Chapter 4 PRPG New Clients and Engagements

Question 1

4.1 Obtaining Clients

Answer 1

A member should refer to the guidance on business development and market activities. A member who is invited to undertake professional work by a prospective client is under no obligation to act. They should decline if they believe they are unable to fulfil the duty of care that they would have to that client. A client has the right to choose or change professional advisers, or to take a second opinion, or have different advisers on different matters.

Question 2

4.2 Introduction fees and rewards

Answer 2

Where permitted by law a member may pay a fee, commission or other reward to a third party in return for the introduction of a new client (or further work for an existing client) provided that:
• A member has no reason to believe that undue pressure or influence was exerted on the prospective client by the third party
• Before accepting instructions, a member has disclosed to the prospective client in writing the amount and nature of the fee, commission or other reward and the identity of the third-party recipient.

Question 3

4.3 Client acceptance

Answer 3

Before accepting a new client, a member must comply with the identification requirement in the anti-money laundering guidance and consider:
• Whether the client will be acceptable in terms of the risks that arise for the practice from acting for that client and whether a member has the capacity to manager those risks. In accessing risks, you should consider the potential client’s personal and business circumstances, financial standing, sources of funds, integrity and attitude to disclosure in regard to compliance with tax law
• Whether a member and the firm have the skills to service the client’s requirements
• Whether there is a conflict of interest in accepting the client and if so, how it can be managed
A member must only accept an appointment on the basis that full disclosure of the client’s tax affairs will be made. A member must not assist a client with criminal offences and is encouraged to keep a record of the basis for client acceptance.
A member must consider the application of the Consumer Contracts Regulations 2013 where their client is a consumer. There is a requirement to provide a cancellation notice if the contract is not concluded in a member’s business premises to ensure enforceability of any contract terms, including fees. A member should be aware that criminal sanctions can be imposed upon them for failing to comply with the regulations.

Question 4

4.4 Professional Enquiry (Professional clearance)

Answer 4

A member should communicate with the previous adviser before accepting an appointment, you must need the client’s permission to do so. When permission is received, a member should ask the adviser in writing whether they are aware of any professional reason why they should not accept the appointment (although they should not ask if any AML suspicious activity reports have been made). It will usually be convenient to request relevant handover information at the same time, to ensure no filling deadlines and other similar matters are missed in the transitional period.
If the prospective adviser does not receive a positive response to their professional enquiry, the prospective adviser should consider the facts before deciding whether to accept the appointment. It would be advisable to document the facts, circumstances and justification, especially if deciding to accept the appointment.

Question 5

4.5 Scope and Engagement letters

Answer 5

On accepting instructions, a member is recommended to issue an engagement letter to the client and review it regularly. The letter ca be used to manage client expectations or related correspondence, set out fees and the scope and nature of the assignment. The client should be asked for their formal agreement, this provides protection to a member and is likely to be an important document in a dispute. When scope of the engagement changes significantly a new letter could be required. It is not however compulsory for an engagement letter to be issued.

Question 6

4.6 Services Directive

Answer 6

Under the Services Directive a member must provide certain information to clients and prospective clients. The information must be supplied before the conclusion of a contract for the provision of the service, or where there is no contract, before the services are provided.

Question 7

4.7 Obligations in respect of advice given by a predecessor

Answer 7

Unless the client requires otherwise, a member has no duty to investigate advice given by a predecessor, but if they become aware that it was incorrect, they have a duty to tell the client. A member should always follow the guidelines in PCRT.

