Each year in the UK, His Majesty’s Revenue and Customs (HMRC),undertakes thousands of tax investigations into businesses and personal taxpayers alike.
HMRC refer to these as ‘enquiries’ (typically into tax returns) or ‘compliance activity’, which will often focus on Employer Compliance (PAYE/NICs/IR35) and VAT issues, as the term ‘investigation’ has a negative connotation which HMRC sought to remove from their vocabulary many years ago. These investigations are designed to ensure an individual or business is paying the right amount of tax.
If HMRC uncovers any discrepancies in your tax return, you would be required to pay any backdated tax, as well as interest from when the tax was due and potentially even a penalty if you failed to take reasonable care in presenting your tax affairs. That penalty will increase if your errors are due to deliberate efforts to mislead HMRC and in some circumstances, criminal charges may even be brought.
The truth is, tax discrepancies are not uncommon and don’t always indicate intentional wrongdoing. Nevertheless, if your small business is subjected to an HMRC challenge you will be advised to ensure that you have access to representation from a good accountant or tax adviser to ensure that you can fight HMRC on an equal footing. Tax investigations can be long drawn-out affairs – often taking more than a year to conclude – and certainly involving specialist work and are therefore very expensive. This is where specialist tax investigation insurance comes in.
Tax investigations insurance, often referred to as fee protection insurance because it meets the cost of your defence – is a specific type of legal expenses insurance, although often part of a comprehensive legal expenses insurance package. These valuable policies work in a relatively simple way. As is the case with most small business insurance policies, you will pay a monthly or annual premium.
At Caunce O’Hara, for example, our Legal Expenses and Tax Investigation Insurance policies start at £75 a year. For this premium, your business will be protected up to the value of £100,000 in professional fees in the event of a tax investigation. This pay-out will cover the cost representation should your business be required to defend itself against a claim.
For example, say you are a self-employed contractor working for a small company and operating outside of IR35. If your limited company is investigated by HMRC, and they successfully argue that your engagement was in fact inside IR35, HMRC would be seeking additional tax, employer and employee National Insurance Contributions, interest and potentially penalties for the entire duration of an incorrectly determined engagement(s).
On top of that you would also have to bear the cost of your defence, which based on a typical IR35 enquiry will cost £3,000 to £5,000 if the matter does not go to tribunal and at least 10x that amount if it does.
However, if you have tax investigation insurance, the costs of your IR35 tax investigation could be covered by the policy and ensure that you can afford the best representation to get the right outcome without worrying about the cost of your defence. Ultimately, this could help to secure the survival of your limited company going forward.
Should HMRC decide to investigate your business finances, tax investigation insurance can save your business money, time and a whole lot of stress.. Below, we take a look at the three primary benefits of this type of cover.
1. It can save you money
HMRC investigations can happen at any time without warning. This means if you are accused of doing something wrong, a large bill could come from nowhere.
Indeed, even if you are found to have been compliant, defence costs in the wake of the investigation can run into the thousands.. When you have insurance in place, your business finances are safeguarded.
2. It can save you time
It’s not only business finances that are impacted when a tax investigation is carried out; valuable time can also be wasted. The length of the investigation depends on a variety of factors. These include how much documentation HMRC have to go through and the size of your business. However, for context, small investigations into tax returns – known as aspect enquiries – can easily take between three and six months, as can a VAT or Employer Compliance review. A large, full-scale investigation – a “Full Enquiry” – can take much longer. We have seen IR35 Enquiries which have gone to Tribunal last as long as seven or eight years.
Dealing with HMRC on a day-to-day basis during the investigation can be very time-consuming. From regular correspondence to locating and sending requested documents, these tasks take up valuable time that could be spent running your business. Having the support of a specialist IR35 consultant as part of the Caunce O’Hara tax investigations policy allows you to cooperate as efficiently as possible with the investigation, knowing that you are getting the best defence, without having to worry about your financial situation. Often the support we provide through our tax investigation insurance can ensure that the investigation is completed quickly and with the right result, so that you can go back to doing what you do best – running your business.
3. It provides peace of mind
Having tax investigation insurance in place offers a great deal of reassurance. For a relatively low annual premium, you can remove all stress caused by the prospect of a tax investigation.
As we discussed above, even if you think you’ve done everything by the book, mistakes can happen or just as likely, HMRC might believe that errors have been made and the focus of the enquiry becomes not mitigating for mistakes, but justifying that the figures which have been submitted as part of your tax return are genuine. And this can often be just as expensive to prove. Having up to £100,000 worth of cover to fall back on should you be challenged means you can have complete peace of mind. This allows you to focus solely on running your business.
The cost of tax investigation insurance depends on a range of things. This includes your provider and the maximum pay-out the policy provides. As mentioned above, here at Caunce O’Hara, we offer legal expenses and tax investigation insurance policies starting from £75 a year. These policies also ensure you are supported by tax investigations specialists who often have an HMRC background and are therefore experienced in dealing with tax enquiries from both sides of the defence. Where your enquiry is of a more specialist nature; e.g. VAT or IR35, then the consultant will always be a specialist in that area of tax.
As HMRC investigations can be conducted at random, for most businesses, you may think the chances of one occurring in a year are slim. This may lead you to think you are paying for a policy you might not ever need when purchasing tax investigation cover. However, the fact of the matter is, if you are one of the thousands of businesses that is investigated, this cover could save you far more than the cost of your annual premium.
Or to put matters into context: if you do not have this cover and you need your accountant or a tax adviser to deal with the matter, their hourly rate – because this is specialist work – is unlikely to be less than £150 per hour while some firms will charge £300+ per hour.
Therefore the cost of an annual premium of £75 will – if you are lucky – get you half an hour of your accountant’s time. And it pales into insignificance compared to the 50 plus hours your accountant might spend over the next two years defending you in a complex HMRC enquiry.
When the potential cost of professional fees could escalate and even threaten your business’s survival, the small expense of insurance premiums makes these policies very worthwhile.
Protects against claims of alleged negligence in your professional services, advice and designs.
Protects against claims of injury to third-parties or damage to a third-party's property.
Cover for contract disputes, tax investigations, court attendance, debt recovery, and more.
Covers your business in the event of a malicious attack on your computer systems and data.