Tax investigation is an insurance policy that Professional Fee Protection (PFP) initiates to protect their clients in the event of a tax investigation. Tax investigation protection is an annual policy that covers our costs associated with dealing with an HMRC tax investigation in the event that HMRC initiates an investigation into your tax affairs. In this article, we will talk a lot about the worth and cost of tax investigation insurance in the UK, as well as what it does and does not cover.
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Tax Investigation Insurance
Tax Investigation Insurance is a policy that protects the clients of an accounting firm; against any professional fees incurred as a result of an HMRC investigation. By offering a Tax Insurance policy, you give your practice complete access to our in-house tax and VAT consultants. This resource of over 30 skilled professionals is an extension of your practice; that can be useful as much or as little as you need; you retain control.
Tax investigation protection is an annual policy that covers our fees for dealing with an HMRC tax investigation; if HMRC initiates an investigation into your tax affairs. The costs of these inquiries can sometimes exceed thousands of pounds, and this provides you with peace of mind; that our costs will be covered and that we will be able to assist you in defending the inquiry.
Why do I need Tax Investigation protection?
Since ‘Schedule 36,’ HMRC has been granted expanded information and inspection powers; which has resulted in an all-time high level of HMRC inquiry activity. These investigations are completely random, and anyone who pays tax may be subject to HMRC’s inquiries, so you getting your preparation done can be beneficial.
Some people believe that investigations occur only when there is wrongdoing with tax returns; however, this is NOT true. HMRC has the authority to investigate you even if your tax return and business records are accurate; the taxman discovers no errors. These investigations can cost thousands of dollars, which is why taking out insurance with Cardens may protect you.
Now let us check the value of tax investigation insurance for your business.
Is Tax Investigation Insurance Worth it?
Some believe that the worth of tax investigation insurance is defined by a coin toss. If you are under investigation by HMRC, the policy will almost certainly save you thousands. If you do not receive the dreaded HMRC letter, it may appear to be a waste of money. More compliance checks are likely to be conducted to ensure that programs such as Job retention and self-employment income support are administered correctly and in accordance with the guidelines.
Tax Investigation Insurance, for those who are unaware of its worth or have not previously required it; covers your accounting fees in the event of an HMRC tax inquiry. Often, tax investigations are lengthy and, in addition to the unnecessary stress and inconvenience; will generally result in you incurring additional accountancy fees for obtaining professional assistance in dealing with HMRC, even if you have committed no wrongdoing.
While the insurance policy does not cover any tax that is discovered to be owed; it does cover accountancy fees entirely, allowing you to leave the investigation in the hands of professionals without regard for accountancy costs.
Along with covering Corporation Tax, VAT, self-assessment, and all of your other ongoing taxation matters; the policies we provide will now cover any inquiries relating to HMRC’s COVID-19 support schemes. Policies start at £40 plus VAT and increase in price based on your tax requirements.
Tax Investigation and Insurance Cost
Costs associated with a typical tax investigation frequently escalate, not because you committed an error, but because you are in demand to establish your innocence of any wrongdoing. This tax and VAT investigation insurance policy costs up to £100,000 in fees associated with HMRC tax inquiries.
Each year, HMRC conducts tax and VAT investigations on thousands of individuals and businesses. VAT and PAYE payments are thoroughly audited with the goal of increasing tax revenue. Certain individuals will be randomly selected for a thorough investigation as part of the Error and Fraud Analysis Program. These are referred to as EFAP inquiries.
Since April 2009, HMRC has been able to inspect all tax records at business premises. They can now also send you written queries prior to the submission of your annual returns. If you have a business insurance policy, it is likely that you already have legal expenses coverage, which may include some tax/VAT investigation coverage. Alternatively, there are specialist tax and VAT investigation insurance providers who will cover the professional fees associated with conducting a tax or VAT investigation. Self-employed consultants are also subject to IR35 investigations, which are typically covered only by specialized tax and VAT investigation policies.
The top five reasons for using the Tax Fee Protection Insurance service
- Over the last four years, HMRC has raised an additional £11.7 billion.
- HMRC does not require a reason to initiate an investigation.
- Anyone who files a tax return is subject to investigation.
- A single enquiry can cost thousands of pounds to resolve.
- The vast majority were not motivated by suspicion or fraud, and thus many innocent taxpayers and businesses were targeted despite the fact that they had committed no wrongdoing.
Tax Investigation Insurance UK
Tax investigation insurance can also be in operation in the UK; let us take a look at it.
How Tax Investigation Insurance Works In The UK
Tax is not optional, and tax investigation insurance does not cover HMRC debts. It merely compensates for the professional fees associated with an HMRC investigation. As an example, suppose you receive notification from HMRC that you or your business owes £7,500 in unpaid tax. You instruct your accountant to provide information and negotiate on your behalf with HMRC in order to reduce the demand. Assume the accountant charges £1,500 for this time spent on your behalf.
