What is tax investigation insurance?

 In General

Managing a small business can be difficult at the best of times. Margins are low and finances are a delicate balancing act. During a pandemic, the thought of the additional unexpected costs of an investigation are even more worrying. That’s why many companies are taking up tax investigation insurance.

Should you take out tax investigation insurance?

At any time HMRC may select your company tax records for investigation. It may happen because they see something suspicious or they may do it entirely at random. Either way, the process can be costly and disruptive. 

Even if everything is in order, the process can be complex and take several years. Investigations have been known to take up to 16 months to complete and may involve thousands of pounds in legal fees. If they do find inaccuracies, you could find yourself facing penalties and additional tax to pay. 

The process can be overly intrusive. Recent studies suggest most (56%) of SME owners feel HMRC does not do enough to minimise the trouble their investigations can cause and that their investigations are overly rigorous, excessively expensive and take too long. 

For small businesses whose cost margins are a fine balancing act at the best of times, the time and cost involved with a tax investigation can cause a serious drain on their finances which is why it makes sense to take out insurance.  

Cover varies from provider to provider, but you can generally expect it to pay your accountancy fees and give you access to beneficial support such as:

  • Tax advice helpline
  • Representation from former tax inspectors in HMRC communications
  • IR35 legislation support
  • Corporation/Income Tax full and aspect enquiry protection
  • PAYE/VAT representation

For example, the Federation of Small Businesses (FSB) offers its members tax investigation insurance which can cover their accountancy costs and will provide access to tax experts who will assist throughout the investigation. They employ experts who are all former HMRC tax inspectors who understand how the process works and how you can quickly move it towards a conclusion. 

These services in themselves could prove invaluable in keeping your business stable in the event of an unexpected tax inspection.

How can tax investigation insurance help you?

Many businesses will see this as an unnecessary expense. However, even if everything is in order the expense and disruption to your operations can be extremely costly. Having a good tax investigation insurance policy in place helps in many different ways. It protects your business financially with the costs involved with PAYE, VAT, Self-Assessment investigations, and it can also help you financially and appeal if appropriate against HMRC’s decision. 

Advice and support services can also provide cover in helping you to understand your rights and what you need to do to comply with the regulations. For example, the arrival of changes such as IR35 creates all sorts of uncertainties surrounding what a company must and must not do and which workers will be covered. 

One of the most common reasons why businesses fall afoul of the regulators is that they don’t fully understand what’s required of them. 

However, policies do come with exclusions. For example, the insurance will not protect you if you fail to complete and file your tax returns properly and on time. They may also exclude any criminal behaviour by you or another representative of your business. 

Why Keeping accurate financial records are key

Of course, the best way to protect against problems is to ensure all your financial records are accurate and up to date. This will reduce the chances of your records flagging up suspicions which could trigger an investigation in the first place and minimise the disruption and costs caused if an investigation does happen.

This can be challenging for some businesses. Depending on how you keep data in order, mistakes in records are common. Often this comes from the business growing faster than its accounts department. 

For small businesses, accounts are often completed by the business owner or assigned to a member of staff who may not be fully qualified. While this might work in the earliest days, as the business grows, things become more complicated and errors can pile up. Common mistakes such as entering the wrong data into the wrong place or assuming profits always mean cash flow can cause a business to have an inaccurate idea of its financial situation, assets, income and liabilities. 

Changing tax rules can also make it difficult to keep up. In recent times, businesses have had to keep up with a range of new practices and regulation such as IR35 rule changes and Making Tax Digital. The pandemic added more complexity into the mix with its various rules surrounding how different workers could be furloughed and tax reporting obligations. 

Staying on top of all these new rules and obligations is increasingly a specialist task. Ignorance is no defence for a tax investigation, which is why it’s crucial to ensure that everything is up to date and complying with the latest tax obligations. 

Managing your accounts

Advances in tax software such as Xero and FreeAgent do make things easier with many tasks being automated and streamlined. It not only makes it easier to see all the information you need, but also ensure that information is correct. Even so, to keep on top of things, it can be well worth your while seeking specialist tax advice. At 3 Wise Bears we can help with expert advice and guidance for everything to do with your taxes.

Our Chartered Accountants offer advice to create the best setup for a tax efficient structure to make sure tax liabilities are minimised and ensure all of your tax returns are filed on time with HMRC. Get in touch to find out more.

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