Fee protection scare
Insurance to cover the cost of your advisor’s fees during an investigation seems sensible. However, there’s a new catch with some policies. What is it?
Investigation. Any enquiry from the Taxman takes time to deal with and time costs money. Even if it turns out that there is no additional tax to pay you are still left with a bill from your advisor if he’s been involved. This is where so-called Fee Protection Insurance (FPI) comes in. You pay a premium to an insurance company and they pay your advisor’s fees. But there might be a problem with the payout with some of these policies.
Classic advice. As with all policies it pays to read the small print. Our previous advice has been to look for clauses to do with; (1) honesty - the insurance company will not pay out if the agreed errors are over a predetermined limit, e.g. a percentage of profit, and; (2) notification - you will usually be required to notify the insurer within a specified period of receiving an enquiry notice. So what’s changed?
Recent trend. The Taxman is supposed to read any additional information you’ve included on your tax return before opening an enquiry. This is true whether he wants to know about just one tax return box (a so-called aspect enquiry) or if he wants to question several points, (a full enquiry). To prevent an enquiry being opened, more and more information is being disclosed in the additional information box (the white space) on tax returns. This is also thought to be a form of protection against the Taxman coming along several years later saying he’s discovered something new about your tax affairs which allows him to re-open otherwise closed years. A very sensible approach you would have thought; unless you are an underwriter.
Problem. We’ve heard on the grapevine that at least one fee protection policy (as it is currently worded) will not pay out if you have put something in the white space that directly leads to an enquiry.
Tip. Check with your fee protection provider that entries in the white space of your return will not invalidate your insurance cover. If you haven’t already filed your personal tax return for 2005/6 but are planning to make an entry in the white space when you do, hold back until you’ve got a definitive answer on the fee protection position.
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