1. Without tax investigations insurance: Even if your accountant successfully negotiates a tax bill can be down to zero, you will still be in requirement to pay the £1,500 accountant’s fee. In the worst-case scenario, if the negotiation fails, you will owe £7,500 to HMRC in addition to the £1,500 owed to your accountant, for a total cost of £9,000.
2. With tax investigation insurance: if your accountant successfully reduces the tax bill to zero, your insurance will cover the accountant’s £1,500 fee, bringing your total cost to zero. In the worst-case scenario, you will still owe £7,500 to HMRC despite the insurance, but the insurance will cover your accountant’s fee, bringing your total cost to £7,500.
Examples of Tax Investigations
HMRC’s annual number of inquiries has increased significantly over the last decade. Any individual or business may be the subject of an investigation, even if their financial affairs appear to be in order. Three instances are provided below in which tax investigation insurance fully covered the accountant’s fee.
1. Individual with a high net worth: HMRC wanted to ascertain the individual’s domicile status in this case. HMRC made numerous requests for information over a four-year period. Throughout the investigation, the accountant assisted the individual. By the time an agreement with HMRC was reached, the accountant’s fee had exceeded £75,000.
2. Personal tax: Following the sale of a property, HMRC initiated an investigation into an individual’s Capital Gains Tax position, requesting property valuations, and leases, and challenging the transaction, which involved a family business. While the inquiry was resolved quickly, it necessitated extensive correspondence. Although HMRC accepted that there was no additional tax to pay, the accountant’s fee for resolving the inquiry came to £3,500.
3. SME: In this case, HMRC investigated a software company’s claim for a Research and Development Tax Credit. HMRC desired to ascertain the amount of qualifying expenditure. The accountant provided detailed information and conducted a conference call with the HMRC officer who was investigating the Research & Development claims to explain them. This enabled HMRC to close the investigation without making any adjustments. In this example, the accountant’s fee was £6,000.
Should I get Tax Investigation Insurance In The Uk?
While no one can avert a tax investigation, fee protection insurance can provide you with peace of mind. You will be in coverage against the professional costs associated with an HMRC inquiry for an annual fee. Allowing your accountant to handle these inquiries on your behalf has the following benefits:
- Dispute HMRC’s assertions and present the strongest defence possible to protect your tax position.
- Ascertain that they can deal with your case fairly.
- Ascertain that the tax inspector requests only pertinent information and documents
- Provide all supporting documentation from our records pertaining to your accounts.
- Liaise with HMRC on all matters, including letters, phone calls, and notices issued
- Prepare for, and attend, in-person meetings with the tax inspector.
- Defend any complex or technical tax issues that arise during the investigation.
Tax Investigation Insurance Cover
By purchasing tax investigation insurance, you can help mitigate the potential cost of an HMRC investigation, which can be both time-consuming and costly. Additionally, this type of insurance policy provides you with the assurance that you will be covered if you are into a tax investigation.
Why do I need tax investigation insurance?
As a sole trader, consultant, or small business owner who maintains accurate and current records, files their tax return annually, and pays any taxes due on time, you may view tax investigation insurance as an unnecessary expense. Cost estimates vary widely, and a great deal depends on the nature of your business, the volume of transactions you conduct, and other factors, but this type of investigation is more than a financial headache.
Trying to run a business while also complying with HMRC’s requests for financial records and additional information about your taxes can be a real strain and significantly impair your ability to operate efficiently. This is where tax investigation insurance can prove beneficial.
What does tax investigation insurance cover?
Tax investigation coverage, like other types of insurance, can be customised to meet specific needs. Most providers will write policies to cover professional fees incurred in conducting an investigation and/or defending disputes up to a predetermined limit, as well as income tax self-assessment inquiries, corporation tax, IR35 inquiries, employer compliance disputes, VAT disputes, business records, and other checks. Additionally, you can get an offer of a guarantee against outstanding tax and national insurance obligations, as well as any interest or potential fines. With tax investigation insurance, you can conduct business as usual without fear of an unwanted call from the tax office.
What tax investigation insurance does not cover
Certain items are not covered by our Tax Fee Protection Insurance Complete details are available upon request, but include the following:
- The cost of correcting errors in books, records, accounts, or returns.
- Claims arising from any matter that existed prior to the commencement of the insurance period, except where full disclosure was made and the risk increase was accepted in writing.
- Enquiries about the minimum wage, student loans, CIS, and tax credits.
- Returns that are more than 90 days late.
Tax Investigation Insurance FAQ
What triggers an HMRC investigation?
Typically, HMRC conducts claims compliance checks when figures submitted on a return appear to be incorrect in some way. If a small business suddenly makes a large VAT claim, or a large business declares a negligible amount of tax, HMRC will almost certainly flag this.
What is HMRC investigation insurance?
Tax investigation insurance, also known as legal expenses insurance or HMRC investigation cover, reimburses you for professional fees incurred defending you in the event of a tax investigation. Given the length of a single investigation, this type of coverage could potentially save you thousands of pounds in fees.
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