There is a common misconception that HMRC investigations only target businesses when individuals are equally susceptible. With the advent of cutting-edge technology and AI, the number of HMRC investigations has surged in recent years. As a result, both businesses and individuals are increasingly opting for Fee Protection services through their accountants as a proactive measure.
While tempting to ignore Fee Protection as another “unwelcome cost”, as with any type of cover, you appreciate its value only when you need it. Therefore, if you submit any form of tax assessment to HMRC, whether as part of a business, sole trader, or self-assessment return, you should consider Fee Protection.
What is the potential scope of an HMRC investigation?
Before we look at the pros and cons of Fee Protection in detail, it’s important to appreciate what HMRC may investigate and the different types of investigation. The more typical enquiries will revolve around:-
- Taxes paid (not paid)
- Accounts and tax calculations
- Self-assessment tax returns
- Company tax returns
- PAYE records
To put this into perspective, HMRC income from investigations hit a record £39.2 billion for the calendar year 2023. The trend in recent years has revolved around:-
- Ultra high net worth individuals suspected of underpaying tax
- Undeclared income from cryptocurrency traders
- Undeclared income from residential landlords
- Transfer pricing and cross-border payments by multinational companies
While this may give the idea that individuals in relatively small businesses are likely to escape investigation, this is not the case.
What are the different types of tax investigation?
If HMRC contacts you regarding a tax investigation, it will come under one of three categories:-
Aspect enquiry
This is a focused enquiry examining one or more specific areas of your accounts, typically taxes and returns.
Full investigation
As the term suggests, this will be a full investigation. Your entire tax return will be reviewed, and many questions will likely arise, even if you have done nothing wrong.
Random investigation
While it is difficult to get details from HMRC, random investigations tend to focus on high-risk areas or sectors. These include industries that receive a high number of cash payments amid suspicions that not all income is being declared.
Aside from the basic types of investigation, red flags may emerge if you are constantly late with your accounts, fail to pay your taxes, or there are significant changes/discrepancies. While this may increase your chances of an HMRC enquiry, even those with copybook returns can also be approached by the tax authorities.
What is the scope of an HMRC investigation?
The enquiry could take in one particular type of tax or potentially look at a range which can include:-
- Income tax
- VAT
- Capital gains tax
- Corporation tax
- National insurance
While much of the communication between HMRC and individuals/companies tends to be digital, a compliance check could include:-
- Site visits
- In-depth check of employee records
- Multiple information requests
- Interventions
At this point, it’s crucial to appreciate the scope of any HMRC enquiry. The greater the scope, the more assistance you will likely require from your accountant, much of which will incur fees.
How does Fee Protection work?
In simple terms, Fee Protection will cover professional fees incurred as a consequence of an HMRC tax enquiry. It’s essential to recognise that it won’t cover any tax that you may owe HMRC or additional findings. However, when you consider the costs of an enquiry, which can run into tens of thousands of pounds (and more), the benefits are clear.
The average length of an HMRC investigation could be anything from just a couple of months to many years, with the average quoted at circa 19 months. There is also a huge variation when it comes to professional fees as part of an investigation, although it is common for these to exceed £5000. While the scope of a Fee Protection service can be adjusted for your particular scenario, the standard agreement will typically cover up to £100,000 in associated professional fees.
As the fees are claimable directly by your accountant from the insurance company, this will not impact personal or company cash flow. It also gives your accountant a degree of certainty about payment. As HMRC will determine the type and scope of investigation in the early days, although this may be open to change, a package fee would usually be agreed before the commencement of any work.
What are the pros and cons of Fee Protection cover?
When businesses are struggling, and funding is tight, there may be a temptation to review “non-critical” expenses. For some companies and individuals, eliminating Fee Protection cover could be a costly error.
There are numerous benefits to Fee Protection services, including:-
Cost savings
When you consider that some complex HMRC enquiries/investigations can last years, it’s easy to see how professional fees can reach tens of thousands of pounds. Even a relatively simple HMRC enquiry could incur fees into the thousands of pounds.
Access to experts
As experienced accountants, we regularly deal with HMRC on tax related topics. Our specialist team not only provide the relevant information as quickly as possible but also fight your corner, increasing the likelihood of a favourable outcome.
Peace of mind
Some areas of tax regulations can attract different interpretations, which can sometimes conflict with HMRC. The peace of mind that Fee Protection provides should not be underestimated, whether there are issues or it is a straightforward enquiry.
Time savings
Unfortunately, some of the more complex tax investigations can last years and become extremely time-consuming for individuals and businesses. Fee Protection removes this burden, allowing you to appoint representatives to speak with HMRC and save valuable time.
Additional services
While “standard” agreements are available, the details of a Fee Protection service can be shaped around your particular requirements. This may include access to additional services such as tax and legal helplines, which can help avoid long-running investigations in the future.
To inject a degree of balance into the article, it’s essential to appreciate the potential downside to Fee Protection services, such as:-
Cost
As this is a relatively active area of the accounting sector, pricing tends to be relatively competitive, but it is important to appreciate the level of cover vs the cost.
Quality of service
You may find that your regular accountant has expertise in specific areas, but HMRC investigations may not be their strong point. It’s important to find experts to best represent your interests.
Fine print
As with any type of fee cover, the terms and conditions can be adjusted to suit your particular scenario. It’s critical that you understand the level of cover provided by a Fee Protection service so that there are no unwelcome financial shocks later on.
False sense of security
This shouldn’t be an issue, but Fee Protection could provide a false sense of security for some individuals and businesses. Whether or not the service covers particular matters, it’s important to maintain good accounting practices and compliance with the relevant regulations.
What are the chances of being investigated by HMRC?
It’s difficult to say with any great certainty how likely you are to be chosen by HMRC for further investigation. Prior to the introduction of self-assessment, some people put the chances at one in 100 that your tax returns would be looked at in more detail. This may have fallen to around one in 10 today, but the introduction of cutting-edge technology and AI could significantly enhance investigative capacity in the future.
Online statistics suggest that HMRC carries out 300,000 investigations a year into self-assessment tax returns. Considering that 11.5 million self-assessment returns were lodged in January 2024, the percentage investigated equates to just 2.6%. The definitive rate for businesses is unclear, but it may be as high as once every five years. However, this may not be a full investigation – for many, it is more likely to be a review of VAT returns or company records.
Future investigations
There are several factors to consider when looking at Fee Protection services, some of which can be measured in monetary terms. In contrast, others relate to time spent away from your business. The introduction of the latest technology, including AI, has significantly increased HMRC resources in this area. In a split second, patterns can be identified, discrepancies noted and a list of potential red flags produced for HMRC employees to pursue.
If chosen for an HMRC enquiry, the best-case scenario would be a relatively short investigation with low expenses in the thousands of pounds. Unfortunately, for many individuals and companies (often with more complex tax affairs), the cost can run into the tens of thousands and sometimes hundreds of thousands of pounds. We have also seen investigations ongoing for many years, creating anxiety and stress for individuals and, in many cases, impacting the smooth running of businesses.
Summary
Wilkins Southworth works with Croner-I Taxwise-Protect to provide a comprehensive Fee Protection service shaped around our clients’ individual needs. While the service fees are relatively modest, we appreciate that they will still impact your cash flow. However, compared to the potential repercussions of an investigation, our Fee Protection service is now critical for many companies and individuals.
If you would like to discuss the benefits of Fee Protection or you would like to find out more, please contact us, and we will look at your situation in more detail.