An HMRC tax investigation isn’t a pleasant thing to go through for any type of business. Even if your company’s affairs are very simple and you have made no mistakes, the process of dealing with the taxman is time-consuming and stressful.
This is why many businesses opt to take out tax investigation cover to pay for the cost of professional representation should HMRC decide to look into their tax affairs.
In this guide, we look at what tax investigation insurance covers and what it doesn’t. For the typical limited company contractor, what are the benefits of paying for a tax protection policy?
How does HMRC decide to investigate a particular business?
A tax enquiry can be triggered by any number of things – a tax return might be late, inaccurate, or worthy of further inspection in the eyes of HMRC.
It might also be completely random.
HMRC carries out thousands of compliance checks every year, ranging from simple information requests to full investigations into a company’s tax affairs.
For limited company contractors, HMRC enquiries can also involve the IR35 off-payroll rules. If you provide professional services through your company, you must be aware of these rules and make sure that you meet your tax obligations.
How likely is an HMRC investigation for contractors?
The vast majority of small companies will never face a full HMRC investigation. However, compliance checks are a routine part of the UK’s tax system and they can happen to any business.
HMRC does not publish precise probabilities for investigations, but enquiries are relatively common in certain situations. For example, HMRC may review returns where figures appear unusual, where there are inconsistencies between different tax filings, or where a business operates in an area that HMRC considers higher risk.
Contractors operating through limited companies may face additional scrutiny under the IR35 off-payroll rules. These rules determine whether income should be treated as employment income rather than company profits.
In practice, many enquiries are fairly minor and may simply involve HMRC asking for clarification or additional documents. However, more detailed investigations can take months to resolve and often require professional representation from an accountant or specialist adviser.
This is one of the main reasons many contractors choose to take out tax investigation insurance. While it cannot prevent an enquiry from happening, it can cover the professional costs of dealing with HMRC if your company is selected for review.
What are the benefits of tax investigation cover for a contractor?
There are numerous benefits to taking out this type of cover. Unsurprisingly, the level and extent of cover will depend on the insurer you use.
But generally speaking, tax investigation policies offer a number of common benefits.
Financial protection
- Covers the professional fees if HMRC opens an enquiry into the company’s tax affairs. This can help avoid potentially large accountant’s bills, which can run past the £4,000–£5,000 mark for a typical enquiry.
- Can cover up to £250,000 of professional fees per claim, depending on the policy.
- Some specialist policies may also cover tax liabilities, penalties and interest if you are found to owe tax following an investigation, although this type of cover usually costs significantly more.
- Tax investigation insurance is relatively inexpensive, with premiums starting from around £100 per year.
- Payouts from the policy will not be taxable, so the company does not lose a portion of the claim value in tax.
- Premiums are an allowable business expense, so they can be offset against your company’s Corporation Tax bill.
Support during an HMRC enquiry
- Provides access to expert tax advice and support from the insurer throughout the investigation process.
- The insurer may be able to negotiate with HMRC on the company’s behalf and achieve a more favourable outcome should your company be found to be liable for unpaid tax.
- Can provide access to legal advice on tax-related matters without having to pay high hourly rates to your accountant.
- Removes much of the stress and anxiety of being selected for an HMRC tax investigation. This is a massive benefit for time-poor contractors.
Types of tax enquiries that may be covered
- Some policies include enquiries into VAT, PAYE, and Corporation Tax.
- Many policies provide cover for previous years, provided taxes are up to date when the policy commences.
- Will cover investigation costs related to IR35 status challenges by HMRC – probably the single biggest threat to contractors who work via their own companies.
- Some policies provide support for other types of tax, including Inheritance Tax (IHT).
- Tax investigation cover is often included as an add-on to contractor combined insurance policies. This bundles together other types of cover, such as public liability insurance and professional indemnity.
What tax investigation insurance does not cover
Most policies are designed to cover the professional costs of defending a tax enquiry. They do not normally cover every possible financial outcome of an investigation.
Typical exclusions include:
- Deliberate tax evasion or fraud.
- Late filing penalties or interest caused by negligence.
- Tax liabilities themselves, unless you have specialist tax liability cover.
- Issues that arose before the policy started if your tax affairs were not up to date.
How can you buy tax investigation insurance?
Tax protection cover is widely available and typically reasonably priced.
As you would expect, your premiums will reflect the amount of cover you take out – you can insure the professional costs of representation should you be investigated.
In some cases, you can also insure yourself against any taxes you are found to be liable for following an HMRC investigation.
We have worked with contractor insurance specialist Qdos for over a decade. Qdos offers two types of tax investigation cover: Tax Enquiry Insurance and Tax Liability Insurance.
What is tax enquiry insurance?
Qdos will handle all correspondence associated with an HMRC investigation, as well as defence costs of up to £50,000.
The team has handled over 1,600 cases to date, covering Corporation Tax, Self Assessment, VAT, IR35, Section 660 and MSC enquiries.
You can cover your own limited company for a mere £8.25 per month. Find out more on the Qdos website.
What is tax liability insurance?
Tax Liability Cover (TLC) is a product developed by Qdos to cover contractors not only for the costs of professional representation but also any liabilities, penalties and interest owed as a result of a tax enquiry.
TLC covers up to £250,000 in defence fees, and up to £250,000 if you are found to owe tax following an investigation.
This is very much a “belt and braces” cover – providing peace of mind that your limited company is covered for any eventuality.
The cost of TLC depends on the level of cover you choose. Find out more on the Qdos website.