Audit Insurance - Is It Worth the Money?

Audit Insurance - Is It Worth the Money?

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Hello. I am new so please be kind.

We have started up a small practice and only have a handful of clients. Some we do bookkeeping and returns / accounts for, others just bookkeeping. A new bookkeeping client has informed us that he has "HMRC Audit Insurance" with his current accountant, which he has been told is essential for him (a sole trader) as it is very likely he will be audited during the life of his business.

How does everyone rate this type of insurance? Does this advice seem fair? It seems like scaremongering to us - as we have only heard, in our other careers, of a  handful of Sole Traders being audited.

Interested to hear your views!

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By Ken Howard
08th Nov 2011 07:41

Like any other insurance

You insure your home against it burning down, but don't really expect it to happen.  To insure your belongings against theft, but don't really expect it to happen.  Same with cars, your boiler, your kitchen appliances, your life.  That's the nature of insurance.  The premiums charged depend on the likelihood of the insured event happening and the likely costs for the insurer when it happens.

Not so long ago, I had a small one man business who was the subject of a tax enquiry which dragged on for two years and cost him about £5k in professional fees - how he wished that he hadn't ignored my offer for tax enquiry insurance at only £50 per year!!!

I've had two other clients the subject of tax enquiries, both of whom were members of the FSB, so just passed the file over to their tax enquiry consultants.  Both clients said it went on for over a year and had needed 2/3 meetings to conclude the enquiry.  Luckily didn't cost them anything.

In all three cases, the enquiries were closed with no tax to pay, but in all three, it was a battle for the clients to prove their innocence, which necessitated a lot of accountancy time.  

Just how much time would you be happy to give away for free in case of an enquiry?  I don't think anyone would mind an hour or two, but what happens when it becomes 10 or 20, or you lose half a day for every meeting?  One letter isn't so bad, but what about when it gets to 10 letters or more?  I include in my engagement letter that I'll provide all backup information from my working papers to the inspector in case of enquiry at no charge, i.e. to support the entries made in the accounts/returns, but after that, any further time is chargeable. 

It's true that HMRC havn't been too active in the last decade or so (probably too busy with mergers. re-organisations and coping with too many tax law changes), but if you go back more than a decade, enquiries were a lot more common.  There is every sign that enquiries will again become a lot more common, with the newly introduced compliance checks.  

You can't just assume that your clients are unlikely to be subject to an enquiry, and if it happens, you can't assume that the tax inspector will quickly accept things are fine and walk away.  Considering tax enquiry insurance is free as part of FSB membership and often free for members of other trade/professional bodies, and that a lot of accountants will charge less than £100 p.a. for it (some just £50 or so if they're not out for making a profit on it), to me it's a no brainer.  However, if the accountant is over-charging for it, or charging for duplication of cover where it's already in place by membership of a professional or trade body, then I'd say it's time to move to a different accountant who don't take their clients for mugs.

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By sallyrichardson
08th Nov 2011 16:50

 

 

Thanks very much Ken. You have provided just the viewpoint and experience we were after! I've had a talk with my partner and we may add a clause to our engagement letter offering support for free if they are audited. As you say - it is a matter of weighing up the risk - and as all of our clients have very simple tax affairs, we feel that the goodwill achieved by including this extra service will greatly outweigh the effort and loss of fees if an audit was to occur. However - we will be very very sure to put a capped limit on the amount of hours per client. We're nice and very supportive - but we are still running a business!!

 

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