Top professional indemnity claims of 2021
Members receive a number of benefits and policy enhancements through our exclusive, ICAEW members’ PI insurance scheme. But we’re here to provide more than just insurance. The team behind the members’ PI insurance scheme offers a variety of experience, advice and insight to help members manage risk more effectively.
Claims are a good indicator for areas of improvement, and we don’t always need to make the mistakes ourselves to learn from them. Our PI claims team has worked closely with the claims handlers supporting the scheme’s insurer to produce the top five PI claims made by members under the scheme in 2021, and ways to avoid a similar claim going into the new year.
The top five claims made under the ICAEW members’ PI scheme in 2021
1. Failure to comply with filing deadlines resulting in interest and penalties being imposed by HMRC
While one of the most common types of claims in the scheme, they are usually reasonably low in value. It is key to remember that any additional tax is often due in any event, therefore not recoverable from the accountant. A claim will likely be limited to interest and penalties imposed by HMRC. Penalties are still likely to be imposed if the return is filed late, even if the tax has been paid.
Avoid liability by maintaining a robust and organised diary/case management system. This will allow you to automatically flag any approaching deadlines and ensure all the information required for the submission is obtained in plenty of time. In circumstances where the client is causing delays, maintain regular communication with them and remind them of the relevant deadlines. Maintain a robust paper trail of all communications with the client.
2. Providing incorrect advice on taxation issues such that the client becomes liable for tax that could have been avoided
This type of claim can relate to several circumstances. A common set of circumstances is inaccurate advice being provided in relation to the level and/or availability of various tax reliefs.
For example, a client has transferred shares from X to Y prior to the sale of a company. The sale would trigger a chargeable event for Capital Gains Tax and Entrepreneurs’ Relief may be available on the shares that have been held for 24 months beforehand. A transfer within 24 months would therefore lose the relief and Capital Gains Tax will be payable at a higher level. This may have been avoided if the accountant advised the client to not transfer the shares or, if that result was required, to apportion the proceeds after the sale once the Entrepreneurs’ Relief has been claimed. The loss would be the additional Capital Gains Tax i.e. the difference between what they paid and what they could have paid.
Avoid liability by having clear, written terms of engagement and only advise on matters that fall within the scope of the engagement terms. If advising on certain types of tax and /or tax relief falls within the scope of the engagement terms, ensure all members of staff are up-to-date with the current tax rules and regulations by providing regular updates and training. Expert advice should be sought, either internally or externally, in areas that fall outside the accountants’ area of expertise.
3. Failure to identify material transactions when carrying out an audit
An example of a failure to identify material facts may be a failure to identify fraud during the audit, e.g. an employee appropriating company funds.
Avoid liability by tailoring the audit strategy and material transaction level to each client. Clearly set out the scope of the audit service and stick to the audit strategy.
4. Negligent advice as to the structure of a company / the client’s personal tax affairs
A common claim stems from an allegation that the accountant should have advised the client partnership / sole trader to form a limited company so they can benefit from limited liability and lower tax and/or National Insurance.
Loss would be the difference between the position your client would have been in had a limited company been formed, and the position they are currently in. The difference, broadly speaking, is the loss.
Avoid liability by having clear, written terms of engagement and only advise on matters that fall within the scope of the engagement terms.
5. Failure to properly prepare end of year accounts
At the end of a financial year, a company’s accounts must be sent to HMRC and Companies House. This includes annual accounts and company tax returns. A common claim stems from allegations that the accountant failed to prepare or properly file the required documents.
Avoid liability by knowing your client and their business. A good understanding of the client’s business will significantly reduce the risk of errors within the annual accounts.
Helping you manage risk in 2022
Risk is usually very specific to your business, and depends on a variety of factors including the services you provide. Our dedicated team are experts in PI insurance, and have extensive experience working with ICAEW accountants.
For advice on the ICAEW’s minimum requirements for member PI insurance, or for more information on how to decide what level of cover you want, call our team on 0345 894 4684.
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