Does your business need tax investigation insurance coverage?

If you file a tax return with HMRC, or you claimed financial support from the UK Government during the coronavirus pandemic, you run the risk of being randomly selected for a mandatory tax investigation that could see your business facing additional accountancy costs in the thousands.

Tax investigation insurance ensures that, even if you are singled out, your accountancy bills will be covered, allowing you to relax and get on with running your business as usual.

Here, we take a look at when tax investigation insurance is needed, what it covers, and why it could soon be more important than ever to protect your business by finding an accountancy firm offering a tax investigation service.

What is a tax investigation?

Having your taxes investigated – otherwise known as a tax investigation – involves HMRC taking an in-depth look at your business accounts in order to double check that you are paying the correct amount of tax and accurately claiming any allowable expenses.

It’s a turn of events that impacts over 100,000 UK businesses and self-employed individuals each year, and when it occurs it can be a very timely, stressful, and drawn-out process, requiring your participation for weeks or months on end.

What happens during a tax investigation?

If you’re selected for a tax investigation by HMRC you’ll receive a phone call or a letter through the post notifying you that your tax accounts are under investigation. This will explain exactly what aspect of your accounts will be reviewed, so you can prepare the information required.

The review will take place in person, either at your home, your place of work, or at a location specified by HMRC. If you have a bookkeeper or accountant who manages your business or self assessment tax return on your behalf, HMRC will get in touch with him or her directly and they will bear the responsibility of liaising with HMRC for the duration of the investigation

Failure to comply with the investigation may result in your business incurring a penalty, so it’s very important not to ignore a tax investigation notice from HMRC and that you supply all the relevant information that is asked for. This may include purchase receipts, PAYE records, and bank account statements relating to your self employment or your business.

How long does a tax investigation take?

This depends on a few factors, including how many years’ accounts HMRC want to see and whether they’re conducting a full investigation or simply taking a closer look at one particular aspect of your business accounting.

That said, it’s not unusual for HMRC tax investigations to drag on for weeks, months, or even years at a time. If you use an accountant you’ll be paying for all the time he or she spends dealing with the tax return on your behalf, which is why accountancy bills for tax investigations can quickly climb into the thousands. It’s for this reason that many businesses now choose to protect themselves against the cost of a tax investigation with a tax investigation service covered by an insurance policy.

What is tax investigation insurance?

Tax investigation insurance will cover the cost of your accountants’ fees if your business is singled out by HMRC for a tax investigation. This means that any time your accountant bills you for defending the tax investigation on your behalf will be paid for by your insurance policy.

In the majority of cases, tax investigation insurance offers financial protection of up to five or six figures and, providing your claim meets all the qualifying criteria, your insurer will simply settle the bill with your accountant on your behalf, so you won’t have to part ways with a single penny.

The only things not covered by tax investigation insurance are any additional taxes you may owe, as well as any penalties you may incur if the investigation concludes that your business intentionally misled HMRC.

Who needs a tax investigation service?

A tax investigation service is for anyone, business or individual, who files an annual tax return, self assessment tax return, or VAT return with HMRC. It doesn’t matter if you’re a registered company or just a sole trader, if you pay tax directly to HMRC you could find yourself randomly selected for a tax compliance check at any point in time, as many businesses have discovered.

Why do you need a tax investigation service?

Since covid, tax investigations over a six month period were found to have risen by nearly 10%, with those who claimed government support during the pandemic frequently singled out for investigation by HMRC.

Without a tax investigation service covered by insurance, this could see your business liable for additional accountancy fees amassing tens of thousands of pounds, at a time when cost of living increases are already putting additional strain on finances.

A tax investigation service is the only way to protect yourself against the unforeseen costs of a tax investigation by HMRC, giving you the peace of mind that you won’t have to pay out a costly accountancy bill that you haven’t set money aside for. 

Sarah Evans