Question 8

4.8 Engagement letters for tax practitioners

Answer 8

(This guidance is based on the law of England and Wales and is based on the law as of 13 March 2018). The engagement letter pack comprises of the following documents:
• Covering letter
• Schedules for various specific services
• Standard terms and conditions of business
• Privacy notice
• Cancellation notes for consumers
Whenever sending engagement letter documents a practitioner must tailor them to meet individual circumstances. Legal counsel has misgivings in relation to the provision of template wording and legal opinion or support should be sought where required to tailor the draft template documents.
• When sending an initial engagement letter to a client, all above documents should be considered for inclusion. For additional services, a practitioner can tailor the letter and include an additional schedule. A new covering letter can be issued to inform a client of a change of fees or terms and conditions. It is not necessary to send all of the documents in these circumstances
• A practitioner should consult their professional body’s PRPG on engagement matters to ensure they fully comply with the requirements
• This guidance does not cover engagement letters for statutory audits, insolvency work or regulated investment business
• Engagement letter in this guidance means the covering letter (Appen Aa), privacy notice (Appen Ab), the schedule of services (Appen B1-13) and the standard terms and conditions of business (Appen C). there is also a letter of disengagement (Appen D)
• Since AML obligations should be satisfied before a practitioner agrees to act for a client, they are not covered here
• A practitioner mist be aware of their obligations under the Services Directive and obligations under Professional Conduct in Relation to Taxation
• A practitioner acting for individuals should check whether they fall within the obligations of the Consumer Contracts Regulations 2013. Should also be aware of the provisions of the Consumer Rights Act 2015.
• A practitioner must be aware of their requirements under the Data Protection Act (DPA) 2018 and the General Data Protection Regulation GDPR.
• A practitioner must be aware of the requirements under the Payment Services Regulations 2017 and ensure they are not undertaking payment services for clients without proper authorisation. These engagement letters have not been prepared on the basis that a practitioner is offering these services and specialist advise should be taken where client accounts are operated in this way
• A practitioner must review and amend the letters to meet the requirements of their own practice. Many members arrange with their legal advisers for bespoke letters to be prepared.

Question 9

4.9 Status of Engagement letters

Answer 9

The importance of an engagement letter for tax work is to define the terms and limitations of the engagement and agree these with the client. It can be used to manage client’s expectations and provide protection to the practitioner whilst only being evidence of what was agreed in a dispute. Professional indemnity insures regard the failure of the issue engagement letters as an increased risk, which many raise the premium.

Question 10

4.10 Application of Engagement letters

Answer 10

Engagement letters should be issued to a client at the outset of an engagement and also when the scope of services changes significantly. New letters or revised schedules may be needed, for new terms and conditions, change in fees and change to the scope of services. Typically, an engagement letter will comprise a covering letter with a privacy notice and possibly a separate fee schedule, schedules of services and standard terms and conditions of business.
Where a new service is provided a practitioner will typically need to issue a new schedule of service and a tailored covering letter, updated fees schedule and an updated privacy notice. Under GDPR a practitioner needs to tell their client if the purpose or lawful basis of processing their data has changed. It is strongly recommended that engagement letters are reviewed annually.
Separate letters should be issued if a practitioner provides tax services to both:
• An individual and their spouse/ civil partner
• An individual and following that person’s death, the personal representatives administering the deceased’s estate
• A partnership and the individual partners
• A company and its shareholders
• A company and its shareholders
• A company and its directors
• A company and its employees where a bulk tax return service is provided
• The trustees of a settlement and its beneficiaries
If the status of a practitioner alters, new engagement letters should be issued to all clients concerned. If the client incorporates, merges or demerges or converts to a limited liability partnership, a new engagement letter is needed to establish the terms of the business relationship with the new entity. When acting for a group of companies it may be practical to send a single engagement letter to the parent company of the group, specifying all services to the member companies of the group. If this approach is adopted, a practitioner should check that the parent company has the authority to bind all companies of the group.

Question 11

4.10 Application of Engagement letters (2)

Answer 11

If a composite letter is used, it should set out what would happen should there be a dispute between the clients who have signed the letter and where the ultimate liability of the fees lie, including whether the adviser reverses the right to continue to act for one or more of the clients.
Terms of engagement can only be varied by agreement, not enough to place an update on a website, this wouldn’t be sufficient evidence in a dispute that the client agreed to the changes. Courts will not generally favour an approach where; it is unrealistic that a client will regularly consult a website for updates. Minor terms may be updated by website, provided the engagement letter say that. A minimum requirement is to email each of the clients informing them of the new terms, stating the changes are on the website and asking for confirmation.
While it is important to advise the client of changes to terms and conditions, it is not necessary to send the full set of appendices to the client every time a change is made.

