HMRC investigations and insurance
Good Morning, I hope you enjoyed the Jubilee celebrations. What a great weekend with so much entertainment and just showing that the country is not as divided as some of the media would have us believe.
We're still working on tik tok videos so please keep an eye out for these, they are on the way.
So to HMRC investigations, every firms worst nightmare. Or is it? Well, no one wants to be investigated by HMRC but it is a consequence of doing business really. Any firm can be singled out for investigation. What are the chances of it being your firm? Well, it's hard to say as HMRC keep that information pretty close to their chests. What we can say, is that in recent times, HMRC have redeployed staff from the furlough scheme back to their old posts. HMRC have revealed that they have ramped up the number of investigations from 75,000 from the last quarter of 2020 to 137,000 in the last quarter of 2021.
The UK government have also spent an eyewatering amount of money during the pandemic and the various schemes have been open to fraud and abuse, so it's little wonder that HMRC are investigating to to try to claw some of this back.
What happens during an investigation?
In the first instance, HMRC should write to you or your agent or they may contact you by telephone. Please be aware there are a lot of scams. They will not for example leave messages telling you to call them right away or the police will be coming! They will not threaten you if you don’t pay a figure immediately. They will telephone or write to explain what they want to look into and may request you provide records to them. It is vital at this early stage to speak to your accountant before you do anything, and no inspector should have an issue with that so don’t feel pressured to provide information and/or explanations until you speak to them.
There are two basic types of investigation.
1) Aspect enquiries – These are launched to look at a particular aspect of your accounts, where HMRC suspects an error. Keep in mind the word suspects. It doesn’t mean that there is one, just that HMRC want to double check the figures. Honest mistakes happen by taxpayers (and accountants!), so even if there is an error this isn’t a cause to panic.
2) Full enquiries – These take a broader look at your accounts, usually because there is evidence or suspicion of a significant error. These can typically be much more involved and time consuming.
Whilst an investigation takes place, HMRC may ask to conduct a meeting in person. It is strongly recommended that you have an accountant present. It’s not unheard of for HMRC to bring an inspector for another tax that you weren’t expecting, or to over-reach their powers with an unwitting taxpayer.
Dependent on what tax is being investigated, and whether or not HMRC believes the mistake is deliberate, there are different limits into how far back into your records they can go. For innocent errors they may go back 4 years for example, whereas if HMRC feels you’ve deliberately evaded tax, HMRC can go back up to 20 years.
Penalties vary from tax to tax and on a number of factors, such as whether the mistake was deliberate and how co-operative the taxpayer has been. Tax investigations can be time consuming and expensive, without penalties, so our advice is very simple. Involve your accountant as early as possible. If a mistake has been made, nothing is gained by not being co-operative and hiding information or giving misleading explanations. All of these things will only delay matters, increase costs and mean any penalties are likely to be higher than they otherwise would have been. Even if you have committed fraud, it is better to give HMRC full disclosure as you might be able admit it through the contractual disclosure facility which offers immunity from legal proceedings in exchange for full disclosure. Whatever your situation, your accountant can advise you throughout the investigation and communicate with HMRC on your behalf.
Should I be worried?
Unless you’ve been deliberately acting fraudulently, the simple answer is no. It’s not possible to say how likely a taxpayer is to be investigated. HMRC keep this information very close to their chests but it’s a risk to all taxpayers.
Providing you are keeping good records and acting in good faith, it’s unlikely that an investigation will lead to significant penalties if you provide information promptly and answer queries in a timely fashion. If you are concerned, maybe that you’ve made mistakes, or haven’t declared all your income, then speak to an accountant. There are not many things more stressful than worrying about a visit from HMRC.
Should I get insurance?
Our opinion on this has changed in recent years. Prior to the pandemic we would have advised that it wasn’t value for money unless your business was a business at high risk of an inspection. These are typically businesses that are heavily cash based. But circumstances have changed quite substantially.
HMRC set up a task force to combat fraud in 2016. This triggered a rise in the number of firms offering HMRC investigation insurance.
The thing to remember is the insurance will NOT pay any tax owing. What it will do is pay the advisers fee. So lets say at the end of an investigation, you have a £10k tax bill, and a £4k accountants bill. Well, best case without insurances is that the accountant is successful in getting the 10k quashed (only possible if HMRC have it wrong, it can’t be negotiated down if it’s a genuine 10k bill) but the £4k accountants bill is payable (research shows most investigations cost £4000 - £5000 in professional fees fees). Worst case is £10k tax bill AND £4k accountants bill. With insurance in either case, the professional fees will be covered by the insurance premium.
In 2021 HMRC hired another 1500 compliance officers, and the government have created a new covid task force to get back overclaimed furlough claims and fraudulently claimed grants and loans. So given the increasing likelihood of investigations and the cost of these (furlough investigations will not be cheap) we’ve come to the conclusion that good insurance is something we should offer. So, to that end we have sent information on this with this newsletter.
It's also our opinion that in recent years HMRC have moved away from ensuring the correct amount of tax has been collected, to maximising returns. With all of the support handed out by the government, it’s our view that inspectors will be more aggressive in their strategies and be less understanding as they were in during the pandemic. So, amongst rising taxes, rising costs, increased inspections and inspectors looking to maximise returns, prudent insurance against the costs of an investigation are ever more a sensible option.
Remember, any business can be investigated, but in our view if you’ve had any of the following then you may be at increased risk:
Bounce Back Loans
Covid Related Sick Pay
In summary then, dealing with or worrying about an investigation can be extremely stressful but things are rarely as bad as they seem. So if you have had the dreaded letter from HMRC saying they want to investigate your or your business, or if you are worried about an investigation, give us a call to discuss your concerns or to arrange insurance cover.