An engagement letter is the written contract that sets out what an accountant will do for a client, what the client must do in return, how fees are worked out and how complaints are handled. It is compulsory for statutory audits. For other work it is not strictly required, but the information it normally carries (the basis of fees, the complaints route, insurance details and any consumer cancellation rights) still has to reach the client in writing, so in practice almost every firm needs one.

Is an engagement letter a legal requirement?

For an audit, yes. ISA (UK) 210, paragraph 10, requires the agreed terms of an audit engagement to be recorded in an audit engagement letter or another suitable form of written agreement, covering the objective and scope of the audit and the responsibilities of the auditor and of management.

For accounts, tax, payroll and advisory work there is no single rule saying “issue a letter”, but several obligations point the same way:

  • Fees. Paragraph R330.4 of the ICAEW Code of Ethics requires the basis of fees to be explained, with an estimated initial fee given at the earliest opportunity. Paragraph R330.5 requires fee quotes or the basis of fees to be given in writing before the engagement begins or as soon as possible after it starts. If there is no engagement letter, a separate document must contain these details.
  • Commission. Under paragraph R330.5B a firm must obtain the client’s explicit written consent before keeping any commission or other benefit received in connection with referring the client.
  • Complaints. ICAEW Disciplinary Bye law 7 requires every firm to make new clients aware in writing of the principal to contact if they wish to complain, and of their right to complain to ICAEW.
  • Service information. Regulation 8 of the Provision of Services Regulations 2009 requires a provider to make available its name, legal form, address, any registration number, VAT number, professional body and title, general terms, the price where it is set in advance, and details of any compulsory professional liability insurance, including the insurer’s contact details and the territorial coverage. Regulation 11 says this must be given in good time before the contract is concluded.

ICAEW’s own guidance is that engagement letters are not needed in every case, but that members should always consider issuing one. A firm that chooses not to must still meet each of the requirements above some other way.

What should an engagement letter contain?

ICAEW’s model package, fully reviewed and reissued on 10 March 2026, is built in parts: a covering letter (Part 1), schedules for each service (Part 2), optional clauses such as limitation of liability (Part 3), terms of business (Part 4) and a short privacy notice (Part 5). A complete letter normally covers:

  • who the client is, with separate letters for a company and for its directors personally;
  • the scope of each service and, just as importantly, what is excluded;
  • what the client must provide, by when, and that the client remains responsible for the accuracy of returns;
  • fees, billing and payment terms, and any commission;
  • anti money laundering duties, including the need to complete identity checks before work starts;
  • data protection roles, document retention and who owns the papers;
  • any limit on liability;
  • complaints, governing law and how either side can end the engagement.

The March 2026 update added schedules for clients within Making Tax Digital for Income Tax, for capital gains tax 60 day property returns and for agreed upon procedures, and the terms of business now address whether artificial intelligence or other software tools are used in delivering the service. Schedules for firms acting as an Authorised Corporate Service Provider, with or without identity verification for Companies House, were added in December 2025.

Do consumer clients have a right to cancel?

Often, yes. The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 apply where the client is a consumer, defined in regulation 4 as an individual acting for purposes wholly or mainly outside their trade, business, craft or profession. A typical example is an employee or pensioner who needs a personal tax return. If the contract is a distance contract (agreed by email, phone or video call) or an off premises contract (agreed at the client’s home), regulation 29 lets the consumer cancel without giving a reason.

  • For a service contract, regulation 30(2) says the cancellation period ends 14 days after the day the contract is entered into.
  • If the firm fails to give the required cancellation information, regulation 31 extends the period by up to 12 months.
  • Regulation 36 bars the firm from starting work in the cancellation period unless the consumer expressly asks it to (on a durable medium, such as email, for an off premises contract). A consumer who then cancels pays an amount in proportion to the service supplied. A consumer who was never told of the right to cancel pays nothing for work done in that period.

Sole traders and companies engaging the firm for business purposes are not consumers, so these rules do not apply to them.

Can an accountant limit liability in the engagement letter?

It depends on the work and the client.

  • Audit. Section 532 of the Companies Act 2006 makes void any provision exempting an auditor from liability for negligence in the course of the audit. The exception is a liability limitation agreement under section 534, which must comply with section 535 and be authorised by the members of the company.
  • Non audit work for business clients. Section 2(2) of the Unfair Contract Terms Act 1977 allows liability for negligence (other than for death or personal injury) to be restricted only so far as the term satisfies the reasonableness test. Section 11(1) judges reasonableness by what was known or contemplated by the parties when the contract was made.
  • Consumers. Section 62 of the Consumer Rights Act 2015 provides that an unfair term in a consumer contract is not binding on the consumer.

A cap that bears a sensible relationship to the fee, the risk and the firm’s professional indemnity insurance is more likely to survive challenge than an arbitrary figure buried in the terms of business.

Who should the letter be addressed to?

The person or entity that is actually the client. An owner managed company and its director are two clients, even if one person signs for both. This has practical consequences later: an accountant’s right to hold papers for unpaid fees applies only to the property of the client who owes the money, so a company’s records cannot be held back over the director’s unpaid personal tax bill. See accountants’ lien and client papers. Couples, partnerships and groups each need the same thought about whose letter covers which service.

How often should engagement letters be updated?

ICAEW’s March 2026 guidance is that letters should be reviewed regularly, ideally each year or whenever the scope of work changes, and that clients should be asked to sign and return updated versions. An unsigned or partly updated letter gives limited protection in a dispute. New regulatory duties are the usual trigger. A client moving into Making Tax Digital for Income Tax, a client who sells a residential property and needs a 60 day capital gains tax return, or a new Companies House identity verification service all need a schedule that did not exist when the original letter was signed.

How does a consumer cancellation work in practice?

Illustration only. A retired client agrees by video call on 1 May to pay a fixed fee of £600 for a personal tax return. This is a distance contract with a consumer, so the 14 day cancellation period runs until 15 May.

  • If the firm starts work on 2 May without an express request and the client cancels on 10 May, the client owes nothing for the work done.
  • If the engagement letter set out the right to cancel and the client asked by email for work to start straight away, and the firm had completed roughly a quarter of the work when the client cancelled, the client would owe a proportionate amount, here about £150.

The cancellation wording and the “please start now” request cost nothing to include and decide whether the firm is paid.

What are the common mistakes?

  • Vague scope, with no list of exclusions, so the client later argues that advice on an unrelated tax or a review of earlier returns was included.
  • Using a model letter without tailoring it. ICAEW notes that its templates are a starting point and that drafting them with AI software should be approached with caution.
  • Starting work before customer due diligence and the professional enquiry to the previous accountant are complete.
  • Giving a fee estimate orally and never confirming it in writing.
  • Leaving out the consumer cancellation notice for clients signed up remotely.
  • Not saying whether the firm offers a tax investigation or fee protection service, so the client assumes enquiry work is covered by the annual fee.

Solar Protect runs fee protection schemes for accountancy and bookkeeping practices. See how our accountant schemes work or read fee protection schemes for accountants.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.