What are insurers so interested in tax schemes? Lockton’s Amy Newton explains.
As insurance brokers, we’re having a lot of discussions at the moment with clients who have been involved in tax schemes, as to why insurers are asking for so much information and why premiums are going up. We want to try to make this as easy as possible for you and to assist with as stable a pricing environment as we can. Therefore, in this article, I hope to explain why this is happening and what we can do to manage it together.
First, insurers are becoming more interested in tax schemes simply because they are paying out more claims in connection with them. The more insurers shed in claim payments, the more they seek to recover through premiums. Accordingly, they increase their rates, which means that historical discounts can be removed and loadings are applied where appropriate. Unfortunately, this often ripples across the book of business to spread the load, but it also applies more heavily where insurers deem that the major risks settle.
State of the market The reality is that the professional indemnity market has been very soft for the past few years (i.e. premiums have been cheap) and we are still in a relatively soft market. However, it is hardening, meaning premiums start to increase. A comfort, however, is that insurers are often not loading premiums at all – they are simply taking off previous discounts. Essentially, they are asking for their technical rate, which has been what they desired all along, but were able to make concessions because the market was very soft and they weren’t paying out that many claims. In a lot of cases, discount still remains – the insurer just removes a proportion of it. Therefore, please rest assured that a balance is being struck and we always negotiate where we can.
Further to this, as a consequence of claim payments, many insurers are closing their doors altogether to clients who have been involved in tax schemes in any way. They aren’t inviting renewals and they aren’t taking on any new business. This withdrawal obviously affects the market somewhat. A slim number of insurers are still writing cases with tax schemes exposure, but are doing so at increased rates which take the risks into account.
However, as brokers, we are always thinking of new solutions – new partnerships with insurers and new ways to reach a mutual understanding that is fair to everyone. Therefore, when one insurer might close its doors, we do all we can to ensure another opens.
The change in the market is unfortunately a truth which applies for all clients, although, for those that are involved in tax schemes, it rings truer still. We regularly hear clients say that they have only made introductions, and give no advice on the schemes, in the hope that this removes the risk. In reality, we see very few clients who have any role in giving advice; the majority do the former alone – introduce and later complete the tax return.
As discussed in the April issue of In Practice, being an introducer only is no panacea to liability. There are many factors that mean a claim can come back to the introducing accountant. It can be the case that promoters are difficult to find, insolvent or have given comprehensive risk warnings to the client meaning liability can be pushed away from them.
Alternatively, the accountant’s letter of engagement may not be comprehensive, or is not in place. The accountant may not have stressed the risks emphatically enough, and the burden of this duty is increasing all the time. At Lockton, we have seen clients of ours, who have only introduced, suffer large claims for these reasons.
Furthermore, even if the introducer has done everything that is reasonable and followed the professional guidance to the letter, an attempted claim still needs to be dealt with, however spurious, and defence costs are rising. Some solicitors will adopt a scattergun approach and name everyone who is connected in any way to the scheme in a claim attempt, and extricating one’s selves can be time-consuming and expensive. Accordingly, it must be appreciated that these claims do occur and they can have a significant effect on your claims experience and the insurers’ pockets.
Government’s stance Also having an effect is the recent strengthening in the government’s stance against tax schemes, as it suggests that more claims may be on the horizon. With the advent of DOTAS, POTAS, conduct notices, monitoring notices, follower notices and APNs, it is clear to see that the government is looking to attack the tax deficit, which will have a knock-on effect on investors.
HMRC have put additional resources and £1bn into their pursuit of tax schemes, which has resulted in £26bn being recovered in the past year alone. The aim is to settle thousands of cases and individual HMRC officers have limited freedom to settle with taxpayers, therefore there is less likelihood of a deal being struck. APNs are being issued, which indeed some clients are paying without gripes, and this does work in your favour. However, no doubt there will be some who are unhappy with it.
GAAR can apply to any communication with HMRC and utilises a very expansive test – ‘cannot reasonably be regarded as a reasonable course of action’ – which enables HMRC to capture potential evasion at any point. Combined with the fact that the 2015 Budget advised that a specific penalty is to be introduced for breach of GAAR, these remedies for HMRC are very wide.
Furthermore, as many of these powers are new, there is a vast amount of uncertainty as to how they will be applied, which puts insurers even more on the back foot. Although there are challenges and we are aware that the APN legislation is to be judicially reviewed later this year, it must also be remembered that HMRC currently win approximately 80% of their cases.
If your firm retains an involvement with tax schemes, it is generally accepted that the greater distance you place between yourself and the scheme, the better. Aim to follow the ACCA’s guidance and engage as little as possible with the planning and implementation processes. A point often in question is commission – if taken, it is challenging to argue that the introducer wanted nothing to do with the scheme.
Increased questions We appreciate that the growing concern about tax schemes has resulted in increased questions from insurers. As arduous as it may be, and we apologise for this, every piece of information that is requested is important and is used to assist us in getting the most competitive premium that we can. Details that can help us are as follows:
Your letter of engagement – does it have a good third party advice exclusion? Was it in place for all the introductions that you have made? Please send us a copy as this may work in your favour.
Have your clients got separate letters of engagement with the promoters?
Are any of the schemes under a Spotlight, or DOTAS registered?
Are any of the schemes being investigated?
Have any of the schemes been reviewed under GAAR?
Have any clients received an APN? If so, how have they reacted?
What commissions have you received from introductions?
What is your stance to schemes now – are you actively introducing, not at all, or just on request?
How did/ do you explain the risks to your clients? If in writing, send us a copy of what you gave to the client.
Who is the promoter? What is your relationship with them? What stance are they taking to the most recent changes? Insurers do differentiate between promoters and their schemes as to how much risk they present.
How exactly does the scheme work? Is money being invested, or is it a way of structuring assets to shelter a profit? If amounts were invested, please advise us of what the figure was. If profit sheltered, please advise us the amount, plus the fee the client paid to the promoter.
Your knowledge of the scheme itself can be better than ours, so please help us. If you feel confident in the promoter, or the particular scheme, tell us why. We wholly appreciate that it can be time-consuming, but please trust that the more information we receive, and the earlier we receive it, the more powerful we can be to negotiate with insurers on your behalf.
Please rest assured that insurers do not just see the phrase ‘tax schemes’ and decide to increase your premium disproportionately. Many discussions and negotiations are happening behind the scenes and we are doing all we can to present your case in as best light as possible. At the first renewal during which schemes are disclosed, it is often the case that the premium increases. However, in the following years, provided no further introductions are made and no claims are faced, the premium will often stabilise.
Ultimately, it is all about communication, between you and the insurer, through your broker. If our presentation is reasonable, detailed, prompt and informative, insurers will engage in the same way and we can reach a mutually-agreeable goal.
Amy Newton – account manager, Lockton Companies LLP
The purpose of this article is to provide a summary of our thoughts on this matter. It does not contain a full analysis of the law nor does it constitute an opinion by Lockton Companies LLP. The contents of this article should not be relied upon and you must take specific legal advice on any matter that relates to this. Lockton Companies LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of the material contained in this article. No part of this article may be used, reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Lockton Companies LLP.
Lockton Companies LLP is ACCA’s recommended broker for Professional Indemnity insurance. For information, please contact Lockton on 0117 906 5057.