Question 12

4.11 The covering letter

Answer 12

The covering letter should be printed on the practice notepaper. It is important to be clear who within the client’s organisation has the authority to give instructions for work to be undertaken and who is the authorised signatory. The covering letter states the start date of the engagement. The period such as the tax year or accounting period, in respect of which the first work will be undertaken. The letter should specify when advisory services will begin. If a practitioner agrees to carry out additional work after issuing an engagement letter, a new engagement letter or updated schedules should be issued unless the work is covered by the ad hoc and advisory section of the original letter. A practitioner may wish to include a paragraph setting out the other services available to clients.
If a practitioner takes work in automatic exchange of information (AEOI) and Foreign Account Tax Compliance Act (FATCA), they should use the relevant schedule in Appendix B4b and amend the covering letter. The engagement letter should make clear the client is responsible for advising the practitioner of any changes to their FATCA status or to US connections. Non-UK resident subsidiaries are outside the scope of the UK agreement, but UK permanent establishments of non-UK entities are within it. The engagement letter must deal with data protection as it may be necessary to share FATCA status and Global Intermediary Identification Number (GIIN) with other financial institutions and make appropriate reports to HMRC.

Question 13

4.11 The covering letter (Fees, limitation of liability and agreement of letter)

Answer 13

Fees – should be provided in the practice’s terms and conditions, they should also be mentioned in the covering letter. Fees must be set out in detail, as if a client does not know what they are agreeing to pay, they may not be required by courts to pay. For complicated fees it is appropriate to set the position out in a schedule. The hourly rates for each member should be included unless a fixed-fee arrangement is in place. It’s important to explain when and how clients are advised of changes of rates or other relevant changes.
Where a fixed fee is in place or some other basis of charge has been agreed, the paragraph in the engagement letter should be amended accordingly. Fees may not be payable by the client where fee protection insurance is in place and this should be drawn to the client’s attention where relevant. Where additional fees are charged due to work being completed in a shorter period due to late receipt of information, the client should be made aware of this to minimise the possibility of a dispute.
Limitation of liability – it is open to a practitioner to limit or exclude their liability for negligence, any limitation is subject to the reasonableness test in the Unfair Contract Terms Act 1977. Where the contract is made between a trader and a consumer for the trader to supply goods or services there are also implications that may limit the effectiveness of a limitation of liability clause following the Consumer Rights Act 2015.
Agreement of Letter – the client should be asked to agree to the scope and terms of the engagement in writing, usually with a signature. This minimises the risk of disagreement over the terms, any changes which are agreed orally should subsequently be confirmed in writing. For a group the letter can be signed by the representative of the parent, provided all companies are listed on the engagement letter and the signatory is properly authorised. If the client does not send back the contract, the contract with the client will be evidenced by the subsequence conduct of the parties, for example by the client sending records needed to carry out the work. If the letter is never signed but services are performed, a practitioner needs to prove the letter was communicated to the client. A record of receipt can be an email sent by the client, sending a reminder engagement letter by recorded delivery or a telephone conservation noted down when the client has referred to receiving the letter. Any discussion of the client’s views on the engagement letter are relevant. If the client had expressed dissatisfaction with the terms, this would negate any case that the engagement terms had been accepted by conduct.
If there is a need to act in the client’s interests before the engagement letter is signed, it is important to ensure that such work is later covered by the terms of the engagement and the client should be made aware of these and the practitioner should make a file note recording the discussion. The client should receive in writing that the work before the engagement letter is subject to the terms and conditions in the engagement letter, so there cannot be a later dispute.

