Should my business have tax investigation insurance?

More than ever before, HM Revenue and Customs (HMRC) are cracking down on individuals and businesses who aren’t paying the right amount of tax. Investigations can be invasive, worrying, long and expensive.

But you can avoid those sleepless nights and make sure you’re protected. Here’s what you need to know.

What is a tax investigation?

A tax investigation is when HM Revenue and Customs (HMRC) decide to take a closer look at the finances of an individual or business. It is an official inquiry to ensure that individuals and companies are paying the right amount of tax.

During the investigation, HMRC may contact your accountant and will look at things like:

• The tax you pay
• Your accounting records
• Your most recent Self-Assessment tax return
• PAYE records if you’re an employer
• VAT records if you’re VAT-registered

Tax inquiries can be inconvenient, stressful and lengthy. If you require professional assistance when dealing with HMRC, you will incur additional accountancy fees, even if you’ve done nothing wrong.

Why might HMRC conduct a tax investigation into your business?

HMRC may want to look at your finances for a number of reasons — don’t assume it’s because you’ve made a mistake or done something wrong. A tax investigation may be triggered by:

• A mistake or misunderstanding in your documentation. This may be something as simple as forgetting to tick a box or failing to include additional information where it was expected.
• Your business is in an HMRC target sector. There are some areas that HMRC are particularly interested in — they may have identified a pattern of tax shortfalls, or multiple sources of income.
• You are considered a risk. Things like cash trades or high levels of capital coming in and out of accounts can flag businesses up as higher risk.
• Suspicious activity. Inconsistent or irregular activity in relation to your finances may prompt HMRC’s interest in you, even if there is no evidence of wrongdoing. If there is evidence of criminal activity, HMRC will investigate you.
• A random check.

What are the possible outcomes?

The outcome of your tax investigation will depend on whether you were deemed to be at fault and the severity of any wrongdoing on your part.

If HMRC find problems they don’t believe were due to fraudulence or negligence, they will advise you on how to put it right and give you 30 days to do so. If you are asked to pay a penalty, extra tax or interest, we advise you pay quickly. You may be asked to pay a penalty if HMRC believe you made significant mistakes or deliberately concealed relevant information.

If you’re found to be at fault, HMRC will almost certainly monitor future financial activity, so make sure you’ve understood what went wrong and taken steps to ensure you don’t make the same mistakes again.

Why invest in tax investigation insurance?

Tax investigation insurance is a policy that covers the accountancy fees incurred in the event of HMRC carrying out a tax investigation into you or your business. Any penalties or additional tax found to be owed is not covered by the insurance.

It’s similar to car insurance in that you only need it in the event of being investigated. On average, full HMRC investigations can last 16 months and cost a potential £5000[i] in accountancy fees without insurance. Investing in cover considerably reduces your potential overall bill.

A tax investigation can happen to anyone. Investing in tax investigation insurance will give you peace of mind that you’ll be protected and have the right help available from your accountant, should you be selected. Most policies cover costs as well as providing help and advice from experts throughout the process.

What are the risks of not having insurance in place?

The bottom line is that the tax investigation process is time-consuming and costly. Even if, at the end of the inquiry, HMRC finds your tax returns to be accurate and complete, you will still incur the costs of working with your accountant to have provided all of the necessary information. If you are found to be at fault, deliberately or otherwise, you will have to pay penalties. With tax investigation insurance, your accountancy costs will be covered.

Tax investigation insurance is well worth the investment, but it’s also worth getting in the habit of using accountancy software such as Xero to manage your bookkeeping effectively, as this will make information requests from HMRC far easier to deal with, should they occur.

Want the comfort of knowing you’re covered? Talk to us and we’ll tailor the right package to protect your business.

[i] Source: https://www.fsb.org.uk/join-us/membership/fsb-tax-investigation-protection.html