In March 2021, HM Revenue & Customs (HMRC) launched a consultation about making professional indemnity (PI) insurance mandatory for tax advisers in a bid to raise standards in the sector.
By doing this, HMRC said it will improve tax advice and provide taxpayers with better access to redress in cases where they have received bad advice.
The government estimated there are 72,000 tax advisers, of which about 70% are members of professional bodies. This leaves around 21,000 advisers who are unaffiliated and, therefore, less likely to hold PI cover.
HMRC said in the consultation: “The advantage to setting out certain minimum mandatory levels of cover is to ensure taxpayers are adequately protected. If advisers are able to underinsure then taxpayers may not receive the improvements in the level of protection the government is seeking to achieve.”
International Adviser spoke to the Tax Advice Network, Buzzacott and ATC Tax to find out what impact HMRC’s plans to introduce mandatory PI cover for tax advisers could have.
Standards
One of the main reasons HMRC gave for mandatory cover was to raise standards.
However, Mark Lee, chairman of the Tax Advice Network, said there isn’t an issue in the sector surrounding standards.
“Most qualified tax advisers and accountants are already obliged to abide by the Guide to Professional Conduct which addresses standards re-tax advice generally,” he said.
Scott Barlow, tax director at ATC Tax, said that “standards in the UK are typically high” but “issues can arise within a minority of mainly smaller firms, sometimes with underqualified tax advisers, which do not operate under the governing tax body”.
He said: “The regulator could also look further into supporting advisers with an international presence. It may benefit these individuals to have the appropriate credentials to advise across nations.”
Rakesh Dabasia, director at Buzzacott, added: “HMRC accept that the majority of tax advisers adhere to a high level of professional standards, but there are some tax advisers who aren’t regulated and don’t have any PI insurance.
“These tax advisers can currently operate quite openly. HMRC have taken steps to tackle the promotion of tax avoidance schemes which appear to provide a tax advantage through the requirement to disclose by the scheme promoter and then issuing spotlights to warn taxpayers.
“However, this hasn’t deterred those scheme providers who’ll find alternative ways to operate.
“There’s a wider issue to consider in relation to standards and as to whether a particular tax adviser has the expertise to provide the technical advice required.”
Solve everything?
PI cover seems to be HMRC’s main strategy for improving the tax advice market but Barlow argues that this “wouldn’t completely solve the issues we currently see in the sector”.
“The majority of qualified advisers already have PI insurance in place, either personally or via their employer, so the task is centred on encouraging those outliers to put protection measures in place.”
Dabasia added: “PI insurance does resolve the issue of redress for taxpayers, but it doesn’t necessarily deal with HMRC’s objective of dealing with the promoters of tax schemes. They’ve issued a further consultation looking at how this can be addressed.”
Another of the issues that HMRC want PI cover to solve is redress.
But will it provide taxpayers with better access to compensation?
Lee said it will not because “it’s already a requirement for members of most professional bodies”; while Dabasia said that “the risk of a claim against an adviser’s PI insurance does contribute to an improvement in the tax advice and whether they have the expertise or should seek external advice”.
“There needs to be a suitable complaints procedure in place, otherwise the taxpayer would have to make a legal claim to enforce redress.” Dabasia added.
Costs
The financial advice market has been having problems with the spiralling cost of PI insurance over the last few years due to various defined benefit (DB) pension transfer scandals.
HMRC will have to find a way for PI insurers to make cover affordable so as not to depleate the market as they have for financial advisers.
Buzzacott’s Dabasia said: “As we’ve seen with financial advisers, the cost of the PI insurance premiums will invariably be affected. Tax advice is generally perceived as high risk by insurers due to the complexities of the tax legislation.
“HMRC could play an important part in determining the cost of PI insurance. Tax advice comes in many forms, whether it’s relatively straight forward routine tax advice, or more complicated tax advice.
“It will be hard to distinguish between the two for the insurers. HMRC have drawn the definition of tax advice quite widely to encompass most scenarios.
“HMRC have already taken steps to deal with dishonest tax agents and this could be considered when determining the cost of PI insurance for insurers.
“HMRC needs to work with both insurers and advisers to ensure that cost of PI insurance is not prohibitive such that good tax advisers are put out of business.”
Working with HMRC
To bring in mandatory PI cover, HMRC will have to be very hands-on and engage in dialogue with tax advisers to make sure it works.
ATC Tax’s Barlow added: “With HMRC announcing launching several consultations around tax advice, such as how tax advice is defined, the body must be clear and open with any changes it wants to make.
“Clear information and access to plenty of guidance will be essential to ensuring tax advice businesses understand what the new changes mean.”
Dabasia said: “HMRC needs to consider the position where there is a general disclaimer stating that no tax advice is being provided but there is reference to the tax position or an external tax opinion is provided.”
PI cover and tax avoidance are HMRC’s two big issues it wants to crack down on.
But Tax Advice Network’s Lee says that “if HMRC wants to raise standards they would need to do two things”.
Lee said that it needs to “stop authorising unqualified advisers to operate under the anti-money laundering legislation” and “report to the relevant professional bodies when HMRC becomes aware of concerns”, which includes the advice and behaviour of qualified advisers.
