Should a practitioner automatically respond to a professional clearance request? If so, what is the best way to proceed? Karen Eckstein explains how to deal with what can be a tricky situation.
In this, the second of a series of articles looking at problem areas in practice and how to manage the risks associated with them, we consider a professional enquiry (referred to here as a request for professional clearance). A number of problems can arise if practitioners are not alive to the issues facing them, including having the client’s consent to respond, making the new adviser aware of information relevant to whether or not they accept the appointment, and dealing with outstanding fees.
We will consider each of these issues in turn, including by using a case study so that the issues can be considered against a ‘lived example’. The flowchart below should help you to navigate your way through most situations.
Case study: Peter, Simon and Don |
Peter, a tax adviser, prepares returns for Simon each year. He realises, when preparing the returns for the current year, that Simon has failed to disclose rental income for the previous three years. Simon is also reluctant to agree to include a capital gain in the current return, saying that “the gain belonged to his former partner and he didn’t see why he should include it on his return”.
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Do you have the authority to respond to the request?
The first issue is that, of course, a professional clearance letter is received because the relationship between the current adviser and their client has come to an end. This may be at the request of the client, or by decision of the practitioner, or because the retainer has come to an end naturally. However, the duty of confidentiality owed by the adviser to their client does not end with the termination of the relationship.
Often, practitioners fail to send formal disengagement letters to their clients at the end of the engagement and fail to get formal confirmation from the client that they can send information to the new – named – adviser. The practitioner may assume that, because they have received a clearance letter from a firm saying that they have been instructed to act for the practitioner’s former client, that means that they should reply to the letter without client consent. However, that is a mistake.
Clearance letters should only be responded to once the former client has confirmed that the practitioner has authority to reply to that firm. If the former client hasn’t provided the name of their new advisers, then the easiest way of obtaining consent is to send the former client a copy of the clearance letter and ask for consent to respond. In that way, not only does the practitioner get confirmation of the name of the firm to correspond with, but also consent to respond to any particular requests contained within the clearance letter.
Peter seeks consent to reply |
Peter does not have authority to reply to Don. He writes to Simon asking for consent to reply to the letter that he has received from Don. He waits until Simon confirms that he can reply to the letter before he does so. He tells Don that he is awaiting instructions before responding. |
Are there issues to bring to the attention of the new adviser?
The second issue that often trips up practitioners relates to situations where the relationship between the practitioner and their former client broke down leading to the termination. That might be because the client behaved badly, failed to follow advice, gave inconsistent instructions, tried to bully the practitioner, or for a variety of other reasons. What should the practitioner say in the clearance letter, which usually asks a question along the lines of “are there any other reasons not to accept the appointment or is there anything else we should be aware of?”
The practitioner may give into the temptation to let any hostility towards the former client roll over into the correspondence with the new adviser. That is a big mistake. It is important to be factual, not hostile in any response, and consider if any information provided is relevant, and appropriate to be provided, taking into account the guidance from ICAEW.
ICAEW’s helpsheet Change of professional appointment – outgoing accountant states that: “If there are no matters of which the prospective accountant should be aware, this should be stated in the response; and if there are matters of which the prospective accountant should be aware, the details should be provided – it is not sufficient to state that unspecified matters exist.”
If a practitioner is unsure whether any of the issues referred to are ones which the new accountant should be aware of, then they should take advice, either by speaking to the ICAEW technical helpline or from a specialist adviser.
If a client has irregularities in their reported tax affairs and has not corrected them by the time that the relationship with the practitioner has ended, then the issue is more sensitive. The relationship might have ended because the client refused to correct the irregularities and the practitioner then terminated the relationship in accordance with professional conduct in relation to taxation (PCRT) (see also ICAEW’s helpsheet on dealing with errors). The practitioner may also have made a Suspicious Activity Report (SAR) relating to the irregularity for money laundering purposes.
