Government plans to mandate professional indemnity insurance for tax advisers could offer important consumer protection, says ICAEW, but further discussions are needed with the insurance industry to identify a viable solution which does not have a disproportionate impact on professionally qualified advisers.
ICAEW has reaffirmed its support for HMRC’s plans to mandate professional indemnity insurance (PII) as part of work to raise standards in the tax advice sector and provide greater consumer protection.
ICAEW members in practice must already have PII so the measure should not impact them but only tax advisers who are not members of a professional body. However, ICAEW argues that more consultation and research are needed to ensure the measure will be effective and does not have any unintended negative consequences for taxpayers or professional advisers such as ICAEW members.
In response to a consultation on professional indemnity insurance and defining tax advice, ICAEW’s Tax Faculty urges for a narrower definition of “tax advice” than those suggested by HMRC and outlines areas of tax advice that, for the time being, should potentially be scoped out of the measure.
In the consultation, HMRC outlines a definition of “tax advice” that is as wide as possible and encompassing all tax work undertaken in the UK or related to UK taxation, but with some exceptions and exemptions.
However, in ICAEW Rep 57/21, ICAEW cautions against this approach. “There is a danger that if the definition is drafted too widely, it could catch many areas where there is little or no risk, while imposing substantial compliance burdens on the rest of the tax advice sector.
“We would suggest that the definition of tax advice should be narrower than that which has been proposed by HMRC, but with the power to add to it later.”
The faculty argues that there are areas that should be scoped out of mandatory PII. It gives the example of payroll processing services where no tax advice is provided, as well as subcontractors providing tax advice whose work should be covered by the PII in place at the firm for which they are working. ICAEW also suggests that tax software providers should also be scoped out pending a detailed review of the oversight of the tax software market.
In responding to HMRC’s consultation, the Tax Faculty engaged extensively with ICAEW’s PII experts and members and insurers.
In principle, the need to obtain PII should help drive up standards in the unaffiliated adviser market, as riskier advisers will face higher premiums and be forced to adhere to stricter standards. High-risk advisers would face not being able to obtain cover and, potentially, have to exit the market.
However, it also warns that it is difficult to gauge what the PII market reaction would be to the measure. “Given the increased demand and possible limits on supply, at least in the short term, PII costs could rise for all who provide tax services and not just those who have never obtained PII cover.”
ICAEW concludes that any PII regime will need to be proportionate and ensure that it does not result in potentially undesirable outcomes, such as increasing costs for all advisers or pricing taxpayers out of taking advice when they need it.
ICAEW also outlines a series of questions about the requirements for PII that need to be addressed before the proposed measures can be taken forward. These include what would be the required minimum level and the minimum terms of cover.
It concludes: “HMRC needs to work closely with the insurance industry and other stakeholders to identify a viable and comprehensive PII solution which the insurance industry can deliver successfully.”
In line with its previous consultation responses, ICAEW reiterates that in relation to high-risk promoters, the PII proposals by themselves may not be sufficient to stop their activities and the professional bodies and HMRC need to continue to work together to try and stamp out such activity.
“Based on past experience, there must be a danger that such advisers they are likely to either reinvent their activities but in a slightly different form or within a new structure, move offshore or, at worst, ignore the rules altogether. We remain concerned that such providers will continue to present a real and present threat to the UK tax system and that PII by itself may not be sufficient to stop them.”
ICAEW Know-How from the Tax Faculty
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