Question 14

4.11 The Covering letter (DPA and GDPR)

Answer 14

The sample engagement letters have been updated to consider GDPR and the DPA 2018. Privacy notices have additional requirements under GDPR, with a document explaining to data subjects their rights and how their personal data will be used. Privacy notices are part of a subjects right. Data controllers must provide certain information to individuals at the time that their personal data is collected from them or, if the data is obtained from another source, within a reasonable period of obtaining the data and no later than one-month subject to limited expectations. It is not a legal requirement to send privacy notice with an engagement letter. A practitioner must update clients if the purpose or lawful basis of processing their data changes.
The ICO advices that before preparing a privacy notice, businesses should document what personal data they hold, where it came from and whom it is shared. A table may include, source of fata, information stored, purpose processing storage/computer program, access/security and deletion policy. Data collection should identify all of the lawful bases in which they intend to process data and the privacy notice should set out the lawful basis. The lawful bases in which data can be processed are:
• Consent
• Contract
• Legal obligation
• Vital interests
• Public task
• Legitimate interests
It is advisable that to rely on several bases. If a practitioner relies on consent, it is necessary to obtain the data subject’s free, specific, informed and unambiguous consent to the processing. A practitioner may find it helpful to include a summary of purposes of the date processing and the legal basis of the processing. The source of personal data collected needs to be included in the privacy notice and examples of sources include:
• A spouse/partner
• HMRC
• Employer
• Electronic ID verification providers
• Third parties, like banks
Transfers of personal data outside the EEA is a section on the privacy notice, the statement assumes all data is kept only in the EEA. A practitioner needs to consider this and take specialist advice if the data is kept outside the EEA.
The privacy notice stresses the important on clients retaining their own records, so a practitioner can delete their records at an appropriate time. GDPR requires data should not be kept for longer than necessary, professional body guidance suggests records should be kept for 7 years and this should be stated in the data retention policy. Members are asked to review their standard terms and conditions of business in case amendments are required in relation to their own clients and their practice.
Practitioners should be aware of more stringent restrictions on the processing of special categories of personal data (racial origin, sexual orientation etc). when processing this data, you need to ensure at least one of the criteria for processing specified in article 9(2) of the GDPR is satisfied. With GDPR a practitioner needs to consider if they are a data controller or data processor for each assignment. The contractual documents will need to be amended to reflect the requirements in each case. A practitioner should note the requirements in relation to sub-processors and be aware of these when using subcontractors. GDPR requires contracts between controllers and processers to be in writing. A practitioner needs to consider the policies and procedures they have in place to meet the requirements of DPA 2018 and GDPR. A practitioner should agree the best method of communication with clients and made them aware of the risks if they insist on corresponding by email without additional security measures in place. It is important practitioners review historic files as files cannot be retained for excessive periods.

Question 15

4.11 The covering letter (right to cancel

Answer 15

under the Consumer Contracts Regulations 2013 a practitioner must provide specific information to the client before the contract is agreed if the client is a consumer. In some circumstances the client has a right to cancel. A consumer is an individual acting for purposes that are wholly or mainly outside that individuals trade, business, craft or profession, that includes:
• Private clients, trustees and individuals administering deceased’s estates
• Where a practitioner provides services such as personal tax return preparation either to directors of company clients or sole traders or partners, for whom a practitioner prepares the accounts or partnership tax returns
If a practitioner acts for a consumer there are three contracts: an off-premises contract, distance contract and an on-premises contract. It can be difficult to distinguish between the types of contract; this guidance is drafted to give every consumer the right to cancel within 14 days.

Question 16

4.12 Schedule of services

Answer 16

A practitioner should prepare the schedule of services using appendices B1-13 as a guide. If the client’s instruction covers two or more types of services separate schedules for each are recommended. The objective is to set out clearly the scope of the work with the client’s responsibilities.
Recurring compliance work – whether this is a fixed-fee basis or not, only the work specified will be covered. A practitioner should be clear that is covered by routine compliance work and alert them that additional requests will be an additional fee
Ad hoc advisory work – this is not part of the recurring compliance work and as such will not be covered by a fixed or annual fee for the work. The scope of such work and the basis of the fees needs to be explicitly agreed with the client when it is requested.
The schedules are intended to address the most common services but are not exhaustive. Four specific issues that may require consideration are:
• HMRC enquiries – a separate schedule has been prepared for when an enquiry becomes significant or is a more formal investigation
• Tax credit and universal claims – these are impacted by wider circumstances, so a separate schedule addresses the related issues
• Tagging – compulsory for a tax return using iXBRL format. Schedule B7, if the client does this themselves the schedule will need amending
• Probate – schedule not created for probate work and a practitioner licensed to undertake this work should refer to their licensing body for guidance
The schedules include a disclaimer in relation to changes in tax law. Normally when a retainer ends, a practitioner does not have an obligation to update a client, when it is ongoing then the member should update the client.

