In the past decade, the number of tax enquiries undertaken by HM Revenue & Customs (HMRC) has significantly increased year on year.

The cost of defending an HMRC tax investigation can run into thousands of pounds. Fee protection insurance helps to save you from unexpected costs of having your tax returns, limited company accounts or other tax areas investigated by HMRC.

In this blog, we look at HMRC enquiries, how they may affect you and the benefits of having fee protection insurance in place.

What is a HMRC tax investigation/enquiry?

Every year there is an estimated tax gap between what HMRC should collect from individuals and businesses and what it actually collects. To ensure that individuals and businesses are paying the right amount of tax and to close this ‘tax gap’, HMRC undertakes tax and VAT investigations.

Who can be subject to a tax investigation?

Any individual, sole trader or business can be subject to an enquiry, even if you file your tax returns on time, pay the tax due and you believe you tax affairs are in order.

What prompts a HMRC tax enquiry/investigation?

There doesn’t have to be a prompt for an enquiry to be started. Your accounts/self-assessment tax return may be selected at random for a tax investigation, even if you’ve filed these on time and you believe the figures are correct.

Things that may trigger a HMRC enquiry are:

• Late filing of tax returns
• Incorrect figures on a tax return or in your accounts
• Someone alerting HMRC to unusual activity in your accounts
• The industry you work in being seen as ‘high risk’ (for example where ‘cash in hand’ transactions are common)
• Missing information
• Inconsistency in tax returns figures (large increases or drops)
• A simple sense check
• Activity behind the scenes you may not have declared

Random enquiries into tax affairs can and do happen. So, whether you’re an individual taxpayer or business owner, an investigation is possible, and nobody is exempt.

HMRC have sophisticated IT systems and AI, allowing them to spot unusual activity more easily, errors, high risk industries, trends or changes.

What HMRC can check

HMRC will write or phone to say what they want to check. This could be:

• any taxes you pay
• accounts and tax calculations
• your self-assessment tax return
• your Company Tax Return
• PAYE records and returns if you employ people

What types of tax investigation are there?

There are three categories of tax investigation:

• Aspect enquiry: where HMRC want to assess one or more areas of your tax information.
• Full investigation: where the whole of your tax return is reviewed (personal return or corporate tax return).
• Random: These can often be aimed at higher risk tax areas or sectors.

Whatever the type of enquiry, the consequences and costs can be serious.

Which taxes can be queried in a HMRC tax investigation?

Because no one is exempt from HMRC’s compliance check, whether an individual or a company, many taxes can be subject to scrutiny.

Here are the types of taxes and schemes that HMRC inspects:

• Income Tax
• VAT
• Corporation Tax
• Capital Gains Tax
• Construction Industry Scheme (CIS)
• IR35
• Insurance Premium tax
• Landfill Tax
• Climate Change Levy

What is fee protection insurance?

Fee protection insurance covers your professional fees in the event of a HMRC tax enquiry. It is a great way to protect you should you be a target of a tax investigation.

Whilst a fee protection policy doesn’t cover any tax found that you owe, it will generally cover all your accountant’s fees that you will incur in dealing with an investigation.

The benefits of fee protection insurance

There are substantial benefits to being covered by a fee protection insurance policy. The main benefit of taking out tax investigation protection is that should you be subject to a tax enquiry, you can pass this onto your accountant to handle the investigation on your behalf and all the accountancy fees will usually be covered by the policy at no additional cost to you.

The professional fees for defending a tax enquiry can be claimed under the insurers policy, giving you peace of mind and protection from facing a large bill, as well a potentially a tax bill or penalties.

Fee protection insurance also ensures that you and your accountants will be able to defend a tax enquiry fully, without you worrying about large fees.

Some fee protection insurance policies, such as the one offered by Barnes Roffe will include helplines and support with other areas such as:

• Legal Services
• HR
• Health & Safety
• Employment Law

What happens without fee protection insurance?

You will be asked lots of potentially complicated and confusing questions during the enquiry from HMRC and you will be required to submit additional information. Without tax investigation insurance, you will need your accountant to help you both to submit the required information to HMRC and to potentially manage the conversations and answer questions posed by HMRC. This in turn means you will incur additional professional fees and depending on the length and complexity of the investigation, these can run into thousands of pounds.

Cover for those unexpected costs

Having fee protection in place gives you the reassurance that your accountant’s costs in dealing with the investigation will be covered.

Summary

HMRC investigations are on the increase as HMRC seek to collect additional revenue. Professional fees incurred in dealing with a tax enquiry can be expensive. Expert advice during a tax investigation can save you thousands of pounds, save you time or could reduce penalties.

Most accountancy practices will offer some form of fee protection insurance to their clients but as with other insurance policies, the level and scope of the cover can vary. So, choosing the right scheme is an important decision to make.

Here at Barnes Roffe, we offer our clients a comprehensive fee protection insurance scheme. To find out more contact us.