Do limited company owners need tax investigation insurance?

IR35 tax insurance

By taking out tax investigation insurance, you can help to 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 you 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 tax investigation by HMRC, it’s time to think again. In reality, anyone who submits an annual tax return can be picked at random for a compliance check by tax inspectors to see whether they’re paying the right amount of tax and national insurance contributions based on their income.

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 are carrying out 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.

Am I 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.

If you’re one of the thousands of IT contractors in the UK, for example, you may well have heard about the Intermediaries Legislation, or IR35, which was introduced in 2000 to tackle so-called ‘disguised employment’.

This is when employees resign from an IT position but are then taken on again as a freelance IT contractor, working as they did previously while also claiming tax benefits through their own limited company. If you’re working as an IT contractor or other type of freelancer, IR35 insurance will cover you for this type of tax investigation and is definitely worth considering.

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 well see tax investigation insurance as an additional expense you can do without. But as already stated, you can be selected for tax investigation at any time and while you may have nothing to fear in terms of fines for underpayment or false declarations about your taxes, the investigation itself can be a lengthy and stressful business and, if selected, you have no choice but to comply.

Estimates of the cost vary and much will depend on the nature of your business, 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 tax investigation takes some 16 months and costs around £5,000 in accountant’s fees. Trying to run your business while at the same time 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.

What does tax investigation insurance cover?

As with other types of insurance, tax investigation cover can be tailored to suit individual 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 and national insurance due, plus any interest or possible fines. A number of 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 for over a decade now on our business site network. They provide all types of cover for small companies – and are particularly well-known for their tax investigation package, which is surprisingly affordable. You can find out more here.

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