Question 17

4.13 Standard terms and conditions of business (application of law, client identification and verification, client money, commissions and complaints)

Answer 17

Applicable law – a practitioner should insert the name of the legal jurisdiction in which the practice operates. A practitioner needs to be aware in a consumer contract, a clause requiring a consumer to bring any proceedings in a jurisdiction other than the consumer’s domicile will be unenforceable, providing the trader purses commercial activities in the EU member state in which the consumer is domiciled.
Client identification and verification – under AML legislation a practitioner must have identification procedures in place to confirm the identity of clients, these procedures should be satisfied before they agree to act for a client.
Client money – if the practice is likely to hold client money a practitioner should follow the guidance in PRPG and amend the terms. A practitioner should be aware of the Payment Services Regulations 2017 and ensure they don’t undertake payment services for clients without the proper authorisation.
Commissions and other benefits – commissions received must be accounted for to the client but with the client’s permission, can be retained by a practitioner. A firm licensed as a designated professional body must account in writing for the commission or benefit to the client.
Commissions can be accounted for to clients by paying the whole amount to the client or by deducting it from fees and showing the deduction on the face of the fee note.
Complaints – all new clients should be informed in writing the contact to receive complaints about services provided and clients should be informed of their right to complain to a professional body. The practice should investigate complaints and ensure it is resolved.

Question 18

4.13 Standard terms and conditions of business (confidentiality, conflicts of interest, data protection, disengagement and electronic communication)

Answer 18

Confidentiality – a practitioner is obligated to keep client information confidential. However, by law, regulatory bodies or insurers may be required to disclose information about clients, this must be covered in the separate privacy notice. A practitioner remains responsible for client information even where work is subcontracted or outsourced to third parties, who should be placed under an obligation of confidentiality.
Conflicts of interest – practitioners should access the significant of perceived conflict of interest and should not allow it to compromise their professional or businesses judgement.
Data protection – DPA 2018 and GDPR contain rules for processing personal information. On occasions it is necessary to hold data on family members and family is included in the standard terms and conditions.
Disengagement – practitioners find it useful to send letters of disengagements to provide some protection against claims by an ex-client. The letter usually addresses, the services provided, any further action to be taken by a practitioner, a note with outstanding matters that need addressing, details of any impending deadlines, practitioners willingness to assist the advisers on outstanding issues with HMRC, details of outstanding fees and a note indicating whether a practitioner or their successor is to advise HMRC of the change.
Electronic and other communication – standard terms is that practitioner is using virus-scanning software to reduce the risk. A practitioner should ensure all systems are set up to deal with relevant scans, data security is a fundamental requirement under data protection requirements.

Question 19

4.13 Standard terms and conditions of business (fees and payment terms and investment advice)

Answer 19

Fees and payment terms – fees are a matter of commercial negotiation and should be agreed in writing. Due regard should be given to the nature of the engagement and client relationship when setting fees. Possible arrangements include time and expenses, fixed fees, contingent or success fees or fees covered in whole or in part by professional fee insurance. A practitioner can reduce the risk of fee disputes by giving an indication of fees before work is started or by agreeing fees before issuing invoices. Where fixed or contingent fees are agreed, it is important to state the scope of work they cover, this protects a practitioner if unexpected additional work arises. Fees should be stated as being exclusive of VAT, where not stated, the fees will be treated as inclusive of VAT (VAT Act 1992) assuming the practitioner is VAT registered. A practitioner may charge interest on payment of late fees but must meet the requirements of the Consumer Credit Act. The rate of interest should not exceed the limits in the Late Payment of Commercial Debts Act 1998. Where continuous supplies of services are provided and two or more payments are to be made by standing order, a practitioner can issue a VAT invoice showing the normal invoice details and listing all the payments due over a period of up to one year. The tax point then becomes the earlier of the receipt of each payment or the time when each payment falls due.
Advanced fees or acting as a guarantor – a practitioner may wish to use a third party to obtain a guarantee for payment of fees incurred by the client. If so, the practitioner should seek a separate agreement with the intended guarantor in advance of entering into the engagement with the intended client.
Investment advice – during tax advice, aspects of investment advice or insurance mediation services might be touched on, whether services are regulated is a complex area and some activities undertaken by the firm that is licensed to do so by a DPB or authorised by the FCA. Some paragraphs relating to investment services are included in Appendix C for firms not registered by a DPB or authorised by the FCA. Licensed practitioners should refer to the DPA or FCA handbook.

