Professional indemnity insurance may be compulsory for tax advisers

The government is consulting on plans to make professional indemnity insurance mandatory for tax advisers in a bid to improve standards and protect taxpayers

The proposals would introduce a requirement for tax advisers to hold professional indemnity insurance, including minimum levels of cover, and how the policy could be enforced and implemented.

However, the Treasury rejected the idea of setting up a licensing system for tax advisers, stating that ‘the case for going further has not yet been proven’.

Mandatory insurance could increase costs as some advisers may pass on costs to their clients, meaning higher costs for taxpayers, while the government accepted that there was a risk that rising costs may see some advisers choose to leave the market and operate in a ‘shadow’ tax advice market by continuing their activities without any supervision or oversight.

There may also be a rise in premiums across the market if insurers choose to insure riskier advisers, affecting all advisers.

The move came as the Treasury warned that ‘there are a minority of tax advisers who do not live up to the high standards of behaviour and competence expected of the profession. Some of these advisers fail to meet acceptable standards due to capability, perhaps because they have failed to keep up with technical tax developments or because they are acting beyond their area of expertise, whilst others may deliberately set out to attack the system’.

Around a third of tax advisers – an estimated 21,000 advisers – are not members of any of the professional bodies and are only overseen by HMRC’s registration system, which is not protecting customers.

It will introduce a common requirement for all tax advisers to have professional indemnity insurance that will help taxpayers to have trust that there is a method of recourse should things go wrong; enhancing customer protection.

Accountancy professional bodies tend to require specified minimum levels of cover, usually depending on fee income with a recommended minimum. For example, the Institute of Financial Accountants (IFA) requires members to hold professional indemnity cover of 2.5 times gross annual income or £100,000 if gross fee income is under £400,000, or if fee income is over £400,000, cover must be £1m.

In order for the system to work effectively, there would be a strict compliance process. The government proposes an enforcement regime with three elements: transparency, checking advisers have insurance, and sanctions for non-compliance. These three elements together would form a comprehensive enforcement approach that reinforces the government’s policy intent of improving trust in the tax advice market by targeting behaviour and improving redress.

The HMRC would continue to operate its own common minimum standards set by the HMRC Standard, which applies to all individuals and businesses involved in professionally representing or advising taxpayers. If the insurance proposals get the go-ahead, the requirement to hold professional indemnity insurance would be added to the HMRC Standard for Agents.

As part of the enforcement process, the consultation also seeks views on a new sanctions regime to ensure the new requirement is not avoided and to act as a deterrent. These sanctions could include a new offence of providing tax advice without holding professional indemnity insurance. In addition, there may need to be sanctions for not holding adequate cover, or for taking out cover but letting it lapse by deliberately not paying premiums. HMRC could also suspend the adviser’s access to online services and/or refuse to deal with them until they had the required insurance in place.

Adam Harper, director of professional standards & policy at Association of Association of Accounting Technicians (AAT), said: ‘It is already clear that doing nothing more than requiring unregulated tax advisers and accountants to hold PII – as has been required of professional body members for decades – is simply inadequate. It could arguably make a small improvement to the symptoms of unregulated advice but does nothing to address the causes.

‘There are serious tax evasion and money laundering consequences of having so many unregulated accountants and tax advisers; and there are frequent horror stories of mistakes and poor advice that can leave taxpayers with unnecessary fines, penalties and tax liabilities. The unregulated are also costing the Exchequer hundreds of millions of pounds a year.

‘If the government is serious about tackling this problem, it needs to make professional body membership compulsory for anyone providing paid for tax and accountancy services. Doctors, nurses and solicitors have long been required by law to belong to a professional body, why not accountants and tax advisers?’

On a slightly more conciliatory note, Association of Taxation Technicians (ATT), president Jeremy Coker said: ‘We see the introduction of mandatory insurance as essential but it is not a magic bullet in improving consumer protection in the tax advice market. In particular, it will not take out the hard core minority of unscrupulous tax advisers.

‘It needs to be accompanied by adherence to common professional standards by all tax advisers, and that can only be achieved if they are subject to formal disciplinary and complaints proceedings through a professional body.’

The consultation does not set out a timeframe for the introduction of the new requirement, even suggesting that it could be introduced over a transitional phase depending on the turnover of the firm.

The consultation closes for comment on 15 June 2021.

HMRC consultation, Raising standards in the tax advice market: professional indemnity insurance and defining tax advice

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