By taking out tax investigation insurance, you can help mitigate the potential cost of being investigated by HMRC, which can be both time-consuming and expensive.
This type of insurance policy also gives you the peace of mind that you will be covered should your company be selected for tax investigation.
What are the chances of being investigated?
If you think that only large companies or wealthy individuals are likely to be subject to a tax investigation by HMRC, it’s time to think again.
In reality, anyone who submits an annual tax return can be randomly selected by tax inspectors for a compliance check to determine whether they’re paying the right amount of tax and national insurance contributions based on their income.
How does HMRC select cases for investigation?
HMRC uses both random selection and risk assessment tools to identify cases for investigation.
Advanced technology, such as the Connect system, analyses data from various sources, including banks, social media, and online platforms, to spot inconsistencies or undeclared income.
This means even minor discrepancies can potentially trigger an investigation.
So, what’s going on?
The employment sector has undergone a huge transformation in recent years and how, where and when people work has changed across the board in the UK.
The number of freelancers or individuals registered as self-employed has also increased significantly in the UK as the economy continues to diversify.
In response, HMRC has adopted a more focused approach to tax compliance and is conducting more investigations to ensure that tax revenue owed is collected.
It’s important to note that tax investigations are not only prompted by suspect accounting, missing records, late submissions or for some other reason, and can be triggered at random.
In other words, you don’t have to have done anything wrong to be the subject of a tax investigation, and tax inspectors have extensive powers, including the right to see financial records going back as far as six years.
Is my limited company likely to be investigated?
Although tax investigations are randomly selected, HMRC is paying closer attention than ever before to a number of specific trades and professions.
These include self-employed plumbers, joiners, builders, sole traders, freelancers, consultants, and contractors.
Additionally, HMRC often focuses on industries where cash transactions are common or where tax avoidance schemes have been prevalent historically.
Why do I need tax investigation insurance?
As a sole trader, consultant or small business who keeps accurate and up-to-date records completes their tax return every year and pays any taxes due on time, you may see tax investigation insurance as an additional expense you can do without.
But as we’ve already highlighted, you (personally), or your business can be selected for tax investigation at any time.
While you may have nothing to fear in terms of fines for underpayment or false declarations about your taxes, the investigation itself can be lengthy and stressful, and if selected, you have no choice but to comply.
Estimates of the cost vary and will depend on the nature of your company, the number of transactions you carry out and other factors, but this type of investigation isn’t just a financial headache.
According to the FSB, the average ‘full enquiry’ tax investigation takes some 18 months and costs around £5,000 in accountancy fees.
Trying to run your business while simultaneously complying with HMRC demands for financial records and additional information about your taxes, can be a real strain and seriously affect your ability to operate efficiently. That’s where tax investigation insurance can help.
It can be particularly beneficial for navigating complex tax rules, such as VAT or IR35.
What does tax investigation insurance cover?
As with other types of insurance, tax investigation cover can be tailored to suit your and your company’s needs.
Most providers will write policies to insure you against professional fees incurred complying with an investigation and/or defending disputes up to an agreed limit, as well as for income tax self-assessment enquiries, corporation tax, IR35 enquiries, employer compliance disputes, VAT disputes, business records, and other checks.
You can also be insured against unpaid tax, national insurance due, and any interest or possible fines.
Some policy providers also have a tax advice helpline where clients can get free advice and information. With tax investigation insurance in place, you can get on with business without worrying about an unwelcome call from the tax office.
Where can I get cover?
We’ve worked with Qdos on our business site network for over a decade and use them for our tax investigation cover.
Other well-known providers in the market include Simply Business, Axa, and Hiscox.
Qdos provides all types of cover for small companies and is particularly well-known for its tax investigation package, which is surprisingly affordable (from £8.25 per month). You can find out more here.
