When the financial climate is tough, either due to recession or the more recent troubles caused by the Coronavirus pandemic. Instances of claims can increase as businesses look to claw back some monies that they feel they have unfairly paid out on taxes or services that they feel may have been negligent.
As a result, many scenarios can arise in which an accountancy firm can find themselves needing to claim on their professional indemnity insurance, the following are a few examples;
Failing to comply with filing deadlines resulting in HMRC interest and penalties
This is a common claim, but is usually of low value and any taxes that need to be paid to HMRC are not recoverable from the accountant. Claims are typically limited to the interest and penalties imposed by HMRC.
A robust case management system can help you to pre-empt any liability by documenting all your client correspondence, including any instances of the client causing delays which result in late filing. This evidence may be required to support your professional indemnity insurance claim.
Incorrect financial advice that leads to the client becoming liable for tax that could have been avoided
This can include inaccurate advice regarding the availability to the client of various forms of tax relief. If for example, a client transfers shares from one party to another prior to the sale of a company, the sale would trigger a Capital Gains Tax (CGT) charge. Entrepreneurs’ Relief may be available on shares that have been held for more than 24 months. However, a transfer within 24 months would lose the relief and CGT will be payable at a higher level.
This instance could have been avoided if the accountant had advised the client not to make the transfer in the first place. However, communication is key here and if the client made the transfer without warning or prior discussion with the accountant, then that would likely strengthen the accountants professional indemnity insurance claim.
Failing to inform a client that their business has breached the VAT threshold
An accountant failed to inform their client that their income had exceeded the VAT threshold and they should register for VAT. As a result, the client claims against the accountant for the eventual liability.
Close monitoring of your clients’ finances each month, or even quarterly, will indicate if your client is likely to exceed the VAT threshold in advance. You can then impart the appropriate advice to your client and avoid any potential liabilities and penalties.
Failing to properly prepare and file end of year accounts
A common claim is for allegations that the accountant failed to prepare or properly file the required end of year accounts and company tax returns for the client. A good understanding of your clients’ business, and if you manage their accounts on a monthly or quarterly basis, will certainly help to mitigate the risk of errors within the annual accounts.
Misinterpreting the accountants advice
There have been large claims where Accountants have tried to give helpful advice verbally or with limited scope to their clients. Their end client takes the advice in a different direction to that intended and subsequently tries to blame the accountant for a costly outcome. This is challenging for an Accountants reputation as well as the potential defence costs.
Failing to detect fraud and dishonesty
The accountant fails to detect fraud or dishonesty and is blamed by other directors or possibly the client’s creditors, for lack of oversight and controls when the fraud comes to light. This is often a hindsight argument as the Accountant can never have perfect knowledge, particular when the perpetrator is trying to disguise their conduct.
Communication is key to success for most industries and it works both ways. Documenting your correspondence with your clients can help to mitigate liabilities and save you and your client a lot of money and stress. Professional indemnity insurance is vital to protect your business as well as your clients’ for those instances when communication isn’t as good as it could be and a claim arises as a result.