Market fears "disproportionate impact" of mandatory PII plans

Plans by the UK government to mandate professional indemnity insurance (PII) for tax advisers have been met with concern from industry members.

The proposals were first outlined via HMRC’s consultation on Raising standards in the tax advice market, published in March. Broadly, they comprise a series of measures to bolster the integrity of the tax advice market and provide greater consumer protection.

PII is is not currently mandatory for tax advisers, however, professional bodies require their members to hold it as a condition for membership. But HMRC estimates that around 30 percent of tax advisers operating in the UK are not affiliated with such bodies.

“In theory, PII is a good and mandatory thing for people to have in the professional bodies. But by itself, is it sufficient, and will it actually work as a standalone measure?” says Frank Haskew, head of tax at the Institute for Chartered Accountants in England and Wales (ICAEW).

“If you insist on people who are not members of a professional body having PII, what’s the impact of that going to be on the market?”

Following an initial ‘call for evidence’ which ran between March and August 2020, the March 2021 proposals form part of the government’s wider drive to raise standards in the tax advice market and curb the promotion and incidence of tax avoidance.

Though HMRC acknowledges in its consultation that “around half” of professionally unaffiliated tax advisors may already possess PII, many argue that the volume of high-profile tax controversies in recent years render this a serious and pertinent issue.

Survey results published by YouGov and the Association of Accounting Technicians (AAT) in April revealed a similar appetite for change in the tax advisory profession. The study showed that, of 103 MPs surveyed, more than three-quarters (78 percent) are in favour of introducing compulsory membership of a professional body for anyone offering paid-for tax and accountancy services.

Potential risks

Haskew feels the “hardening” of the PII market is cause for concern, with a lack of supply seeing premiums surge throughout 2019 and 2020.

This is reflected in listed insurer data from the Royal Institution of Chartered Surveyors (RICS), depicting a major upswing in net premiums written during 2019. This amounted to a decade-long high and a 15 percent year-on-year increase.

Haskew notes that this lack of supply could be further aggravated by HMRC’s plans, serving to drive more practitioners out of the trade. This could see PII premiums soar even further and damage the market, he argues.

“Effectively, you’ve got an increased pool of risk that’s likely to raise premiums across the board,” he says.

“If all that happens is you increase insurance premiums for everybody, is that really the policy outcome that you would have envisaged when you started? If it drove them out of the market, that is probably an undesirable outcome of the policy.”

Haskew also laments a range of other risks associated with the proposals, including the likelihood that advisers would be encouraged to operate “under the radar”.

“I think there’s quite a bit of concern as to whether the market has the appetite to actually take these risks on. If there isn’t that appetite, it’s difficult to see how it’s going to work.”

Ultimately, he argues, HMRC simply lacks the hard data and evidence on which to base such changes.

“We need to have better data on the performance of agents. It really is quite difficult to know what the problem we’re trying to address is.”

“Devil is in the detail”

Another contentious area within HMRC’s consultation is the directive that “minimum levels” of PII cover will be mandated. This has seen concerns surrounding definitions emerge from the practitioner side of the market, again largely based on how cost will be affected.

“Minimum terms can work very effectively to ensure there is protection for end users, however if they are too exact, the inevitable consequence is that premiums will be higher,” says Matthew Walker, dispute resolution partner at UK law firm Burges Salmon.

“This is likely to be exacerbated by the fact that the insurance market generally views tax advice as a high-risk activity. This could make insurance prohibitively expensive for smaller firms, even where they are generally competent and not engaging the types of activity the government is looking to eradicate. “

Walker goes on to cite several other “obvious” areas that he argues require more clarity, such as what constitutes ‘tax advice’ and to what extent insurers will be entitled to set the terms of the PII policies.

“As is so often the case, the devil is in the detail. These issues have to be balanced against whether the introduction of mandatory PII will actually cure the disease.

“The government will have to take care to think through the wider impacts on the market to ensure there are no unintended consequences.”