Business owner asks:
What’s tax investigation insurance, and should I get it for my business?
Acumenica answers:
Tax investigation insurance, as the name suggests, is a policy that you pay for 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, although there are other, specialist policies that do cover this.
More than ever before, HMRC are cracking down on businesses and individuals who they suspect are not paying the correct amount of tax. Even if you are entirely innocent, a tax enquiry can be invasive, time consuming, worrying and expensive.
What is a tax investigation?
Put simply a tax investigation is when HMRC want to take a closer look at the financial records of a business or individual to determine whether or not they are paying the correct tax.
HMRC have wide ranging powers in terms of information gathering and the information they request can be quite invasive and comprehensive. It’s not unusual for the initial enquiry to comprise more than fifty questions, and that’s before they’ve asked to look at the books.
What can trigger a tax investigation?
Any unusual activity in your tax records or accounts could flag you up for an HMRC tax compliance check. Most checks are triggered by HMRC’s Central Risk team, who use sophisticated data mining tools to spot unusual activity on accounts or trends in particular industries.
The most common trigger for an investigation is submitting incorrect figures on a tax return - so it’s worth asking an accountant to offer professional advice about your accounts and check over your tax returns before you send them.
Other triggers include:
- the industry you work in being seen as ‘high risk’ (e.g. if there are a lot of ‘cash in hand’ transactions)
- someone alerting HMRC to unusual activity in your accounts
- noticeable inconsistencies between tax returns (e.g, a big fall in income from one year to the next)
- frequently filing tax returns late
- your accounts not matching the industry norms
- Your accounts may simply be selected at random for investigation, even if your books are in order and you always file tax on time.
How long does a tax investigation take?
How long is a piece of string? It’s difficult to be exact about the length of time an investigation takes (both in terms of man-hours and the time an enquiry is open). HMRC can be pretty slow moving and we’ve seen investigations take more than two years to conclude. In our experience an investigation normally takes, from start to finish, around nine months.
What does a tax investigation cost?
Again, it’s very difficult to determine how expensive an investigation can be, as it ultimately comes down to how much time your professional advisers are required to spend on the case. Typically, though, you can expect to pay between £3,000 and £6,000 in fees, although this can be much less and much higher.
So, should I get tax investigation insurance for my business?
It’s insurance, so ultimately it comes down to your attitude to risk. If you’re willing to take the risk of shouldering the costs of an enquiry, then you might not want to bother. If you’d rather have the peace of mind that the eventuality is covered, then you should probably get cover.
There are many companies offering this type of insurance to business and they fall into two distinct camps: policies where your existing accountant looks after the enquiry, or policies where the insurance company appoints an accountant or tax adviser to look after the enquiry. At Acumenica, we feel the best people to look after your enquiry are your existing accountants; the know your business better than any external adviser does, and most likely submitted the accounts and return on your behalf so will likely have the answers to most of the questions at their fingertips.
The Acumenica team are on hand to help business owners with all tax matters. To arrange a no-obligation confidential chat, please complete the form on our Contact Us page or call 03330 166559.
