The tax gap is the difference between the amount that HMRC expects to bring in and the amount they actually end up taking.

The tax gap for 2016/17 was approximately £33 billion, the last year figures were published for.

HMRC have recently been increasing the number of tax investigations into small businesses in hopes of reducing the tax gap. This means that now, more than ever, your business may be subject to a visit from the taxman.

You will need a professional accountant to defend you against accusations that you have not paid the correct amount of tax. If an investigation concludes that you do owe tax, then you will also need an accountant to help you determine the level of outstanding tax and to negotiate on your behalf the fees and penalties you are likely to pay as a result.

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What will trigger a HMRC investigation?

Anything that HMRC deems “out of the ordinary” will be flagged up and subsequently investigated. This can be anything from excessively claiming expenses to an unusually high rise in annual turnover.

It is worth mentioning that HMRC investigations can also be triggered on a whim. This is especially the case with certain industries which are seen as “high-risk” in terms of tax evasion. Businesses operating in these industries can expect more random investigations than other companies in “lower-risk” sectors.

What will they look at?

HMRC will not only look into your income tax history – your other tax declarations will also likely be investigated. Examples of the types of tax investigation carried out include:

• VAT claims,
• Corporation tax,
• Landfill tax,
• Insurance premium tax, and,
• PAYE schemes.

How can I prepare? 

No matter how diligently you have been with reporting and paying your taxes, investigations are sometimes unavoidable. However, there are some things that you can do to make it less likely that you will be subject to an enquiry from HMRC about undeclared or misdeclared income.

Keep good records

The records you should keep in good order and up to date include: 

• receipts of all of the sales that you have made, 
• all of the invoices that you have issued, and 
• all of the invoices you have received. 

If you do this, you will reduce the length of time any investigation into your affairs takes overall. HMRC will likely require these kinds of documents as a part of their investigation into you. The faster you can provide the accurate documents you’re asked for, the sooner any investigation will be over.

Pay your taxes on time

You are far less likely to be investigated by HMRC if all of your taxes are paid on time. If you or your business gets regularly your taxes late, this will attract unwanted attention from HMRC.

Hire an accountant

Accountants help you organise and retain all of the necessary records mentioned above. If you have made any mistakes, an accountant can catch them before a tax inspector looks at them as a part of their investigation. Mistakes on your record will likely result in you misdeclaring your profits thus potentially underpaying your taxes.

Accountants also make sure that you are compliant with tax legislation. They know all of the legal ways to reduce your tax bill and they know all the illegal ways that you should avoid.

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How do the penalties work?

There are two main ways that you can be penalised as a result of a HMRC investigation – these are based on what HMRC find you to be guilty of.

Underpaid tax

If you haven’t paid enough tax, you will be forced to pay the remainder within 30 days. If you owe a larger sum, HMRC may also charge you interest on it, however this is quite rare. If you do not pay the overdue taxes, you will need to pay an additional penalty on top. These penalties can vary in amount, depending on how much you owe. 

Purposeful wrongdoing

If the taxman believes that you have been purposefully avoiding paying your taxes, then they might make the investigation a criminal matter. If you have informed HMRC about any misconduct in the past, they may give you a smaller penalty than otherwise.

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What is fee protection insurance?

Professional fee protection insurance covers the costs incurred by your accountant when representing you during a tax enquiry carried out by HMRC.

Even if your Black and White Accounting professional argues your cases successfully so that no tax or penalties are actually payable, you may incur a significant charge in paying for your accountant’s time and expertise. Fee protection insurance covers all accounting fees generated as a result of HMRC’s investigation.

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Tax fee protection insurance FAQ

Is fee protection insurance tax deductible?

Yes – fee protection insurance is tax deductible.

How much does fee protection insurance cost?

The cost of your fee protection insurance varies according to the range of tax enquiries you wish to cover and the complexity of you and your companies’ tax affairs.

How do I pay for fee protection insurance?

Fee protection insurance can either be paid:

• annually as one lump sum or
• monthly via direct debit (depending on the insurance provided, interest may be charged on instalments)

What does fee protection insurance cover me for?

Depending on the fee protection insurance policy you select, you will be covered for some or all of the following:

• Auto enrolment return enquiries
• Business record checks, inspections and interventions
• Child tax credit enquiries
• CIS enquiries and disputes
• Code of Practice 8 investigations (provided there is no dishonesty or fraud)
• Companies House confirmation statements
• Corporation tax enquiry
• Costs to handle an informal request for information by HMRC
• Gift aid enquiries
• Income tax enquiry
• Inheritance tax
• IR35 and Employment Status
• National Living Wage enquiries
• National Minimum Wage enquiries
• PAYE/NIC compliance
• Personal income enquiry
• Probate return enquiries
• Scottish tax laws
• Section 60 or 61 enquiries under the VAT Act 1994 (where there is no dishonesty or fraud)
• Stamp Duty Land Tax
• Student loan enquiries
• VAT compliance

For a full list of tax enquiries covered, please speak with your Black and White Accounting representative prior to selecting a policy.

Fee Protection Insurance in Hampshire and Surrey

For more information on fee protection insurance, please use the form below, call us free on 0800 140 4644, or email [email protected].

Established for 20 years, Black and White is an accounting and business consultancy professional services firm servicing individual and corporate clients for a fixed monthly fee. We’re currently offering a free hour’s consultation at either your premises or ours.