in the newly incorporated entity. The larger soletraders/partnerships may well have been in existance for many years and so their goodwill (or at least a portion) would not be.
Amazing how many accountants I have seen who have treated their own practice in this way, even though it is incorrect!
mixed up thought
Obviously goodwill created before 2002 can't be written off for tCorporation tax purposes in a non arms length scenario.
But it still provides scope for tax free draw downs until the loan account is exhausted.
There is also scope in the current CGT regime for eventual profit extraction through the sale of the shareholding in the company especially if any entrepeneurs relief is still partly available .