Hi all.
I am new to the site.
I just came across it as I was googling away, looking for anything that relates to AN Annual Tax Investigation Cover Fee.
I got a letter from my accounted, asking me, as sole trader, to pay a fee of £95.00 + VAT in order to be covered should HMRC decide to investigate my accounts.
What on earth is that?
My accountant says that the average investigation fee, charged by HMRC is around £1,200.00, and I can avoid this by paying this fee.
It all just sounds to me another way for these companies to get our hard earned cash.
I am full time employed by another business and, in my spare time I am sole trader as an IT Technician, making no more than £4k to £6k a year before tax.
Can this be true? Can HMRC charge a business for investigating it?
Surely this is a conflict of interest. The more investigations they open the more they make.
Why should any business be charged for having the government investigating their accounts?
If this is true, it only discourages people from registering their genuine business and just keep trading to cash in hand.
Any help in clarifying this issue is well and truly appreciated.
Regards,
Albert
Replies (24)
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I think you have misunderstood
The fee isn't from HMRC, it's the accountants fees for their time in helping you deal with the investigation
Yes, you don't quite understand
It is completely possible that HMRC will randomly select you as a taxpayer who they want to investigate as a sole trader.
They will write you a letter to say that they are doing so, and give you a long list of questions.
Your first reaction will be to call your accountant and ask them to help you.
Your accountant will need to charge you for the work to help you, and this can be a lot of hours of assistance.
This is not covered by your annual accounting fee. You will be angry that your accountant wants to charge you more fees to help you, because you think he or she should help you for free.
Your accountant does not work for free. Almost no one works for free.
This insurance helps you to cover the fees you will need to pay a professional to help you through the investigation process.
Of course, you don't need to pay for this insurance. But it is insurance. You may never need to use it. But for that small amount per year, you will have the comfort if it ever did happen that your accounting support costs will be covered.
This is what it is for. Take it or leave it, the choice is yours.
As long as you understand what the consequences will be.
The Small Print
As with most insurances, the insurers will be anxious to settle any claims as quickly as possible in order to save on the accountant's fees for which they, your insurers, are indemnifying you, the insured, to defend yourself against HMRC. In practice, that willingness to settle claims quickly (and hence, for the insurers, cheaply) can lead to a less than robust defence being mounted on your behalf.
Over the years I've come across:
Clauses restricting the value of any cover you receive (by severely capping the amount of the accountant's fees for defending you - it's a fat lot of use to you if your accountant is forced to throw the towel in early because the financial pot has run dry);
Clauses restricting the type of cover to full-blown enquiries (and not eg the lesser aspect enquiries that HMRC are fond of. VAT and PAYE visits may similarly be excluded from cover);
Clauses allowing the insurer to escape paying out if the outcome of any enquiry is that you, the insured, are adjudged to have done something wrong (almost inevitably HMRC will find something that you have done wrong, however trivual; for which the whole insurance cover could be null and void if the insurers deem any wrongdoing on your part to be of sufficient significance);
Finally, my personal favourite, the clause stipulating that the insurance company appoint the accountant who's going to defend you (which means you don't get your regular accountant. It doesn't take much imagination to guess that the insurance company are likely to instruct their accountant to cave in and settle as quickly as possible, rather than run up fees by contesting your case - thereby keeping a lid on the insurance company's costs at the potential expense of a tax bill for you, the poor old insured. I had a client whose FSB tax investigation insurance - which used to come free with FSB membership, and for all I know might still - was of this latter ilk).
So, now that you know what to look out for, do ask to read the terms of the policy before you commit. For my money, many of these insurances are a triumph of form over substance.
One thing I mention is that you may wish to....
..... check you household insurance policy and see if you have legal cover. If so, this may be covered already on this.
my household insurance has legal cover, which includes legal fees to cover a tax investigation.
however it does not cover all issues and you will need to consult the insurance company to see if and what it will cover.
