Professional indemnity claims arising from tax advice

Q: Which controls reduce tax advice claims?

Engagement letters that define the task. Set out what is and is not included, the tax years covered and the information relied on. TECH 09/15 recommends confirming in a general retainer letter that no advice will be given unless requested and scoped. ACCA notes that the lack of a properly scoped engagement letter is a key element in successful claims against accountants. A reasonable liability cap. TECH 09/15 says a limitation is more likely to be enforceable if fair and reasonable, that excluding liability entirely for paid work is unlikely to be, and that a court will not rewrite an unreasonable cap but will treat it as unenforceable. Contemporaneous records. HMRC's standard expects agents to keep contemporary records of what they advised and when, and timely notes of the rationale for tax planning decisions. A file note of a warning given is often the firm's best defence. Written risk warnings. Where the law is uncertain, say so in writing and record the client's decision. Deadline control. ACCA reports that insurers ask whether a firm operates an accessible diary system to make sure deadlines are met. Second review of higher risk work. ICAEW's PII guidance (paragraph 6.22) suggests that where work is higher than average risk, a firm considers safety procedures such as review by another principal, and decides whether to keep the client. Prompt notification. When a problem emerges, tell the insurer early; see notifying circumstances to your PI insurer.

Q: How might a claim develop?

Illustration only. A client asks in an email whether selling their company shares will qualify for Business Asset Disposal Relief. The partner replies that it should, without checking the shareholding history. Eighteen months earlier, a new share issue to an investor diluted the client below 5% and no election was made. The client sells, claims relief on the return, and HMRC later denies it. The client claims the difference between tax at the relief rate and tax at their normal rate, plus interest and the cost of the enquiry. The firm's defence depends on the email, the engagement letter and whether the client supplied the share history. Had the reply been scoped as conditional on a review of the company's share register, and the review been done, the problem would have been found before the sale, when an election on the dilution might still have been considered.

Most professional indemnity claims from tax work allege that the client paid more tax, interest or penalties than they should have: a relief or election was missed, a transaction did not meet the conditions the client was told it met, or planning failed when HMRC challenged it. The controls that reduce these claims are a clear written scope, contemporaneous advice records, explicit warnings about uncertainty, deadline systems and a second review of higher risk advice.

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Why does tax advice generate so many claims?

Tax advice turns small errors into quantifiable losses. If a relief is lost, the extra tax is easy to calculate, and the client can point to the adviser’s letter or the return the firm filed. The loss often appears years later, when HMRC opens an enquiry or issues an assessment: under the Taxes Management Act 1970 HMRC can normally assess income tax and capital gains tax up to 4 years after the tax year (section 34), 6 years where the loss of tax was brought about carelessly, and up to 20 years where it was deliberate (section 36). By then the adviser may have moved firm or retired, which is why claims made basis cover and run off are so important.

Insurers know this. ACCA’s PII guidance lists tax mitigation among the activities that attract a higher premium or require more information, says insurers are particularly concerned about firms that advise on tax avoidance and tax mitigation schemes, and notes that they also review firms that simply introduce clients to scheme providers. For general causes of negligence claims across all services, see common causes of negligence claims against accountants; this page concentrates on tax.

What are the most common tax advice claims?

Missed claims, elections and deadlines

Many reliefs exist only if they are claimed in time. Section 43 TMA 1970 sets a general limit of 4 years after the end of the tax year for income tax and capital gains tax claims, but many reliefs have shorter limits. Business Asset Disposal Relief, for example, must be claimed by the first anniversary of 31 January following the tax year of disposal: GOV.UK gives 31 January 2028 for disposals in 2025 to 2026. A firm that prepares the return but leaves the relief off, or never makes an election the client relied on, faces a straightforward claim for the lost tax. The page on time limits for tax claims sets out the main deadlines.

Conditions for a relief not actually met

Advice often turns on detailed conditions. For Business Asset Disposal Relief on shares, GOV.UK explains that for at least 2 years before the sale the seller must be an employee or office holder, the company must be trading, and it must be the seller’s personal company, with at least 5% of the shares and voting rights and entitlement to at least 5% of profits and assets or of disposal proceeds. The rate on qualifying gains from 6 April 2026 is 18%. If a client sells on the adviser’s assurance that relief applies, and one condition failed months earlier, the claim is for the difference between the tax paid and the tax promised.

