Tax investigation insurance can cover the professional fees you incur if HMRC opens an enquiry into you or your limited company.
Even where your records and tax returns are accurate, dealing with an HMRC compliance check can involve significant work by your accountant or tax adviser. Insurance is designed primarily to protect you against these additional professional costs.
What are the chances of being investigated?
HMRC compliance checks aren’t limited to large companies or wealthy individuals. Small companies, directors and sole traders can all be subject to an enquiry.
Most compliance checks are risk-based. HMRC looks for information suggesting that tax may have been underpaid or that something on a return requires further investigation. However, some checks are also selected at random.
Being selected for a compliance check doesn’t necessarily mean you’ve done anything wrong.
How does HMRC select cases for investigation?
HMRC has access to information from a wide range of sources and uses sophisticated data analysis to identify inconsistencies.
Its Connect system can analyse and cross-reference information held by HMRC and information obtained from third parties. This makes it easier to identify discrepancies between tax returns and other available data.
HMRC may also open an enquiry because of something specific on a return, information received from another source or activity in an area it considers to present a higher compliance risk.
You can read more about how HMRC carries out tax compliance checks on GOV.UK.
Is my limited company likely to be investigated?
There is no simple way to calculate the likelihood that your particular company will be investigated.
HMRC uses a largely risk-based approach, so inconsistencies in your tax returns or figures that don’t match information from other sources may attract attention.
Certain areas of tax can also involve greater compliance risk. For limited company owners, this might include IR35, VAT, PAYE and Corporation Tax, depending on how the business operates.
However, an HMRC enquiry isn’t proof that anything is wrong. A business which has filed accurate returns and paid the correct amount of tax may still have to spend time and money responding to HMRC’s questions.
How far back can HMRC investigate?
There isn’t a single six-year rule that applies to every tax investigation.
The relevant time limits depend on the circumstances. HMRC can generally make an assessment going back four years for underpaid tax, extending to six years where the loss of tax resulted from careless behaviour.
Longer limits may apply in some circumstances, including certain offshore matters, while HMRC can go back as far as 20 years where tax has been lost due to deliberate behaviour or certain failures to notify.
The precise rules depend on the tax and circumstances involved, so this is an area where professional advice is particularly important.
Why consider tax investigation insurance?
If your company keeps accurate records, submits its returns on time and pays the correct tax, you might reasonably wonder whether tax investigation insurance is worth paying for.
The main reason to consider it is that defending an HMRC enquiry can cost money even when no additional tax is ultimately due.
Your accountant may need to review records, correspond with HMRC, prepare calculations, attend meetings or challenge HMRC’s interpretation of the facts. A straightforward enquiry may be resolved relatively quickly, while a complicated dispute can continue for much longer.
Tax investigation insurance is therefore principally about covering the cost of professional representation rather than protecting you against tax you’ve legitimately underpaid.
What does tax investigation insurance cover?
The exact cover varies between insurers, so you should always check the policy wording rather than assuming every HMRC enquiry is included.
Depending on the policy, cover may include professional fees incurred in connection with:
- Corporation Tax enquiries
- Income Tax Self Assessment enquiries
- PAYE and employer compliance disputes
- VAT disputes
- IR35 enquiries
- HMRC checks into business records
- appeals and disputes arising from a covered enquiry
Some policies also provide access to a tax or legal advice helpline.
There will normally be a maximum amount the insurer will pay towards professional fees, together with exclusions and conditions which vary between policies.
Does it pay the tax if HMRC finds that you owe money?
Standard tax investigation or fee-protection insurance should not be assumed to cover the underlying tax bill.
Its main purpose is to cover the professional fees incurred in dealing with the investigation. Any additional tax, National Insurance, interest or penalties identified by HMRC will normally remain your responsibility unless your particular policy includes separate and specific cover for those liabilities.
Some providers offer additional tax liability products, but these are distinct from ordinary fee-protection cover and have their own limits and exclusions.
What isn’t normally covered?
Again, the precise exclusions depend on the policy, but cover may be refused where an issue was already known about before the policy started or where the claim arises from deliberate or fraudulent behaviour.
Policies may also impose conditions on when you must notify the insurer and who can represent you during an investigation.
It’s therefore worth checking exactly which HMRC enquiries are covered, the maximum professional fees available and the main exclusions before buying a policy.
Where can I get tax investigation cover?
Tax investigation insurance is available from specialist tax insurers and is also sometimes offered through accountancy firms as part of a fee-protection scheme.
We’ve worked with Qdos on our business sites for more than 15 years and use them for our own tax investigation cover.
Qdos provides tax investigation insurance alongside other types of business cover. Find out more about Qdos tax investigation insurance.
Before taking out any policy, compare the scope of cover rather than price alone. In particular, check the types of HMRC enquiries included, the professional-fee limit and any exclusions that could affect your business.