Tax investigation insurance, worth it?

scooby32

Am a sole trader in my first year of trading, have been recommended tax investigation insurance to cover accountants fees if this should happen. this is all new to me and a minefield , can anyone help.

What is it?

What is a tax investigation, what does it involve and would normally cost in accountants fees

The cost is £120 and am unsure if I require it, but would be worried if the alternative was a lot to pay out in the eventuallity this happened.

I know its an individual choice, but any coments would be really helpful

thanks

ukbill69

I wouldnt really, aslong as you do your books well and you have a good accountant then dont waste your money.

Pennywise

If you're business AND personal financial affairs are simple and straightforward and you are keeping all bank/credit card statements, invoices and everthing else financial, etc., both business AND personal, for say 6 years, you should be ok and any tax enquiry should be relatively quick and painless.

It is not whether you have anything to hide that determines the length of an enquiry, it is the inspectors' perception of whether you have anything to hide that matters. That is why it is so important to keep documentary evidence for everything, business AND personal, so that you can quickly and effectively answer his initial questions. If you/your accountant can give a full and accurate reply to his initial letter, then the chances are that the enquiry will go no further, but if there is any "wooly-ness" i.e. declared profits look too low to maintain your standard of living and you have no other provable sources of income (i.e. spouses wage, legacies, selling investments, withdrawals of savings, etc), then it can soon turn nasty and long-winded.

There is an enormous amount of "self help" that you can do to avoid an enquiry. Getting a good accountant will help - one that knows the legal loopholes, not a dodgy one that knows what he thinks he can get away with! Keep accurate records. Keep your finances clean and tidy. Have a real separation between business and private - don't mix business and private transactions in the same bank or credit card account. Keep personal records of any unusual sources of income, such as legacies, investment sales, personal loans and gifts, spouse's wages, withdrawals of savings accounts, etc - FOR AT LEAST SIX YEARS.

As an accountant I recommend tax investigation insurance to all my clients. Not because I think they need, but because I have to in order to comply with professional rules and regulations. I don't want to be sued by a client facing thousands of pounds of fees because of an enquiry because I didn't tell them they could get insurance!

Remember though, that you might already have insurance cover through your professional body, chamber of trade, federation of small business, or it could be a low cost add-on to your business insurance policy.

Two recent cases spring to mind. One a sole trader who really was "clean" and had nothing to hide - he got investigated and luckily had insurance cover. The enquiry lasted over a year and the inspector eventually gave up and closed it without finding anything. Professional fees cost over a thousand pounds and the insurance paid out so it cost him nothing. He was a happy man. In the second case, a limited company, the owner didn't have any insurance and the enquiry has been going on for 3 years already and has already cost him well over £10,000, with no end in sight - needless to say, he wishes he'd paid the insurance which we offered him for £75!

scooby32

Thanks, thats really helpful. Dont have any other form of insurance, but books are simple and all receips in order and could be explained easily, and accountant is good so am thinking should be ok, however your last points have made me think. I guess its one of these to pay or not to pay dilemas

Murphy_The_Cat

After recently having a Compliance Visit, I'd say YES, definitely pay the money for the insurance. £120 is an absolute pittance compared to the time and hassle involved with dealing with HMRC.
I consider that I run a VERY tight ship, but its what the HMRC Inspector think (or thinks that they thinks) that really matters. Don't forget that every hour that you [STRIKE]waste[/STRIKE] spend dealing with HMRC is an hour taken aware from your businesses core function i.e.making you money.

Also be aware that the general belief is that Compliance Visits on small businesses are going to be on the Up and Up as they see us as easy targets !

scooby32

Murphy thats a very interesting point. Are you a small business or self employed sole trader. It is the thought of time, hastle and any fees that scares me, the books are small and self explanantory , however that is a position I would not like to be in. Do you have the insurance now? What does a complience visit entail?

Murphy_The_Cat

scooby32 wrote: »

Murphy thats a very interesting point. Are you a small business or self employed sole trader. It is the thought of time, hastle and any fees that scares me, the books are small and self explanantory , however that is a position I would not like to be in. Do you have the insurance now? What does a complience visit entail?

Hi scooby

I'm the MD of a Ltd Company (i'm not sure where small stops and mid/med starts ) and I employ 12 people.
What does a Compliance visit entail ? In my case, 2 Inspectors came and one of them trawled through my payroll for an entire year and checked that every piece of paternity leave, maternity leave, sick pay, salary sacrifice and pension contribution had been made, exactly correctly, to the penny and then wanted to inspect each and ever SMP certificate, SSP certificate, salary sacrifice agreement etc, etc. They also wanted to check each weeks clocking in sheet, against each weeks payroll, against each weeks BACS transfer for several random weeks.
The other inspector then gave me a 'basic' interview about the business and about the Directors in the Company. She then looked through every single purchase invoice for the year (several thousand of them), the Directors tax returns, the petty cash book for the last 3 years, the P11D for the Company, the Directors Loan account and the Expenses that have been paid out for the last year -- for a lot of these items she was looking for supporting documentation.

The bottom line is that they were with me for several hours, it is a hugely distracting & disruptive event and no matter how 'good' you are, these people will find something to pull you up over. & once they've found it, they can go back 6 years, charge interest on 'missed tax paid', penalties (which CAN be up to 100% of the misssed tax paid) & of course the missing tax.

I do NOT have Tax Investigation Insurance.

I have engaged the services of a tax specialist to argue my case and I am VERY HAPPY with both what he has charged me and the degree of negotiation that he has done with HMRC on my behalf.

Fees wise, unless you have an agreement via a trade organisation or your accountants, he charges on a sliding scale that relates to your turnover & the level/depth of cover that you are looking for. Is it worth it ? If you've never had an investigation, its probably hard to understand why you should pay it. If you have, you can see why such a relatively small amount can potentially save you many, many thousands of pounds and potentially hundreds of wasted hours dealing with HMRC.

For £120, I would snap the hand off the person offering it to you - but just conjfirm with them, in writing,, that it is a fully comprehensive service, with no upper limit on costs at their end.

Good luck, and I hope that you never have to call on their services.

scooby32

Murphy thank you for such an honest answer. It sounds like a horrendous waste of time and costing a days work is probably the same as the time to deal with an inspection, never mind all the stress. I really appreciate your time & help

Murphy_The_Cat

scooby32 wrote: »

Murphy thank you for such an honest answer. It sounds like a horrendous waste of time and costing a days work is probably the same as the time to deal with an inspection, never mind all the stress. I really appreciate your time & help

No worries and I'm glad that I could help.

I run a tight ship at work and even though I had everything to hand, it is HUGELY intrusive :beer:

robert_harper_2000

wow I cancelled mine cause it was more like £300... can you say whose offering it for £120

fengirl_2

The other thing to remember is that HMRC can and does carry out random investigations which are just picked by the computer - so even if yours is not what would be termed a 'risky' business, you can still come up on the random list.