Insights

Now that HMRC are so regularly launching new taskforces and disclosure initiatives to catch those they suspect of underpaying tax, enquiry fee protection is becoming an even more worthwhile investment. In our experience it is especially beneficial for anyone who owns their own business because they may find themselves the subject of a full enquiry into both their business and personal tax affairs. Enquiries of this nature will typically be a long, drawn out and expensive process, all of which only add to the stress of being the subject of such an investigation. Unfortunately HMRC tend to operate under the implied assumption that there has been an impropriety and that the ‘guilty’ taxpayer needs to prove their innocence.

What is the main reason why a taxpayer would face an enquiry?

A common reason for an enquiry to be launched is to enable HMRC to investigate an apparent disparity between the taxpayer’s circumstances and what they have reported on either their personal or business tax return. Although this is never stated outright by HMRC, there is often an assumption by investigating officers that the business owner is withdrawing income from the business and not reporting it accurately (or at all) on their tax return. This is often coupled with an attitude that cash transactions are always understated or that the business is bearing the cost of personal expenditure.

Full enquiries can be particularly stressful because they usually require a detailed analysis of the expenditure a taxpayer incurred during a certain period; typically several years previously. Imagine how difficult it is to remember each entry on your bank statement over the last few months never mind the last few years. Generally, as we have discussed in previous blogs, if you are the target of an HMRC enquiry, it is no longer likely to be on a random basis.  Typically it will be as a result of a tip off, third party information, or an apparent inconsistency between your lifestyle (or the perception of it at least) and what is showing on your tax return (the latter has been highlighted as a particular area that HMRC are targeting).

In a recent blog we highlighted the extent to which technology is being used to alert HMRC to possible candidates for an enquiry and how accurate their profiling methods have become.

How much can an enquiry cost without fee protection?

Every enquiry differs with the individual circumstances; however it is generally safe to say that a full enquiry will last at least 12 months owing to the complexity involved in investigating personal and business records in detail. Typically the initial response to HMRC’s opening enquiry letter can cost between £1,500 and £3,000 and further costs will be incurred as further queries are raised. In order to reduce these costs, some taxpayers understandably attempt to represent themselves with HMRC. The reality is that this is often a false economy because they lack the experience to deal with HMRC’s investigative style and to know what information HMRC are entitled to see and what questions can be batted back as not applicable. We regularly see cases where we are asked to become involved several months into an enquiry and our first job is to spend time going back over the original responses in an attempt to undo damage that was done in the early stages.

Compare this with the cost of a fee protection policy where for as little as £200 per annum, cover is available against the fee cost of a full enquiry, for both the business and the owners. This protects the taxpayer against fees for dealing with the enquiry until it is heard by  the First Tier Tribunal (most cases are resolved long before it gets to this stage). This means that not only is the stress of finding funds to pay the fees associated with dealing the enquiry avoided, but also that the enquiry can be dealt with fully, with no fee pressure.

Case study shows benefit of having fee protection cover

A recent case study illustrates how fee protection insurance can be worth its weight in gold. An independent retail business faced an enquiry into the company accounts, its records and its claims for capital allowances. This business had made a significant investment in renovating one of its retail properties and HMRC were querying whether the correct amount had been claimed for the expenditure incurred.  They also implied that the business was processing cash transactions which were not being recorded. This enquiry was concluded successfully within 24 months, with no irregularities found and no additional tax payment required. However without the reassurance of fee protection it would have been a costly and stressful experience for the business owners.

Our advice 

HMRC publically state that they always embark upon an enquiry with an open mind but our experience is often different.  It seems that there is often an assumption that the taxpayer has done something wrong in some way and the onus seems to be on them to demonstrate this is not the case.  Unless the extent of the enquiry is a simple matter, for example the omission of a small amount interest or dividend, a full enquiry into personal and business affairs can become very expensive and time consuming. Weigh up the modest cost of fee protection versus the total cost of having to defend yourself and it’s easy to see why more and more individuals are choosing to take out cover.

To find out more about fee protection insurance and for specialist advice during a tax enquiry, contact Anne Eager by emailing ae@rjp.co.uk.