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Tax Investigation Protection: What Is It and Why Do You Need It?

Julia RichardsDecember 2020
Tax Investigation Protection: What Is It and Why Do You Need It?

Few things strike more fear into the hearts of business owners and sole proprietors like a message from HMRC that they are about to be investigated.

The time to purchase tax investigation insurance for your business is before receiving such a letter because the tax investigation cover would probably not be valid for any notices of investigation that came prior to its purchase.

But, do you actually need tax investigation protection?


Is it worth investing in tax investigation insurance for my business?

In 2010, HMRC introduced a state-of-the-art data mining and analysis system called Connect, in order to facilitate the discovery of fraudulent or undisclosed financial activity.

The database cross-references business data with personal data and compares that data to numerous other sources in order to discover discrepancies.

In 2016, HMRC upgraded the system so that it now obtains financial information from British Overseas Territories as well as sixty or so other countries that comply with international regulations for the sharing of financial data.

The data which Connect correlates is fairly extensive, including:

  • Adverts on the internet for sites like Zoopla and Rightmove
  • eBay and other online marketplaces
  • Insurance companies
  • Capital gains data

In short: The HMRC is cracking down severely on any possibility of tax evasion.

With such a wide net, there is always the possibility of the wrong fish getting caught.


What types of tax investigations does the HMRC carry out?

The term “investigation” is fairly broad and encompasses a plethora of potential inspections and enquiries that HMRC might want to carry out in your business, or even regarding your personal taxes.

Here is a summary of some of the most common ones:


IR35 Investigation by HMRC

Tax Investigation Protection_ What Is It and Why Do You Need It

It is the bane of all sole proprietors, but also of limited companies composed of only one or two people: Being caught inside IR35.

If HMRC determines that you have a “high risk” of being considered inside IR35, the chances are very high that it will conduct such an investigation into your business. You are likely to have to pay much higher taxes on income earned for contracts in which you were deemed to be in IR35.


HMRC Employer Compliance Review

The HMRC might conduct an Employer Compliance Review if it believes you, as an employer, are not fulfilling all the required tax payments and contributions required of you.

The number of things an employer can be liable for is fairly extensive.


PAYE & VAT Compliance

If there is any discrepancy with your PAYE payments or information given to HMRC when running payroll, the HMRC might run an enquiry into this in your business. The same goes for discrepancies regarding VAT payments.


And so on…

There can also be enquiries and investigations into:

  • Income tax self-assessment returns.
  • Corporation tax assessment returns.
  • Partnerships and Directors.

What does tax investigation insurance cover offer?

It can be quite costly to have to pay an accountant to pore over your accounts in order to provide HMRC with the data it needs to exonerate you from any liability connected to their enquiry.

These are costs which you must pay, even if you are found to be fully in compliance.

Additionally, if HMRC deems that litigation must be pursued, there are costs involved in this as well.

A worthwhile tax investigation insurance will cover all these costs.

Please check with your insurance provider or accountant, what their insurance covers specifically.


How can tax investigation cover help me during an investigation and what does it protect against?

The best tax insurances will offer not only financial benefits but also expert lawyers and accountants who will defend your case in front of HMRC. Ideally, whatever tax insurance protection you purchase would come with a specialist dedicated precisely to your case.

tax investigationAlthough the HMRC is a government department, and we are all brought up to believe that our government is our friend, it is

also true that it operates much like a business — an uncompromising business with all the powerful machinery of law behind it.

A recent study showed that the HMRC now collects an additional ÂŁ10 billion in revenue every year, compared to only half a decade ago. That additional income is not because the economy is suddenly doing better. That income is because laws are getting tighter, and compliance is being enforced with a digital hand.

An HMRC investigation can last as long as 16 months, even if you were not at fault. That kind of constant inspection can put a lot of burden on a business person’s shoulders.


For how long will tax investigation insurance keep my business protected?

Again, this depends on the specific insurance provider.

At Start My Business, your tax investigation insurance would cover you for as long as you keep paying your premiums.


How much does tax investigation insurance cost?

It can cost as little as a few pounds a month for extensive coverage. If you are paying more than that for your tax insurance, you could probably get a better price elsewhere.

The insurance we offer at Start My Business would cover legal costs of up to ÂŁ100,000 if we ever had to go to court for you.


About author
Julia Richards
Julia Richards

Our head of content, Julia has spent the past 20 years assisting entrepreneurs with all aspects of business launch and growth strategies in various industries around the globe.

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