Planning that does not survive challenge

Where planning is defeated, the client may say the risk was never explained. HMRC’s standard for agents expects agents to base tax planning on a realistic assessment of the facts and a credible view of the law, to advise clients of material uncertainty, for example where HMRC’s view differs or is unknown, and to explain the risk and costs of a challenge and any court case. It also says agents must not create, encourage or promote arrangements that are contrary to the clear intention of Parliament or highly artificial and contrived.

Scope disputes and advice not given

Some claims allege that the firm should have spotted an issue it was never asked to look at. ICAEW’s TECH 09/15 says a general retainer gives rise to no duties until advice has been requested and its scope agreed, and recommends documenting scope and avoiding scope being implied by a course of conduct, which can create expectation gaps about whether general or specialist advice was promised. See scope creep in engagements for how this develops in practice.

Errors from software and third party input

HMRC’s standard expects agents to take reasonable steps to make sure third party input, such as software or specialist advice, produces accurate results. A wrongly mapped figure or an outdated rate in a template can affect many clients at once, which also tests whether the firm’s limit is any one claim or aggregate.

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Does PI insurance cover the firm’s own exposure to HMRC?

The ICAEW minimum approved policy wording insures civil liability arising from professional business, ombudsman awards and defence costs. It is designed to meet claims by clients and others who suffer loss. It is a separate question whether a firm’s own regulatory exposure is covered. Schedule 16 to the Finance (No. 2) Act 2017 imposes a penalty on each person who enabled abusive tax arrangements that are defeated, equal to the consideration that person received; advisers can fall within it as designers if their advice suggested arrangements and they knew or could reasonably be expected to know it would be used in abusive arrangements. Read the policy’s exclusions and talk to the broker before assuming any cover for this. The regime is explained in enablers of defeated tax avoidance.

Which controls reduce tax advice claims?

Engagement letters that define the task. Set out what is and is not included, the tax years covered and the information relied on. TECH 09/15 recommends confirming in a general retainer letter that no advice will be given unless requested and scoped. ACCA notes that the lack of a properly scoped engagement letter is a key element in successful claims against accountants.
A reasonable liability cap. TECH 09/15 says a limitation is more likely to be enforceable if fair and reasonable, that excluding liability entirely for paid work is unlikely to be, and that a court will not rewrite an unreasonable cap but will treat it as unenforceable.
Contemporaneous records. HMRC’s standard expects agents to keep contemporary records of what they advised and when, and timely notes of the rationale for tax planning decisions. A file note of a warning given is often the firm’s best defence.
Written risk warnings. Where the law is uncertain, say so in writing and record the client’s decision.
Deadline control. ACCA reports that insurers ask whether a firm operates an accessible diary system to make sure deadlines are met.
Second review of higher risk work. ICAEW’s PII guidance (paragraph 6.22) suggests that where work is higher than average risk, a firm considers safety procedures such as review by another principal, and decides whether to keep the client.
Prompt notification. When a problem emerges, tell the insurer early; see notifying circumstances to your PI insurer.

How might a claim develop?

Illustration only. A client asks in an email whether selling their company shares will qualify for Business Asset Disposal Relief. The partner replies that it should, without checking the shareholding history. Eighteen months earlier, a new share issue to an investor diluted the client below 5% and no election was made. The client sells, claims relief on the return, and HMRC later denies it.

The client claims the difference between tax at the relief rate and tax at their normal rate, plus interest and the cost of the enquiry. The firm’s defence depends on the email, the engagement letter and whether the client supplied the share history. Had the reply been scoped as conditional on a review of the company’s share register, and the review been done, the problem would have been found before the sale, when an election on the dilution might still have been considered.

What mistakes make tax claims harder to defend?

Giving quick answers by email or phone with no scope, caveats or file note.
Letting a general retainer drift into specialist planning without a new engagement letter.
Relying on software output without review for unusual transactions.
Introducing clients to schemes without considering how insurers and HMRC view that role.
Admitting fault or offering to pay the tax before notifying the insurer.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.