Tuesday 24 April 2007

Pricing insurance

Every year our accountants, who are otherwise very good, try and flog us insurance to protect against the risk of paying them to represent us if HMRC decide to investigate our tax return. (I presume, by the way, that our accountants try and flog this insurance to all their clients, and it's not just that they think we are especially likely to suffer an HMRC investigation).

This year, because I couldn't be bothered to try again to explain to our accountant why the insurance is such poor value for money, I just wrote them a cheque.

But it is poor value for money. It costs about £300. Not enough to really spend too much time fussing about, but it still irritates me that our accountants can't assess correctly whether it is good value or not.

Likely professional fees we'd incur if we needed our accountant to represent us in an HMRC enquiry would be max £5k. So I'd need to expect the probability of a tax enquiry to be around 0.06 (300/5000) for this £300 insurance to be good value. I can't find any good numbers on the proportion of corporation tax returns that get investigated, but it can't possibly be 6%, it must be far less. And most investigations are, as I understand it, risk-based not random, so chances of a well-run company like ours getting investigated have got to be pretty slim.

Anyway, I put all this to our accountant last year. His response was pretty astonishing. He thought the insurance was very good value "because, Bruce, two of our clients have had investigations this year, and they were really glad they had the insurance, they thought it was very good value."

That's like saying that lottery tickets are good value, because someone who won the lottery said so.

As I say, our accountants are really very good. But I do get annoyed about little things like this.


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