The issue for the practitioner is, how much do they tell the new accountant? The practitioner clearly does not want to breach paragraph R320.7B of ICAEW’s code of ethics, which makes it clear that the practitioner must not disclose whether they have made one or more SARs, or made any other disclosures that could amount to ‘tipping off’ (this is explained further in ICAEW’s helpsheet on the topic). No questions in that respect should be included in any clearance letter, but if they are, they should not be responded to, positively or negatively. The best response would be along the lines of: “This is not an appropriate question to raise.”
However, just because an SAR has been made does not mean that the practitioner should not provide information to the new adviser about the irregularity. Rather, the practitioner must do so in a way that does not amount to tipping off. ICAEWs guidance states: “It would usually therefore be appropriate to include a factual reference to any irregularities perhaps identifying a specific unresolved matter or an item yet to be included on a tax return for example. An example of this could be: ‘The client informed us of rental income they have been receiving since [date – if known]. However, they have yet to disclose this to HMRC. Full disclosure needs to be made for all periods affected.’ Members may discuss specific circumstances on an anonymous basis with the ICAEW Ethics Advisory Service.”
If a practitioner is still unclear what they can and cannot say in relation to an irregularity, then they should take specialist advice.
Peter responds to Don |
Peter receives confirmation from Simon that he can reply to Don. He writes to Don, confirming the ‘usual’ information (eg, the prior tax returns and accounts as filed and any opening balances, etc). He also states that the prior tax returns are incorrect and require correction as rental income has been omitted. In so doing, he uses the wording recommended by ICAEW, above. He informs Don of the capital gain he understands to be reportable in the current year (or rather the information upon which he based his calculation thereon).
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Are you owed money by the client?
The final area where issues arise relates to outstanding fees. We often see practitioners who say that they will not respond to a clearance letter until their previous client has paid their outstanding fees.
The ICAEW guidance is clear. It says: “Outstanding fees are not a reason for failing to respond to a professional enquiry. You must (usually having obtained the consent of your client) respond to a professional enquiry even where fees are outstanding. You are, however, entitled to raise the matter of outstanding fees in your response. You may, in certain circumstances, have the right to withhold records … however, this does not give you the right to refuse to respond to a professional enquiry.”
So, it would be necessary to respond to the clearance letter, providing the relevant information even though fees were outstanding, but it would be appropriate and acceptable to confirm the fees that were outstanding, and it would probably usually make sense to provide a breakdown if they related to more than one invoice (ie, listing the various invoices, dates and periods and services they related to).
Practitioners should consider carefully what documents and records can be withheld under the exercise of a lien (see ICAEW’s helpsheet) and what information cannot be so withheld, and it would usually be advisable to take specialist advice. A practitioner may wrongly seek to exercise a lien over papers that a client is entitled to (eg, the company’s books), causing further disputes, whereas other information may be withheld – and some can be withheld without a lien (eg, the practitioner’s working papers).
There is a requirement on practitioners to respond to clearance letters promptly, so practitioners should consider the issues above quickly once they receive a request from a new adviser and take appropriate advice if needed in order to ensure that they do not fall into any of the traps outlined. Clearly, it is not possible to provide a definition of ‘promptly’ that covers all scenarios. It is down to judgement. However, if challenged, the person would need a defendable position as to why it took the time it did.
Peter discloses unpaid fees |
In his response to the clearance letter, Peter tells Don that he is owed fees by Simon and the amount of those fees. He does not use the unpaid fees as a reason not to respond to the clearance letter, and he does not exercise a lien over any company documents. Peter could have considered exercising a lien over other papers subject to taking specific advice. |
- The first article in the series covered the issues to consider when responding to a request for information from HMRC. The final article will look at the circumstances in which information may be provided to third parties.
Karen Eckstein, solicitor, Cert Institute of Risk Management, a CTA with 30 years’ experience of defending professional negligence claims (karen@kareneckstein.co.uk)
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