Fee protection insurance: should quality come before cost?

Dominic Preist, head of tax sales at Markel UK, explains how valuable fee protection insurance can be and when it’s worth paying more for quality cover.

How does fee protection insurance safeguard against the cost of being investigated by HMRC?

An accountant will complete the tax returns for their client, submit these to HMRC annually and charge their client a fee for this service. Following the submission of these accounts, HMRC may decide to open an investigation into the validity of the return or have queries on which they need clarification. These investigations could be random, or they may be the result of HMRC obtaining information about the client, their trade or industry.

During these investigations, the accountant will need to liaise with and supply additional information to HMRC, which will take time – time which they would usually bill back to the client. This puts the accountant in the tricky position of having to bill their client for additional time spent on work that they have already billed them for. And the client might question why they are being billed twice.

A fee protection policy provides cover for the cost of the accountant to defend, investigate and respond to an HMRC enquiry, therefore removing the need to ask their client for additional payments. From the client’s perspective it also insulates them from additional, unexpected, unbudgeted costs following an HMRC enquiry.

How valuable is fee protection insurance in instances like this?

Costs can be significant – a typical claim for an accountant’s time would be thousands of pounds. At Markel, we have a limit of £125,000 for any individual indemnity claim, and there have been claims that have reached this limit.

With a fee protection scheme, 100% of the accountant’s fees will be recoverable. When accountants try to recover this fee from their clients, there will inevitably be an element of negotiation, and accountants tend only to recover around 80–90% of their invoiced fees. A fee protection insurer settles the claim without haggling.

Should accountants go for the cheapest insurance, or are there other factors at play?

Going for the cheapest is not always a bad thing. If you are looking for a commodity to fulfil a specific need and you are not concerned about the depth of the product offering, then cheapest is more than likely the best route. If longstanding business relationships that offer more than just a single product are required, you will need to look past the price to see what is being provided.

You need to consider whether it is good value for money in the long run. There is a danger of insurers ‘low balling’ the new business premium and then increasing it over subsequent years. If you are happy to move every year to chase the cheapest rate then that is not an issue, but consider the work and costs involved in reviewing the market, completing the necessary forms, and then adjusting to the way your new supplier operates – not forgetting the disturbance to the end customer. If, however, you are looking for a long-term relationship with consistent pricing, perhaps the cheapest is not the best option.

How would accountants and businesses benefit from quality service and cover?

By partnering with an insurer who is able to provide extended services, the accountant can give their clients the perception they are able to provide for all of their needs in-house. Most suppliers offer helplines and additional consultative services, but not many provide these services themselves – they rely on white label solutions or partnerships. While these are not a bad thing in themselves, care needs to be taken to understand fully what is being offered and by who.

It is important to check the credibility and reliability of these additional services – what checks have been undertaken to vouch for the services provided by a third party? Will the insurer stand by the third party’s work or will they distance themselves if something goes wrong?

Ultimately, the accountant needs a smooth and frictionless journey for their end client. Reputations can be won or lost by introducing a third party into a trusted relationship, so accountants need to be 100% sure who they are putting their most valuable asset, their client, in front of.