Accountant Tax Investigation Service

dealsearcher

I have just received a letter from my accountant inviting me to pay for their tax investigation service. Apparently this is due to there having been significant changes within HMRC over the year. They strongly recommend that I pay for this service.

I am not a small business. I use them for my standard tax return as I have a couple of rented out properties. My accountant keeps the records on these properties and I also have copies. I have not had any queries from HMRC and there is no reason for any.

The cost is £72 (incl. VAT) which is not unreasonable. But is there really a significantly increased chance of suffering the hassle of an investigation? I know the government would rightly go after people who are not paying their correct taxes but I have never had an issue and have always used a tax accountant.

There is also the issue of the exclusions from a policy which include the cost of making good any deficiencies in records and claims that originate from previous years.

I would have thought that in any case an accountant would have to take responsibility for any mistakes they had made. A client should not have to pay insurance to cover any accountants mistakes.

chrismac1

PM me if you want full details on the chances of you being investigated - 3% is the average but this can vary wildy between sectors.

One thing to check is what is covered. Some of these policies just cover investigations, which is a small subset of the total possible interactions with HMRC. The policies I offer to clients for £76.50 also cover "fishing trips" and other interactions with HMRC.

Your accountant will indeed take responsibility for mistakes made - if he or she is any good, and qualified - but the majority of HMRC investigations will not be about this. Ultimately the name on the bottom of tax returns is yours. In your case - just two rental properties - providing you've been above board there is most probably nothing to worry about and most of my clients in this situation have chosen not to be insured which is fair enough and probably what I'd do myself.

The accountancy profession is split right now in assessing the risk of being investigated.

One side sees the extra £600m or so being put into this by the Government and the extra powers HMRC now has - conclusion there will be an increase.

The other side - which I belong to - sees an organistion in chaos, which can't tell its arrse from its elbow 90% of the time, most of its best people have left in the last 5 years, tax affairs are dealt with randomly all round the country and all local knowledge has been scattered to the four winds. Conclusion they'll do well to maintain the 3% average per year.

dealsearcher

Thanks for the reply. I had an experience recently with HMRC where they took many months to reply to our solicitor on an issue of whether any tax was payable on a probate settlement. This has also been mentioned in the news recently with reference to HMRC being unable to cope with enquiries.

I was wondering why my accountant has suddenly hit me with this letter. It appears from their letter that this is a new service they are providing. So maybe they are looking to make their life easier for themselves by selling insurance to ensure their clients continue to deal with them even when HMRC opens an investigation on the client.

chrismac1

I honestly think any decent accountant will offer all their clients the option of fee protection insurance. If you get investigated even pretty straightforward ones can turn into a nightmare if you get the wrong sort of Inspector. Sometimes it's better to let them "find" something - they can be really vindictive and frustrated if they think they're going to come away with nothing. What this means for the taxpayer is an endless series of questions, which you spend money on fees to get properly answered, which in turn are replied to with a new letter with endless new questions, etc...

There have been several cases in the past 10 years where over £1m of Government money - OUR money - has been spent to chase less than £50k of potential extra tax. For the people concerned their lives become consumed by the tax case, at least if they have the insurance their wealth is not also consumed by it. If you know your Dickens, Dombey v Dombey is a good parallel for the modern day tax investigation case which gets totally out of hand - except that on one side you have one taxpayer and on the other you have HMRC who can waste an awful lot of the state's resources in legal fees and so on.

Pennywise

dealsearcher wrote: »

I would have thought that in any case an accountant would have to take responsibility for any mistakes they had made. A client should not have to pay insurance to cover any accountants mistakes.

Correct and that's not what the insurance is for. An accountant will only complete the return with the information given to them. Furthermore, you mention "mistakes", but a protracted argument can ensue when the accountant HAS done his job properly but the inspector is being a pain in the !!!.

