Fee protection insurance (FPI) offers substantial benefits to accountants and their clients. We outline why FPI is a win-win situation and why the industry must offer more support.
The risk to companies of receiving an expensive HMRC visit is increasing rapidly. Except for a brief lull during the pandemic, the number of HMRC enquiries and inspections has been increasing for some time. As we return to normal trading conditions, they will ramp up further as the Revenue will be under pressure to police existing tax rules stringently to reduce the huge debt incurred by the UK government during the pandemic.
HMRC also wants to tackle the misuse of schemes introduced to help businesses through the Covid-19 pandemic and even firms that have used the schemes correctly will get caught up in that melee. HMRC can visit any business and ask lots of probing questions, which they will need their accountant’s help in answering. After many hours of work spent on answering these questions, they may find no wrongdoing, but accountants must charge their clients a fee for this work regardless.
Markel Insurance raises an important question: “HMRC investigators are extremely thorough and can investigate any organisation, from multinationals to small businesses. They can even investigate individuals. But for a company running, say, a 10% margin, cashflow is critical. If it suddenly gets hit with a large, unexpected accountancy bill, how many additional sales must it make to cover that?”
The cost depends on how deep HMRC’s investigation goes – which varies considerably – and on the accountant’s hourly rates. A typical claim will cost £1,500 to £2,500. Markel FPI policies cover up to £125,000, and it has had claims where costs went beyond that. The typical FPI premium of £200 to £300 a year is tiny in comparison but smooths that impact by covering the extra fees involved.
Win-win situation
Offering FPI to their clients also brings substantial benefits for accountants themselves.
“HMRC investigations usually relate to previous work the accountant has done, for example, filling in the client’s tax return,” says Markel. “Without insurance, accountants will have to tell the client HMRC has queries about their work and that they have to bill the client again for that. That can be hard for non-tax professionals to understand and is a tough, awkward conversation.”
Clients often baulk at the idea of being charged twice and try to negotiate the fees related to the inspection. The recovery rate on fees is therefore typically between 65% up to 85%. But a fee protection policy avoids the need for that conversation.
“If the client has FPI, the accountant can do the investigation work, then simply bill the insurer,” explains Markel. “As the insurer, we don’t negotiate the accountant’s hourly rate. We agree the rack rate on day one and pay the full amount with no negotiation or quibbling.”
As well as saving money in this way, providing FPI to your clients can help financially if you choose to sell it on with a margin. This creates a risk-free profit because it has no costs attached.
A moral imperative
The trouble is that accountants often take on an FPI policy but do not promote it actively to their clients. “This can make things worse later,” says Markel. “It’s an awful conversation if your client has to pay the extra fees for an investigation, then finds you could have spoken to them about protecting against that but didn’t. As part of your client relationship, you should always try to put them in the best possible position. So, talking to clients about your FPI policy is a professional and moral responsibility.”
Another problem is that, too often, FPI providers sell their product to accountants but fail to help them get the best value from it. “The industry needs to up its game,” says Markel. “Providers need to supply accountants with more than just marketing material, such as leaflets, flyers, and letters they can mail to clients. We need to provide guidance that enables the accountant, with our support, to maximise the benefit of their scheme, not only for them but more importantly their clients.”
Partnership relationships
Markel concludes that the FPI industry is like no other sector he has worked in.
“For too long the FPI market has commoditised the offering based solely on price. We must move to more of a partnership model with the differentiator being the overall support and education we provide to each accountant. Those are the unique features that Markel provides.”
