Why it pays to have Tax Investigation Insurance

Tax Investigation Insurance. It sure does sound important and a little ominous, doesn’t it? Well, it’s important stuff – for any business. If this is something you’re unaware of, don’t worry, you’re not alone. As optimists, we believe that most businesses are good and shouldn’t need such an insurance product. But, HMRC can and will investigate anyone, regardless of how compliant they are.

HMRC can open a tax investigation into businesses of any size. This is the harsh reality – it’s not just limited to high-profile TV personalities and huge corporations. In a recent hiring spree, HMRC has actually grown their internal investigation team significantly, so it’s clear that they intend to catch out a multitude of offenders large or small, to claw back lost taxes, presumably to help wider economic recovery efforts.

How can I protect my business against a tax investigation?

Well, the real answer here is that you can’t. As we said in the intro, no matter how tight your ship, HMRC could choose you for a spot check, delving deep into your business’s tax affairs. Of course, if everything is as it should be, they’ll be out of your hair in no time. The bad news is that the more questions they ask and the further back they go, the more time-consuming it becomes and the likelihood of needing professional guidance increases.

This could be something as simple as some extra time with your accountant, where they help you to collate whichever information HMRC has requested. Or this could be a little costlier depending on the complexity of the case at hand. A common example is what’s known as the ‘Contractual Disclosure Facility’. Again with the ominous nomenclature. This is a process of disclosure that HMRC uses during the early stages of an investigation. We’ve already written about this in detail, so check out our CDF blog for more information. The good news is that whilst you can’t prevent a tax investigation you can mitigate the associated professional fees which you may incur.

What does tax investigation insurance cover?

Most importantly, time. There is no way around a tax investigation other than compliance, and compliance can be time-consuming. You, the business owner (and your fellow directors, if applicable) must take time to understand the investigation. It’s also important that your in-house finance team is as aware as they need to be, and you must also factor in the time you’ll spend working with an external accountant or tax specialist.

How much would a tax investigation cost me?

It’s difficult to give an exact figure, as every business is different, and it also comes down to the state of your tax affairs. But as a guide, you could look at anywhere between £3k and £20k or more. Remember, even if you have nothing to hide, the cost is finding and providing the information to HMRC.

What if HMRC does find problems?

This is where it can get really expensive. The fees associated with the investigation are fees alone. Should HMRC find errors in your accounting, you will be liable for the unpaid tax, and you might also be charged a penalty on top of that.

Our quick tips for avoiding a costly tax investigation:

• Respond to the letter immediately. A slow response could incur expensive penalties
• Consult your accountant or a tax specialist immediately – they can really help you
• Make time for the investigation. You will need to be responsive and proactive
• Act in good nature. HMRC are humans, after all, and will likely respond favourably to respectful behaviour

Despite the top tips above, the issue at large is still the cost of an investigation. That’s why tax investigation insurance is essential for any business. For a small premium, you are covered whether you’re a limited company, LLP or sole trader and that is why we encourage all of our clients to seek protection.

Speak to us about tax investigation insurance and learn how we can protect your finances regarding an HMRC spot check.