The main issue I have with tax investigation insurance, is that In certain circumstances it is a very good idea (no different to travel insurance. If I were going to Thailand I would take out travel insurance, but not if I were going for a weekend in skegress), however in others it is just a money making exercise for the insurance industry and accountant.
so in my opinion, rather than just trying to sell the same cover for all client types without any care or consideration, accountants assess the risk and highlight the other alternatives. For some client I would recomend taking out a seperately insurance policy. As for my practice, I do not offer fee protection insurance. Instead I refer clients to 3 choices:
1) check their legal cover policy.
2) become a member of th federation of small business and see if their cover is acceptable.
3) take out a policy with a 3rd party insurance broker. In all essence, if a tax investigation is started on one of my clients, and I had not already pre warned on the risks, then I am not confident I am the person to head that said investigation and would want to pass it over to a dedicated investigion specialist.
I understand others will not agree with me.
Double Indemnity?
As for my practice, I do not offer fee protection insurance. Instead I refer clients to 3 choices:1) check their legal cover policy.
2) become a member of th federation of small business and see if their cover is acceptable.
3) take out a policy with a 3rd party insurance broker.
In all essence, if a tax investigation is started on one of my clients, and I had not already pre warned on the risks, then I am not confident I am the person to head that said investigation and would want to pass it over to a dedicated investigion specialist. I understand others will not agree with me.
I see. And if your client ended up with say the FSB's insurance company's "dedicated investigation specialist" heading your client's investigation would you still be inclined to charge your client for your time riding shotgun?
Bonanza?
Now putting your point back to you, if you have one of your policies and your insurance would only agree up to a fee level and the client wanted more, kept phoning/emailing, would you be inclined to charge your client for this additional cost of riding shotgun?
Absolutely, but only because I don't recommend any particular policy (or for that matter the "free" FSB service). And that's in turn is because I wouldn't want to carry the can for those Highwayman Policies' shortcomings by having to ride along for free.
It's a waste of money for most clients
We paid thousands in block cover for about three years. We never made a single claim. All of our client are small business or just taxpayers, and other than the cash business none of them are high-risk.
Most of the enquiry work we get is from taxpayers who have prepared their own 'accounts/tax' and made a complete mess of it, so that wouldn't be covered anyway. We have had a couple of record checks, and they took just a few minutes of our time. We get the occasional request for copies of prime documents when we calculate a large VAT reclaim, but again this only takes a few minutes as we keep scanned copies for our own records. We had a largish VAT enquiry for an ex/returning client and this only took a few hours, for which the client was happy to pay.
If we had continued with the block cover, I cannot think of any instance where we would have been able to make a worthwhile claim.
If a client has been 'naughty', or withheld information from us, and this results in an enquiry, then I wouldn't be upset at losing that client if they refused to pay for our help.
EDIT: I did recently enquire about offering insurance to clients on an 'opt-in' basis, but we had to guarantee we would sell £1,000 of insurance per year. I didn't like that, and the fees were quite high for the low risk clients that we have so I think we would struggle to get any takers. The OP confirms my thoughts.
What are the odds
What are the odds of you crashing your car or your house being burgled? You just might be unlucky. However, once you have been selected it is of course too late to buy the insurance.what are the odds of being selected for a tax investigation?
Leave it alone
Hi everybody.
Now it foes make more sense.
I was under the impression that the charges for investigation were been made, in the eventuality of such investigation, by HMRC themselves and not directly from my accountant.
Off course no one wants to work for free.
Perhaps their letter offering the insurance is not well explained or perhaps I miss understood it.
They have different charges;
Individuals - £75.00 + vat
Sole traders / partnership - £95.00 + vat
Limited company - £125.00 + vat
As a very small sole trader making a yearly gross income of between £4k - £6k and having an accountant doing my tax returns, costing me £250.00 per year, what are the odds of being selected for a tax investigation?
Many thanks to all for your support, help and advice given.
