As part of its work to raise standards in the tax advice market, HMRC is seeking views on its proposal to require tax advisers hold professional indemnity insurance and on a potential enforcement regime.
The rationale for mandating professional indemnity insurance (PII) is to provide a baseline level of protection and reassurance to taxpayers that they have a method of redress should they receive incorrect or incomplete advice.
Market forces may also drive up standards as riskier advisers could face higher premiums and be forced to adhere to stricter standards (such as becoming a member of a professional body and having more robust client engagement and risk assessment procedures) or exit the market.
ICAEW and other professional bodies, including the Law Society, support exploring compulsory PII as a way of raising standards and improving consumer protection.
The new consultation follows on from HMRC’s call for evidence last year on raising standards in the tax market, a summary of responses on which was published in November 2020. The call for evidence aimed to support:
- greater market transparency;
- access for taxpayers to reliable advice from a competent professional maintaining high ethical standards;
- preserving market access; and
- enhancing tax compliance.
This latest consultation is published alongside a further document, Clamping down on promoters of tax avoidance, which includes a number of measures to tackle the promotion of tax avoidance schemes, including the power for HMRC to publish details of promoters and schemes where it suspects arrangements constitute tax avoidance.
The proposal should not affect the roughly 70% of tax advisers who are members of professional bodies (such as ICAEW and CIOT) as they should already hold PII as a requirement of membership. However, this still leaves around 21,000 advisers who are unaffiliated and therefore less likely to hold PII.
There may also be individuals or firms involved in activities where tax advice is tangential to the services they provide, such as customs agents and employment intermediaries. It is unclear at this stage whether these would also be included within the scope of the proposal.
Questions raised in the consultation regarding the nature of required cover include:
- Should each practising adviser in a firm is to hold separate insurance, or just the principal in the firm?
- What should be the minimum required level of recover? Different professional bodies set different recommended minimum cover levels. ICAEW’s PII regulations require a minimum level of £1.5m for any one claim and in total, or 2.5 x gross fee income (de minimis £100,000 cover) where gross fee income is less than £600,000 per annum.
- What should be the maximum level of excess? ICAEW’s requirement is, broadly speaking, £30,000 x the number of principals in the firm.
- What run off cover should be obtained? HMRC proposes that cover should be obtained that remains in force for up to six years after a firm or adviser has ceased business as this is the period over which it can potentially seek to recover unpaid tax liabilities.
To determine who should be required to hold PII, HMRC also seeks to define what constitutes tax advice. It proposes that the definition should be set as wide as possible (encompassing all tax work undertaken in the UK or related to UK taxation) but with some exceptions and exemptions. These could include:
- Advisers working on a pro-bono or charitable basis only.
- In-house tax staff.
- Those providing guidance only, rather than recommending a specific course of action (potentially mirroring the distinction made between advice and guidance in the financial services sector).
HMRC envisages an enforcement regime with three elements:
- Transparency: It should be easy for clients to establish whether an adviser holds PII, ideas for which include requiring advisers to display their certificate of insurance at their premises or online.
- Checks: Ideas here include HMRC performing checks when an agent requests access to online services or to be authorised to act on behalf of a client.
- Sanctions: HMRC could suspend access to online services for non-compliant agents. A more hard-hitting option could be to make advisers joint and severally liable with the taxpayer for errors in returns where they do not hold the required PII.
The consultation is open until 15 June 2021 and HMRC is seeking views from a range of stakeholders.
The government will evaluate the outcome of this consultation and the impact of the package of next steps set out in the November 2020 summary of responses to determine whether further action or greater regulation is needed in addition to the PII proposal.
ICAEW’s Tax Faculty will be responding to the consultation in due course. Please send any comments to email@example.com.
More analysis of Tax Day announcements:
- Tax Day announcements take a long-term view
- Tax Administration Framework Review is ‘mammoth’ undertaking by HMRC
- Earlier tax payments may be coming in the next parliament
- More detail on notification of uncertain tax treatment
- Transfer pricing documentation requirements to be made more robust
- Did Tax Day deliver on sustainability?
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.