You have chosen a fee protection scheme designed to offer fee protection insurance to your clients. Your practice is able to offer this because it has a DPB licence or FSA authorisation, and is therefore legally able to sell insurance.
The charge you make to your clients represents a premium for insurance and is VAT exempt under the VAT Act 1994 Schedule 9 Group 2.
Many practices will seek to charge a higher amount to clients than is payable to CCH for the policy. If you are authorised directly by the FSA, then you will be required to disclose this additional amount to your clients.
However, if your firm is authorised via the Designated Professional Body (DPB) route, you are required to disclose that you have applied such a fee, but you are not required to disclose the amount.
In either case, the whole charge represents a premium for the purpose of the policy and is exempt from VAT. Alternatively, if you choose to charge a separate fee for providing advice to your clients in relation to the insurance, then this separate charge will only be exempt if you disclose it in writing to your clients before they agree to enter into the insurance contract.
IPT is the responsibility of the insurer rather than your practice. However, IPT at 6% is due on the gross amount of premiums i.e. on the charge you pass on to your clients. We will therefore request this information from you to ensure that the correct amount of IPT is brought to account.
When you are required to undertake work for your client following an enquiry or dispute with H.M.Revenue & Customs, your fees will be liable to VAT in the normal way. If your client is VAT-registered, we will ask you to issue a VAT-only invoice to them, which they will be able to recover on a VAT return (assuming their business is fully taxable). The net amount of the fee should be invoiced to your client, but sent to us for payment, subject to the conditions of the policy.
The premiums are a cost wholly and exclusively incurred by the practice in providing services to its clients and are, therefore, allowable under general principles.
Your clients are paying an insurance premium to your practice. HMRC’s view, to be found at BIM46452, is that such premiums are not allowable deductions. Although this is only HMRC’s opinion it would be risky to ignore it. In the absence of case law to the contrary we are bound to accept HMRC’s view on this matter.