Regards,
Albert
The taxman isn't going to be very interested in such a small business. There's nothing in it for him. If that's your only source of income he'll need to more or less double you declared profits before you even start to pay Class 4 NIC. Compare the possibility of paying £500 or so in fees against the certainty of paying £114 in premiums.
I've never been a fan of fee protection. I've had one experience of it with the FSB and - as related above - they were more interested in keeping the claim to a bare minimum than working for you. They even suggested that the books were inadequate - even though they'd never seen them.
It's worth mentioning too that your claim won't cover any tax underdeclared. And if there is any, this may also be an excuse to reject your claim for fees.
What are the odds of an enquiry costing you a lot of money?
Pretty low, unless you have a crap accountant, bend the rules, or do something dodgy.
If you can honestly say you declare all income, only claim allowable expenses that can be justified (eg. you have the invoices or other proof of expenditure), and are compliant in all respects, then any enquiry should be settled quickly and easily ... unless you are extremely unlucky and get a pitbull of an inspector who makes up their own rules.
EDIT: if the insured has done something dodgy, then as soon as it is discovered, the insurance cover will cease.
Cost
The cost is not in terms of tax, necessarily, but in terms of the accountant acting for the client.
We have one at the moment where the client is not a huge earner, but the myriad of information HMRC requires and the justifications in support are immense. In general, income verification for a small earner may be obvious, but in terms of allowable costs there are often things to debate.
Or maybe my client has a crap accountant ;)
FSB membership - Tax Enquiry Insurance
The Federation of Small Business membership fee includes Tax Investigation insurance
Alternative insurers will say that the FSB cover is inferior to their offering, but "they would say that wouldn't they"?
FSB membership might cost more than the fees quoted above, so it would be a cost-benefit analysis matter to see what other potential benefits might accrue from FSB membership.
Whether the cover is cost effective could depend upon many factors:
RISK FACTORS = vulnerable to the several £k cost of defence against HMRC enquiries...
Does your lifestyle seem out of line with your income? (eg. buying a £400k house when annual income is only £20k)Is your business a cash trade that is vulnerable to attack from HMRC?Are your accounting records short of being good?Are your accounting records robust?Are private use percentages provable? (And has accountant never discussed the percentages used?)Are your annual accounts and tax return always drawn up close to being late (or actually late) so inevitable rush-job = extremely high risk of inaccuracy?Are your profits lower than industry average?Do you have an accountant who lets you claim anything without query or explanation?
Still Appointing Cousin Vinnie?
The Federation of Small Business membership fee includes Tax Investigation insurance...
...Whether the cover is cost effective could depend upon many factors:
Do you happen to know whether the FSB's insurance still appoints its own accountant, as opposed to using the services of the insured's regular accountant? That's the factor that bothered me.
Our client - who incidentally is a cheapskate running a £1m t/o company - was worse off having the accountant appointed by the insurers: for starters the new incumbent had no intimate knowledge of the company, which IMHO severely disadvantaged him; secondly, it was evident that he was under instructions from the insurance company to settle quickly in the Revenue's favour, rather than rack up fees contesting some of the more complex issues; and, finally, the client had to pay our firm anyway to liase with the insurance company's accountant (because, as someone pointed out earlier in the thread, nobody can afford to work for free).
On that latter point, I might have felt too embarrassed to charge for our role as junior advocate if we had recommended that insurer (or the FSB membership that accompanied it).
perhaps OP wanted an independent 3rd party view.
Why didn't you just ring your accountant to clarify. That's what they are there for
actually with tax investigation insurance, they are also acting as selling agent for the financial product and may not completely independent.
Beware HMRC's 'Hidden Wealth' taskforce. It is the low disclosed income people that are targeted on the basis that there lifestyle doesn't appear maintainable on their income. It's very (un)popular in the southern part of the country.
Of course there can be a variety of reasons why HMRC's insinuations are flawed but that won't stop them opening an enquiry and it won't prevent a taxpayer requiring representation.
