What is Tax Investigation Insurance?

An investigation by HMRC is every business owner’s worst nightmare. When you’ve been running your business successfully, keeping records, using an accountant and paying your tax to HMRC, the last thing you might expect is to be investigated by HMRC. Along with the enormous stress, it can take up a great deal of time – and, in the worst-case scenario, you could end up with a hefty tax bill.

Everyone hopes they won’t be investigated, but it’s important to be prepared just in case. So, whether you’re facing an investigation or want to make sure you won’t be subject to one, read on as we explain what you need to know about HMRC tax investigations and how Tax Investigation Insurance can help you.

What might trigger an HMRC investigation?

There are several reasons why you might attract HMRC’s attention and eventually be investigated. These include:

they receive a tip-off
your returns show unprofitability for multiple years
your returns regularly include mistakes
there are large fluctuations in your reported figures, for example, income or business expenses
your figures look dramatically out of kilter with the normal position for a business in your industry
you report that the company directors are earning less than employees
they suspect you’re omitting income

What are the types of HMRC investigation?

HMRC have two main types of enquiry, depending on the nature of their concerns:

Full enquiry

These may take place when HMRC believes there is a high risk of errors on your returns. A full HMRC enquiry will look through all your business records – and, could include the examination of the personal records of any company directors.

Aspect enquiry

An aspect enquiry focusses on one specific area of your finances that HMRC is concerned about. This is much more common.

What can HMRC check?

If HMRC launches an investigation into you or your business, there’s a broad range of records and documents they might check. HMRC will contact you or your accountant in advance to set out the documents they want to see or the information they’re collecting. Generally, this will include:

information on the taxes you’ve paid (remember that this isn’t just limited to income tax or corporation tax)
your accounts, and details of the tax calculations you’ve made
annual returns if the investigation is into a limited company
your Self-Assessment returns if the investigation is into a sole trader. HMRC may request the Self-Assessments returns for company directors if the investigation is into a limited company
PAYE records where applicable

What happens during an HMRC visit?

HMRC need to adhere to strict procedures when visiting. You might want to ask them for a copy of the rules in advance, or your accountant may be able to advise.

HMRC may ask to visit you at your business, home, or your accountant’s office. Alternatively, they may ask you to visit them. They can’t legally force you to attend, but doing so willingly is generally seen as a sign of co-operation and may have an impact on the outcome of the investigation. You’re entitled to have an advisor such as your accountant present at these meetings.

HMRC must set out the agenda for the meeting in advance of a visit, and you are entitled to ask for a copy of the agenda before the event. The HMRC officials must stick to this agenda. It’s critical that you answer the questions to the best of your knowledge, and that you give complete and accurate information.

For information on how long an enquiry can take, there is some useful information available on the FSB website.

What happens after an HMRC investigation?

HMRC will write to you with the outcome of the investigation. If they find something wrong with your returns but don’t believe the errors were made fraudulently or negligently, they’ll tell you how they think the return needs to be corrected. You have 30 days to make the correction. If you do not do so within this time, HMRC can correct the return themselves.

If HMRC believes that you have acted with intent or fraudulently, you will be issued penalties to pay, extra tax, and interest. You will normally be required to sign a contract pledging to do so, in exchange for HMRC waiving their rights to prosecute but you must seek legal advice if this happens to you.

Tax investigations are not only stressful and scary – they can also be expensive. Aside from a potential added tax liability and penalties, investigations are time-consuming.

To protect against the cost of this lost time, you may be able to take out Tax Investigation Insurance. Tax insurance has gained importance post-COVID due to heightened tax scrutiny, evolving tax regulations around IR35, financial pressures on businesses and the focus on furlough fraud, and uncertainties surrounding the economic recovery. Tax Insurance serves as a valuable risk management tool, providing financial protection and peace of mind in an ever-changing tax landscape.

Tax Insurance is a type of legal expenses insurance and is relatively simple. The policyholder pays a monthly or annual premium for a set amount of cover, usually £100,000 and the policyholder is reimbursed the professional fees incurred in defending an investigation in the event of an enquiry by HMRC.

What are the benefits of Tax Investigation Insurance?

An HMRC investigation can be stressful and doesn’t necessarily mean you have done anything wrong, but having tax insurance can help offset some of that worry, also saving you time and money. Here are some of the benefits in more detail:-

It can save you money. HMRC investigations can be expensive, even if you are found to have been compliant. Defence costs can run into the thousands, but with insurance in place, your business finances are safeguarded.
It can save you time. Tax investigations can take a long time, from several months to several years. Dealing with HMRC on a day-to-day basis during an investigation can be very time-consuming. With insurance, you can get the support of a specialist consultant who can help you co-operate with the investigation efficiently. This can help to shorten the investigation process and get you back to running your business.
Gives you peace of mind. Knowing that you have insurance in place can give you peace of mind, even if you are investigated by HMRC. For a relatively low annual premium, you can remove all stress caused by the prospect of a tax investigation. This allows you to focus on running your business without worrying about the financial implications of an investigation.

If you are a business owner, I encourage you to consider arranging Tax Investigation Insurance. It is a valuable investment that can protect your finances, your time, your peace of mind, and your reputation.

What Tax Investigation does and doesn’t cover

Like all contracts, there are terms and conditions to be aware of. Your Tax Investigation Insurance could be a standalone policy or part of a wider legal expenses policy. In either case, there is likely to be a fixed maximum amount of fees that will be payable under the policy i.e. £50,000 or £100,000. There is also likely to be a policy excess which is an amount of the claim that the policyholder is required to pay.

Tax Investigation policies are also usually subject to claims conditions, whereby the policy will only respond if the claims process has been followed and if there is a realistic chance of a successful outcome.

BLW will always ensure that all the terms and conditions of a policy are explained to you, and we make every possible effort to match the cover to your demands and needs.

How do I buy Tax Investigation Insurance?

If you would like to arrange a Tax Insurance policy, please get in touch with one of the team today on 01702 543306 and we will help you get the right solution.

How much does Tax Investigation Insurance Cost?

An annual Tax Investigation Insurance policy can cost as little as £75 a year but it’s important to consider the cover limit, excess and if you’ve had previous claims as these will all impact the premium charged.

Is it worth buying Tax Investigation Insurance?

HMRC investigations can be random, so it’s impossible to know if your business will ever be investigated. However, if you are investigated, the cost of professional fees can be significant. We have also heard anecdotally that HMRC has increased their investigatory activity since the end of the pandemic.

For example, if you need your accountant to help you deal with an HMRC investigation, their hourly rate is likely to be at least £150 and could be as much as £300. This means that even a relatively short investigation could cost you thousands of pounds in professional fees.

In contrast, the cost of tax investigation insurance is relatively small. For example, a policy that covers up to £100,000 in professional fees could cost as little as £75 per year. So, even if you never need to use your tax investigation insurance, the cost of the policy is still a worthwhile investment. This is because the potential cost of professional fees is much higher.

In addition to the cost of professional fees, an HMRC investigation can also be incredibly stressful. Tax Investigation Insurance can provide you with peace of mind, knowing that you have financial support if you are investigated.

If you are a business owner, you should consider taking out Tax Investigation Insurance. It is a small expense that could save you a lot of money and stress if an HMRC investigate.

Tax Investigation Insurance could be a worthwhile investment but is not a substitute for good recordkeeping. You should always keep accurate records of your business finances so that you can easily demonstrate your compliance with tax laws. If you are unsure whether tax investigation insurance is right for you, get in touch with BLW Insurance Brokers to find out more on 01702 543306 or mark.gilbert@blwinsurance.com.