Investigations will delve far deeper than a typical accountant will go. They will typically want more records, ie. for a buy to let, the accountant only wants to know how much rent is paid - and will take the word of the client for that. HMRC will probably want to see the lease, the rent book, etc. Same with expenses - accountant will be happy with a list you give him of what you spend - it's beyond his remit to "audit" or check what you say, but HMRC will want to see the supplier invoices and will question some expenses as to why you spent/bought items, even if the paperwork is there.

Investigations also delve into the full personal affairs, i.e. not just the tax return, i.e. to check lifestyle - i.e. if you're declaring £25k income per year, but run a £1m house and a porsche, they'll want to know where the money is coming from. Again, your accountant wouldn't be going this deep or asking that type of question.

Your accountant will almost certainly give the tax inspector a copy of his working papers etc without additional charge - that is fairly standard practice. What he won't do without additional charge or insurance is argue your case when the inspector delves deeper - that's where the insurance kicks in, or even worse, when you get a difference of opinion, i.e. you and you accountant want a particular payment claimed as an expense, but the inspector argues it's not - that can come down to legalese arguments and ultimately the appeals/tribunals system - all of which is very expensive for you and certainly not covered by the usual fees of £200-£300 for the tax return completion in the first place.

Insurance is a good idea because it "spreads" the extra time the accountant has to spend on the minority of taxpayers spread across many accountancy practices - remember that HMRC don't have to cover your costs if they open an enquiry and find nothing. For £70 or so, you have a very reasonable price - the accountant is probably just passing on the costs he pays for the insurance policy.

chrismac1

The pattern with my clients is - apart from those who've had a very strong warning from me about the standard of their records! - the folk signing up tend to keep excellent records and be more or less HMRC-proof. But they want the peace of mind, and the knowledge that if the worst comes to the worst they can let me or a tax specialist handle things whilst they deal with the day job. Some of my clients who have not signed up for this are a lot more vulnerable than those who have. But my job is to give them the pros and cons and let the clients decide.

dealsearcher

Interesting what you say Pennywise. I am surprised that accountants just take the word of landlords on what they receive in rent and what they spend. I provide my accountant with all of the figures from the letting agent and the accountant then decides what is allowable as expenses. There are certainly no 'lifestyle' issues either! In fact the accountant already has all of the documents that could be asked for. There is nothing else for the accountant to see.

chrismac1

Well done dealsearcher. Not everyone uses letting agents. Not everyone keeps decent records. Not everyone files on time. I've just filed a 2006-7 and 2007-8 tax return for a client with a very attractive holiday rental property in the heart of the Lakes. Let's just say my health warning about the standard of the records was a feature!

dealsearcher

So I would have thought my chances of being investigated were pretty small? Unless HMRC use the method of wearing a blindfold and taking a pin to stick in a map or list of tax returns.

In fact if they were to investigate me I have all of the information available from the letting agents.

It looks to me that the accountant is looking to me to pay for this service as someone who would, most likely, be one who is there to pad out the cost of the service.

Pennywise

dealsearcher wrote: »

It looks to me that the accountant is looking to me to pay for this service as someone who would, most likely, be one who is there to pad out the cost of the service.

But you could say that of any insurance couldn't you?

I insure my car fully comp, but do very little mileage and have never had an accident in 30 years of driving, so to my mind, there's very little chance of the "extras" of fully comp being needed over & above the basic third party, fire and theft, but I still want it for peace of mind "just in case". So in effect, to use your words, I'm "padding out" for other drivers who drive more, perhaps are more careless etc.

At the end of the day, it's your decision. If you are happy that you don't have any skeletons in the cupboard and are happy to risk paying extra accountancy/legal costs in case of an enquiry to prove your innocence, then just don't buy it.

chrismac1

Whereas if you were in a sector which gets more than its fair share of tax investigations - hairdressing, construction for example - AND your record-keeping was poor (lots of cash expenses with no proper invoices, for example) then you'd be absolutely nuts not to pay the insurance premium.