High Steaks
Beware HMRC's 'Hidden Wealth' taskforce. It is the low disclosed income people that are targeted on the basis that there lifestyle doesn't appear maintainable on their income. It's very (un)popular in the southern part of the country.
I had a butcher client - largely a cash business of course - who underwent just such an investigation many years ago. The Inspector dragged it out for almost two years, making the client list everything he'd purchased over a five year period: shopping and eating habits (scrag end), [***] and booze (non-smoker teetotaller), holidays (none), savings (practically destitute). Even made him list every CD he owned, and its date of purchase. Not surprisingly the client, who was in his mid-thirties, went completely grey (perhaps two years of our extorionate fees augmented that). But no matter how the figures were arranged, the Inspector simply could not arrive at any sizeable disparity between the butcher's reported income and his deemed outgoings.
The client ultimately settled for a £2k slap for no other reason other than the Revenue were moving building. In an unusual but nevertheless genuine ploy the Inspector - sat behind his desk in his otherwise bare office - divulged that most of the Revenue's staff had already moved to their new building and that the only thing preventing him from doing so too were the two large crates (of the client's records) that we, his visitors, were now sat upon; so how would we like to settle there and then to save him carting the crates across town to his new office? The client, still claiming to be poverty-stricken and protesting his innocence, nevertheless professed a desire to put an end to the stress, and so accepted the gift horse, signed the paperwork, and the matter was brought to an abrupt close there and then. Would the butcher and I be able to take his two crates of records away with us there and then (perhaps in the dilapidated old van that had featured in his accounts these past ten years)? Of course, no problem.
And that's how, ten minutes later in the multi-storey car park, I first clapped eyes on the client's spanking new SAAB convertible.
with or without insurance......
.....as accountants we are likely to take a view. I guess we have all decided on way or another. Personally I don't like the insurance offerings and perhaps the way forward is to make a good living from what we do and be prepared to help the client that HMRC may have unfairly picked on, pro bono or at reduced cost. For those clients that have been 'misguided' in their tax affairs, then they can pay for us to do our best to mitigate the final outcome.
I have always felt the fee protection insurance to be overpriced. But I would have travel insurance - especially for a weekend in Skegness...
War stories
While I am sure we all have our share of war stories of relentless battles with intractable, unreasonable or even incompetent Revenue Inspectors, full enquiries of the horror story variety featuring on the tax enquiry insurance brochures are rare.
The figures quoted regarding both the frequency of enquiry and cost are far from my experience and I suspect, from most other agents on here.
I have not as yet, heard of a business record check leading to a substantial investigation either. I remain unconvinced as to why I as the accountant should present at all.
In for the Kill?
I have not as yet, heard of a business record check leading to a substantial investigation either. I remain unconvinced as to why I as the accountant should present at all.
To stop the Inspectorate from bullying or otherwise trying it on with your hapless client?
To prevent your client from answering any trick questions designed to trap him?
To gag your client if nerves get the better of him and he becomes garrolous?
To ensue your client doesn't agree or acquiese to anything he shouldn't?
To balance the contest between client and professional hustler?
To ensure fair play is the order of the day?
To hand-hold your client?
To serve?
Come on now
I have not as yet, heard of a business record check leading to a substantial investigation either. I remain unconvinced as to why I as the accountant should present at all.
To stop the Inspectorate from bullying or otherwise trying it on with your hapless client?
To prevent your client from answering any trick questions designed to trap him?
To gag your client if nerves get the better of him and he becomes garrolous?
To ensue your client doesn't agree or acquiese to anything he shouldn't?
To balance the contest between client and professional hustler?
To ensure fair play is the order of the day?
To hand-hold your client?
To serve?
Have you actually encountered this from HMRC during or following a BRC?
We are obviously wary of HMRC generally but such Machiavellin motives seem impractical. They are mostly conducted on businesses that have yet to file a return.