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Correspondence from readers on a Readers’ forum query concerning professional indemnity insurance and the time it took for HMRC to respond to a letter reporting a gain on a life assurance bond.
Professional indemnity insurance
After reading the other response to the Readers’ forum query concerning professional indemnity insurance, ‘Include an estimate for insurance in final accounts?’ in Taxation, 27 January 2022, page 24 (tinyurl.com/mbyefvmv) regarding run-off cover, I was interested that ANA and I had different views and I have considered the query in more detail.
There was a similar query, ‘Accounting for retired financial adviser’s run-off insurance premiums’, in Taxation, 29 April 2010, page 26 (tinyurl.com/4jxyjhmw), in which the respondents looked at the possibility of making a provision for the run-off costs. A provision is different in accounting terms to an accrual. After considering the responses to that query, along with my own, ANA’s and Taxation’s ‘editorial note’ I think between us we have come to a correct answer, albeit thinking about things slightly differently.
If we consider making a ‘provision’ rather than an ‘accrual’ with the ‘constructive liability’ coming by virtue of Peter’s client contracts requiring run-off cover, I think I would consider things differently. Rather than thinking about this as one provision purely for the insurance, it seems to make sense to me to regard this as two separate contracts which ideally net off to zero. Originally I was just considering making an accrual for the insurance cost, which had not been performed yet, hence why I thought an accrual couldn’t be made.
Under the first contract, a provision could potentially be made for the run off cover requirement in the client contracts and deducted as an expense at cessation. This is subject to the definition of a provision being met. One of these being that the expense can be reliably measured and would result in an outflow from the entity. This is causing some difficulty in this query as a quote cannot be obtained for the full six years, but I do not think this would preclude a provision being made necessarily. If such a requirement was not explicit in the original client contract then this may cause difficulty unless it was required like accountants and tax advisers.
The second is the insurance contract entered into each year. In the subsequent run off period of six years, the provision made at cessation would be unwound against the insurance cost incurred with any over/under provision being dealt with by the post-cessation/receipt rules.
One of the reasons I enjoy Taxation and the Readers’ forum in particular is the collaboration and encouraging different ways of thinking about things. Joe Brough.
Reporting tax liability to HMRC
Last week, I received a letter, dated 9 March 2022, from HMRC, responding to a letter I wrote on 19 April 2021. That is only a delay of nearly 11 months. The letter reads as follows:
‘I refer to your letter dated 19 April 2021. Please accept our sincere apologies for the delay in replying.
‘I enclose a copy of the assessment issued to your client today.
‘If we can be of any further assistance, please contact us.’
My letter was straightforward. It concerned a gain of over £160,000 that had arisen on a life assurance bond in 2017-18 and of which I was previously unaware and therefore it was not included on the client’s tax return. The tax liability was over £30,000. I had sent a couple of reminders, but gave up doing any more some months ago.
I commented in my initial letter that it seemed surprising that HMRC did not receive details of the gain from the UK insurance company so that the omission could have been rectified earlier. If there is not a system for insurance companies to report gains to the department, there must be many instances where higher rate tax is due but not collected. Ian Cruse.
