Author: Mike Scales, Senior TFPI Consultant
FCA Regulatory Requirements – IPT / VAT – In Plain English!
There is a fundamental difference in the way an Accounting Practice is permitted to operate a Tax Fee Protection Insurance scheme. Primarily it depends on the FCA Regulation status of the practice.
Being “Regulated” is either by having a full FCA licence to market and consult within the insurance industry, or via a DPB (Designated Professional Body) licence (such as with the ICAEW or ACCA amongst others), which allows the practice to offer or recommend TFPI directly to the client. If the practice does not hold a FCA or DPB licence, being “Non-Regulated”, the practice can only facilitate a TFPI scheme by insuring itself and offering a Service for the clientele to take.
All TFP insurers provide the option of Regulated or Non-Regulated schemes. They most often do not differ in any form other than the regulatory status which controls whom the insured entity is. Premiums, cover and services are normally identical across the two policy types. The noticeable difference is the treatment of IPT and VAT, which can affect the end consumer price (explained below). FCA regulations apply to the accounting practice / intermediary. Practices that hold a FCA or DPB licence may opt for either scheme type – many Regulated practices run their scheme on a Non-Reg basis for ease of administration and recovery of fees. The ICAEW Ethics Advisory Service December 2012 issue (and previously ICAEW 2007/01 helpsheet ref PAS1/HS20 July 2007) clarifies the FCA regulatory requirements and insurance options.
The regulations state that Demands & Needs Statements and Key Facts documents have to be provided to the insured party, so in a Regulated scheme the practice must provide such documents to their clients when marketing the scheme (insurers provide sample wording or actual documents on behalf of the practice). In a Non-Reg scheme, only the practice is provided with these documents from the originating insurer.
In a Non-Reg scheme, there is no FCA compliance required towards the accounting practice’s clients as the insured party is the accounting practice itself, which in turn provides an extended tax service / enquiry / dispute service to their clients on a personalised fee basis.
The Non-Reg schemes have become the preferred insurance method and marketing route for most practices as it easier to administer, has little or no FCA compliance complications, has more accounting practice privacy (the practice does not have to declare the mark-up to the end client as is the requirement with Regulated schemes), and importantly the practice retains direct control with regard to claims procedures. In a Regulated scheme the claimant is the end client, not the practice, albeit that the practice facilitates and controls the claim, the client gets direct notification of the value of the claim. In a Non-Reg scheme the claimant is the practice and the end client has no view or say in the claim.
In a Regulated scheme the IPT is calculated at the end / consumer selling price e.g. Insurer premium £50, Accountancy Practice mark-up £100, Consumer price therefore £150, IPT at 12% is £18.00, giving an end price of £168.00. The practice pays the insurer the premium plus all IPT, £68.00, and retains the £100 as income. There is no VAT applicable as it is an insurance premium being levied. According to FCA regulations, the practice has to declare (to the client) that a commission content is applicable or that an administration fee is being levied, which can on occasions have implications with regard to client relationships, depending on the level of practice mark-up, which can be quite substantial.
In a Non-Reg scheme the IPT is calculated on the basic insurance premium only e.g. insurer premium £50 plus 12% IPT, £6.00, and is paid over to the insurer (total £56.00). The practice marks up by a further £100 to recover costs / make a profit, making the total fee (note Fee, not premium) is therefore £156.00 (if you include the IPT as a cost). However, VAT becomes applicable as the clients’ invoice will be for services as is normally the case, therefore the end price for a Non-Reg scheme in this example is £156.00 + £31.20 VAT total £187.20. Of course, in many instances VAT is an in/out situation for businesses which can negate the perceived cost difference between the two types of schemes, so it often is cheaper going Non-Reg as the real cost is £156 Non-Reg vs £168 Regulated in this example.
It boils down to whether you have a FCA/DPB licence or not, and whether you want control of the policy or not. Note that Non-Reg schemes cater for circa 90% of the TFPI market.