Question 20

4.13 Standard terms and conditions of business (lien, liability of third party rights, period of engagement, reliance on advice, retention of papers and the provision of services regulations 2009)

Answer 20

Lien – states a practitioner has a right to retain documents belonging to the client if they have not paid the fee. However, the exercise of lien is not straightforward sand may conflict with other professional duties to the client. It is preferable to resolve disputes without resourcing to lien.
Liability of third-party rights – practitioners should exclude liability to third parties and seek indemnity from the client against third party liability. The test of reasonableness where liability to third parties is to be excluded is less strict. The easiest way to exclude contractual liability to third parties is to show the terms of the contract are not enforceable by anyone other than the parties.
Period of engagement and termination – covering letter or standard terms and conditions should make clear when the engagement begins and ends. For one off pieces of work the engagement will end once the work is completed. In relation to ongoing retainers, a practitioner should not cease to act for a client without giving them notice in writing, unless compelled to do so by law.
Professional rules and statutory obligations – practitioners must made clear in the engagement letter they are bound by the PCRT and ensure they are aware of the rules.
Reliance on advice – confirming advice in writing offers greatest protection to the practitioner and client. There is a lower risk of understanding. If clients are reluctant to have written advice, practitioners can delete this standard term and accept the increased risk. It is important to keep a record of advice given to clients. If the client wants oral advice, a short letter or email written to the client confirming the gist of the advice is recommended.
Retention of papers – if records are retained by a practitioner, it is important to make sure they can be accessed if required by HMRC or a successor tax practitioner. The length of time for the documents to be preserved is suggested to be seven years.
The provision of services regulations 2009 – this requires a practitioner to provide details of the firm’s insurer on request. The details should not be included in the practitioner’s engagement letter as the information may change. The limit of a firm’s insurance must not be given without the insurer’s express consent.

Question 21

4.13 Standard terms and conditions of business (limitation of liability)

Answer 21

this section identifies a number of limitations to a practitioner’s liability. A liability cap will only apply to clients who have agreed the terms and conditions of the engagement letter. It is recommended that independent legal advice is taken by the tax practitioner before including the limits of liability in their engagement letters or standard terms and conditions. It is important the advice is checked from time to time to ensure the wording used does not conflict with recent judicial decisions on reasonableness.
There is a risk the limitation may be set aside by a court under the Unfair Contract Terms Act 1977 or under the Consumer Rights Act 2015. It is important to identify the difference between a trader and consumer.
• Trader – a person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf
• Consumer – an individual acting for purposes that are wholly or mainly outside that individuals trade, business, profession or craft. It is a trader’s responsibility to prove an individual was acting outside their trade.
If a court finds a limitation of liability to be unfair, that element of the contract will be invalid, in which case the practitioner’s liability will be unlimited. A practitioner must be able to demonstrate that the limit of liability is fair and reasonable. Under the CRA 2015:
• The trader must perform the service with reasonable care and skill
• Every contract to supply a service is to be treated as including anything that is said or written to the consumer
CRA limits the extent to which traders can restrict their liability to consumers. Clause 2(2) of the Unfair Contract Terms Act 1977 says ‘a professional contract cannot exclude or restrict liability for negligence except insofar as the term satisfies the requirement of reasonableness’. The test of reasonableness is laid down by section 11 of the UCTA 1977. If the limitation is effective, practitioners need to consider the likely strength of their and their client’s bargaining positions, including the resources available to each party to meet the liability and the extent to which each party could protect themselves by insurance.
Section 62 of CRA 2015 provides an unfair term is not binding on the consumer. Unfair means is decided by factors like if it is common in contracts and the justification for the term. If the courts decide the term is unenforceable, a court will not rewrite the term to make it reasonable and enforceable. The clause will be unenforceable and the liability of the person relying on it will be unlimited. Before imposing a limit, the practitioner should explain it to the client and consider a client’s assets to meet any liability and the insurance cover available. The client should have the opportunity to negotiate the limit.
Professional indemnity insurance cover is provided on a claims-made basis. When working out the liability cap to include, a practitioner may reasonably stipulate level of the limits of their liability that are lower than the current maximum cover per claim. Where a limit of liability required by the client is greater than the insurance, a practitioner should consider whether to accept the engagement or seek increased levels of insurance cover.
Practitioners can stipulate a separate liability cap in relation to each service together with an overall liability cap. If they include a liability cap per schedule, they can state in the covering letter than despite the individual cap there is an overall cap.