HMRC Compliance teams have been shifting their focus towards small and medium-sized enterprises (SMEs). Are you prepared?
Tax investigations can not only be triggered by a discrepancy in your figures but can be completely random. If you get a letter from HMRC saying they are coming to visit the first thing to do is not panic, the second is call your accountant.
At Haines Watts we deal with HMRC Inspections and Investigations all the time and as such can re-assure clients that we are here to help.
In the first instance, we always recommend that you take out Fee Protection Insurance – but this must be done before you receive any communications from HMRC regarding an investigation.
Fee Protection service covers you for your accountants fees in the event of an investigation and covers the following:
- Corporation Tax Returns
- Partnership or Sole Trader Tax Returns
- Personal Tax Returns
It also covers disputes into:
- Employer Compliance (PAYE, P11D and NIC)
Our Fee Protection Insurance covers the fees, up to the value of £100,000, that you will incur when your accountant comes to your rescue if you have an investigation.. Your accountant will be able to put you at ease if you do receive a letter saying HMRC are going to visit and help you provide all the relevant information HMRC will require.
Even if HMRC find nothing amiss and you don’t owe any additional tax you will still have to pay your accountant for his time spent in advising you. Fee Protection service will cover these fees for you.
We always recommend that you take out Fee Protection Service. On top of the stress of an investigation you don’t want to have to worry about finding the cash for an additional accountancy bill.
Below we have listed a few case studies regarding Fee Protection Service which we strongly recommend you read.
Again we must stress that you will need the support and experience of your accountant if you do have an investigation and even if HMRC find no additional tax to pay you will still incur charges.
To find out more about our Fee Protection service give us a call now on 01379 640555 or email us at firstname.lastname@example.org.
Case Study 1
Four years to prove innocence during tax investigation
A couple were investigated by HMRC into their building company and public house partnership. The Inspector was initially concerned with sales, wages and rental income from the building company and low GPR, private accommodation/food and drawings from the public house.
Following a review of the records, the Inspector was concerned about poor record keeping at the public house and planned a Business Economics Exercise to check the alleged sales. The building company enquiry then began to focus on sales, employee costs, subcontractor costs/CIS and rental income.
The owners were then subjected to a long delay returning the business records during which time the Inspector made an unannounced and unauthorised visit to the owner’s home! The owner refused to entertain the Inspector but was understandably shaken by the experience.
Further delays then occurred with the professional advisor criticising the Inspector for the delays and the failure to respond to previous correspondence.
The enquiry continued to drag on and eventually the advisor demanded immediate closure of the enquiries. HMRC eventually relented with no adjustments to the original returns. Luckily, the professional costs for handling the case were covered under a Tax Investigation package as fees during this time were almost £10,000 simply to prove the client’s innocence!
Enquiry at a glance
- Investigation lasted over four years
- No additional tax was found
- Professional fees amounted to almost £10,000 to prove innocence
Case Study 2
Straightforward and yet still expensive
This IR35 enquiry “only” lasted eight months, but it was still eight months of misery for the client and would have cost of £2,000 in professional fees without the Tax Investigations Package. The opening ‘Check of Employer Records’ letter requested all information relating to the contracts in the previous tax year.
The letter also requested that the contractor explain the basis upon which they had arrived at the conclusion that the engagement was not ‘caught by IR35’. A detailed response highlighting the positive aspects of the contractual terms and the working practices was sent. HMRC came back – could the contractor explain why he believed that personal service was not a requirement of the engagement?
It looked like the enquiry was going to get bogged down into arguing over whether the right to substitute was somehow undermined because substitution had not taken place. It is not; but HMRC still usually want to know what the engager’s view is, so the advisor and the client prepared for the long haul.
Six months in, a holding letter was received to say that a new officer was taking on the case. Five weeks after that, the officer wrote to say that he had sought ‘technical advice’ and the case was to be closed.
The client was delighted that the matter was settled relatively quickly and also that the £2,000 of professional fees were covered under the Tax Investigations Package!
Case Study 3
Plumber/Electrician – Case Closed!
An electrical and plumbing business was subject to an extremely detailed and time-consuming tax investigation, an unwelcome distraction for a business struggling in difficult trading conditions.
The opening letter demanded a list of items running to two pages: accounts, all books and records, supporting documents including diaries, banks statements together with specific questions to be answered.
The client subscribed to the Tax Investigations Package which allowed a quick and comprehensive response in an effort to close down the case. However, the Inspector took two months to reply with a holding letter requesting a meeting with the client. Due to the Christmas period and January being tied up with tax returns, the Inspector advised that he would make contact again in February to arrange a meeting – this meant six months with no measurable progress, other than the stress for the client. As a result, a client meeting was refused – there is no requirement for a taxpayer to meet HMRC.
The case continued via correspondence, and with each letter the accountant refuted each assertion, but not without much research and asking the client to remember minute details about events that had happened months and even years earlier. The Inspector had no real understanding of the commercial realities of being a small contractor and he focused on low value items – even £35 spent on a Christmas meal! By the spring of the second year, the amount that the Inspector wanted to tax the client on was only £1,100.
In the firm’s eyes that was still not acceptable and finally, just short of two years later, the Inspector wrote closing the case with no additional tax payable.
The client’s subscription to the Tax Investigations Package ensured there were no professional fees to be paid. If cover wasn’t taken out by the client, they would have been required to pay over £6,000 in defence fees over the lengthy two year investigation.
Two lessons to be learned: tax investigations are frighteningly expensive for small businesses, without protection you are left with no choice but to either pay the fees or suffer a large tax bill. Subscribe to our Tax Investigations Package and we can spare you the pain of both.
To find out more about our Fee Protection Service give us a call now on 01379 640555 or email us at email@example.com.
Want to know more? Call us on 01379 640555 or email firstname.lastname@example.org