Tax Investigation Insurance

I would not say you have necessarily wasted your money but I do treat such insurances with a pinch of salt.

We do not offer this for clients though 1 or 2 have asked when joining us from previous advisors.

My personal opinion, the insurance ca be littered with get out clauses for the company, having insurance can encourage less scrupulous accountants to string out fees on investigation knowing the insurance company is picking up the tab.

Random investigations simply do not exist, this is not to be confused with random enquiries which happen often but are not covered by these insurance policies in most cases (or they are bt at much higher cost). Investigations are triggered, this can be for many reasons, some bogus some valid.

Whether you personally require insurance will depend on the likelihood of you having an investigation and the likely complexity and time to satisfy HMRC of whatever they are looking at.

As a final point, we handle roughly 400 personal tax returns per annum. We see roughly 10 - 15 enquiries per year and in 3 years have NEVER had a single investigation. Though I have 1 enquiry currently which may turn into our first and the year in question wasnt done by us.

Hope this helps

ps if you are medium to high risk then £150 will equate to maybe 2 hours of work, so could be money well spent, assuming the insurance will pay out.

I advise our clients to join FSB to get tax investigation insurance for the business and to make sure that they have similar for personal affairs through their household insurance (usually covered within the legal expenses add-on).

We've had several clients over the years who've been investigated and whose FSB membership has covered their professional fees and in almost every case, helped prove their innocence with no extra tax due. Never had a problem with FSB at all. They use their own tax experts and all we do is hand over our files to them, they do the rest. Very simple and straightforward.

We also offer insurance directly through brokers (Qdos or Abbey Tax over the years) which costs the client around £75 per year. Although we could do the work and charge our time to Qdos/Abbey, we'd rather sit back and let the experts deal with it, so again, we just hand the files over and let them argue it out with the tax inspector.

So, we don't actually make any money from tax investigation insurance at all - we just recharge the cost to us and when the work is needed, we charge nothing as we don't do the work. We regard this as a true "value added" service to the client and advise it purely to give the client the backup they need if they're targetted by the HMRC rottweillers. For another poster to say that accountants only recommend it to make money is blatantly untrue for most reputable accountants, like ourselves!

First, I'll put up this number which the accountancy profession use as a rule of thumb and see if any of the HMRC posters want to differ:

In any given tax year, you are 3% likely to be the subject of a tax enquiry or investigation. ON AVERAGE.

There are 2 very different risks to weigh up here :

1. The risk of being investigated.
2. The risk of an expensive investigation - in either fees, time or tax bills - if you are investigated.

Some sectors are more likely to be investigated - construction, pubs & hairdressing (including minimum wage), other cash businesses. Some types of taxpayer are more likely to be investigated - for example those earning over £150k, non-doms. Common triggers for investigation are database mining (e.g sector average gross margin 60%, your gross margin 30%), acting on a tip-off, filing late returns, consistently filing returns in the last week before the deadline.

Once you get investigated, the quality of your records is the single most important feature in the length and pain of the investigation - though be warned, always let HMRC "find" something because some of them get very frustrated with perfect records and waste £000s of taxpayers' money in a desperate bid not to leave empty-handed. So all those things your accountant has maybe been nagging you about - filing all invoices & statements, keeping mileage records to back up those petrol claims, and so on - well if you've done them all consistently you'll suddenly be glad you paid attention. And if you haven't just get your cheque book out....

Insurance - can be well worth it unless you have very simple affairs. £75 to cover you for the £2k to £5k cost of an enquiry.

Insurance cover for legal and tax professional fees and statutory awards in the event of an employment dispute or full tax enquiry

This is in fact quite a narrow % of the total possible issues you may want covered. The better policies cover aspect enquiries, HMRC "visits" (often thinly disguised fishing trips designed to trap the unwary taxpayer), HMRC checks and tax disputes. It appears the FSB policy only covers full tax enquiries, which are a small subset of the full range of HMRC "battles" you may want to cover.

I assess all my clients for tax enquiry risk in the course of doing their accounts.

Those who are deemed high risk know who they are - and I more or less insist they get cover for their own peace of mind. Everyone else knows about the options but does not get a big steer from me on the subject. My perception is that those who've seen a friend go through one of these "visits" are more likley to insure than those who have not.

That is the point I was making. The better policies cover you for "fishing trips" which is important - in many of these HMRC staff want to meet the client face to face and trap them into unknowingly saying things which cause problems, even if these are in fact not true anyway. (Many clients understand what's on the surface of their numbers but haven't a clue about what's going on in the water.)

So in my view clients should either have a policy which covers the full range or none at all. A badly handled "fishing trip" can easily lead on to all sorts of bad things.