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 your 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.
For limited company contractors, there is the extra complication of IR35 to deal with. If you provide professional services via your company, you must be aware of these rules, and make sure that you meet your tax obligations.
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, here are some of the typical
- 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 £4-5,000 mark for a typical enquiry.
- Provides access to expert tax advice and support from the insurer throughout the investigation process.
- Can cover up to £250,000 of professional fees per claim, depending on the policy.
- Some types of cover will also reimburse you for any tax you are subsequently found to owe, although premiums for this extra benefit can be fairly high (for obvious reasons).
- Removes much of the stress and anxiety of being selected for an HMRC tax investigation. This is a massive benefit for time-poor contractors.
- Some policies include VAT and PAYE enquiries, as well as Corporation Tax.
- Tax investigation insurance is relatively inexpensive, with premiums starting from around £100 per year.
- 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.
- Payouts from the policy will not be taxable, so the company does not lose a portion of the claim value in 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.
- Can provide access to legal advice on tax-related matters without having to pay high hourly rates to your accountant.
- Some policies provide support for other types of tax, including Inheritance (IHT).
- Tax investigation cover is often included as an add-on to Contractor Combined insurance policies. This bundles together other types of cover – like public liability insurance, and professional indemnity.
- Premiums are an allowable business expense so can be offset against your company’s Corporation Tax bill.
How can you buy tax investigation insurance?
Tax protection cover is widely available – and is typically a reasonably priced type of insurance.
As you would expect, your premiums will reflect the amount of cover you take out – you can cover 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 the UK’s leading contractor insurer, Qdos, over the past 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 of the correspondence associated with undergoing 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 (see above) 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 ‘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 decide to take out. Find out more on the Qdos website.