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Whether you are the director of a limited company, or are self-employed, it is essential to ensure you are protected against unexpected costs that could put a financial strain on your operations. With HMRC forecasting an increase in compliance activity, as well as the rising cost of living and potential recession, tax investigation insurance is a practical way to safeguard your business.

Tax investigation insurance provides protection against the costs associated with HMRC investigations, meaning you can rest assured your business is secure. In this blog post, we will discuss how tax investigation insurance can protect your business against HMRC.

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tax investigation insurance

What is tax investigation?

His Majesty’s Revenue & Customs (HMRC) may choose to conduct a tax investigation to evaluate the financial affairs of your business and ascertain that it is paying the correct taxes in both the current and past times.

Even though participation in such a process is legally required, it is not necessarily indicative of wrongdoing. If you have an efficient accounting system in place with an excellent accountant, this examination should not be excessively burdensome or lengthy.

The three types of tax investigation

There are three different levels of audit that HMRC can carry out:

A full enquiry

In a thorough assessment, HMRC will go over your entire business documentation, typically due to the risk of an inaccurate tax being present. When inspecting limited companies, they may analyse the taxes of the company directors along with the taxes of the company itself.

An aspect enquiry

HMRC will investigate a particular element of your financial documents when performing an aspect inquiry, for instance, a discrepancy in a component of a most recent tax filing.

A random check

Random audits can occur without warning, no matter the condition of your accounts or if you have activated a warning system.

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What does a tax investigation procedure involve?

HMRC will review your business records and ask a series of questions to ascertain specific information. You will always be made aware an investigation is going to take place; there should never be any surprises.

Of course, tax investigations can be quite complex and stressful; which is why we recommend seeking professional advice and support should an investigation begin. If you already have tax investigation insurance, you will be supported throughout the process and have a level of protection against any claim.

HMRC will always inform you what they’d like to check, but typically is would be your self-assessment tax return, your company tax return, PAYE records and returns, as well as your accounts and tax calculations.

Please note – HMRC must always make it clear why they are carrying out an investigation. However, they can make unannounced visits to your business premises and can ask to see books and records, question you about the business and remove records for review.

By informing your accountant of an investigation, you can ensure all records required by HMRC are handed over in a timely manner.


What triggers a tax investigation?

An HMRC tax compliance check may be conducted in the event of any abnormal activities occurring in your financial documents or accounts. The Central Risk team of HMRC typically initiates these investigations through the use of advanced data mining techniques.

A prime factor of the investigation being triggered is usually attributed to incorrectly-filed information on tax returns; hence, it is suggested that you consult with a professional accountant who can inspect your financial accounts and tax returns prior to submission.

Apart from incorrect data entry, other likely indicators that might draw the attention of HMRC include;

  • Involvement in a risky industry (e.g. handling large sums of cash)
  • The presence of any irregularities in account
  • Disparity in amounts between different tax returns (e.g. an unexpected drop in profits)
  • Recurrent tardiness in tax filings
  • Discrepancies in accounts that fail to align with the norms of the industry.

Lastly, your accounts may simply be selected at random for inspection, regardless of how accurate and punctual you are with the submission of taxes.


How do I know if HMRC is investigating me?

Receiving a brown envelope from HM Revenue & Customs (HMRC) in your letterbox is the first step of a tax investigation. The contents of the letter will indicate the scope of the inquiry, and your accountant should be able to provide some insight as to the reason it has been launched. At the very least, HMRC will be looking for more information to support something in your tax return, while a wider examination of your financial affairs may be in the works.
You may be asked to supply a range of documents to HMRC, such as bank and credit card statements, sales and purchase invoices, VAT records, chequebooks, payroll records, expense receipts and pricing estimates. If your records are digital, the investigators may even request access to your software system.
The time it takes for the investigation to conclude will depend on how much information HMRC needs to examine. Smaller inquiries are typically finished in three to six months, while more comprehensive investigations may last up to sixteen months.
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The HMRC tax investigation time limit

If you’re questioning how far HMRC can dig into your records, generally the answer is four years prior to the commencement of the investigation. If HMRC uncovers negligence (for instance, recurrent errors on your tax filings), they can take a look at up to six years’ worth of accounts. In cases where they perceive purposeful tax evasion, they may even probe up to two decades of available documents. It’s wise to keep access to as much data as you can to be on the safe side.


What are the potential outcomes of a tax investigation?

The consequences of a tax investigation are determined by various factors, but chiefly by whether or not culpability is found. Unless deliberate fraud is confirmed, penalties such as fines tend to be imposed instead of a criminal conviction. To challenge this decision, you must lodge an appeal within thirty days.
In the event of considerable discrepancies or oversights, HMRC will infer that similar mistakes may be present in your past declarations. This presumptuousness will impact the results of the investigation. If you are deemed to be in the wrong due to an inadvertent blunder, or due to omissions either hidden or exposed, then a penalty will likely be administered. To avoid further queries, it is recommended that you mend your ways.
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How can we help?

We provide annual tax investigation insurance and connects you with an advisor, who can protect you and your business; to ensure that HMRC don’t win!

Instead of paying high legal costs to enlist the aid of an attorney, you can opt to cover yourself with our tax investigation insurance at an annual fee; eliminating any extra expenses.

Investing in Tax Investigation Insurance – whether you’re a limited company or a sole trader – will give you peace of mind that you’ll be protected and have the right help available, should you be selected for a random investigation by HMRC. Nobody can prevent an investigation, but Tax Investigation Insurance provides some protection for you, such as:

  1. Removing your concerns about the rising costs of enquiries
  2. Having the right support to argue any complex or technical tax cases, which could be raised during the enquiry
  3. Ensuring you receive the best defence to protect your position
  4. Enabling us to challenge HMRC’s assertions and assumptions head on – as well as ensuring the basis of any enquiry is correct and your case is handled fairly
  5. Giving you peace of mind the tax inspector is only asking for relevant information and documents, and providing all supporting information from our files which relates to your accounts

RHJ Group specialise in worldwide accounts, law, business solutions & more.

We provide efficient and effective tax solutions helping citizens and expats with their tax affairs, to improve or maintain tax efficiency both at home – and internationally.

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