Risk Management - Insurances, Tax Inquiry

When operating a limited company it is vital to consider whether your company and the individuals operating through the company need to take out any insurance. The need to take out insurance may be due to a legal obligation, a contractual requirement or indeed simply due a personal need.

Tax Inquiry

It is a common perception that the UK tax system is now one of the most complicated tax systems in the world; this means anyone running a business must be fully aware of the various areas of taxation that need to be addressed. Most business’s, whether one man PSC’s or multi-nationals, will have specialist professionals dealing with the array of forms, calculations and deadlines that need to be met whether monthly, quarterly or annually.

However as with anything mistakes will be made, and if HMRC notice, tax enquires or investigations will inevitably be launched. HMRC’s figures from 2005/06 showed an overall increased income of 27% from the previous year in its tax compliance work. Therefore small business’s should seriously consider insurance to cover potential enquiries and investigations as the costs of professional fees defending them can run into thousands, and if HMRC win, interest and penalties can also have serious financial implications.

There are various insurers in the market that will offer this type of insurance and the following are common areas of tax compliance which are covered:-

HMRC Enquiries and Disputes

Covers professional fees in relation to any enquires into the policyholder’s self assessment return. This could be a full enquiry where HMRC ask to review the books and records required to make up the return or accounts. It could also be an aspect enquiry where only one or two specific areas of the return require clarification. Generally this will cover all types of self-assessment in relation to the business and/or individual.

HMRC PAYE Control Visits

Covers professional fees in relation to HMRC compliance/control reviews or inspections into the operation of PAYE relating to the policyholder.

HMRC PAYE Disputes

Covers professional fees for defending any challenges into the accuracy or completeness of re-submitted returns following a compliance/control review or inspection regarding PAYE.

Section 660a Disputes

Covers professional fees for an enquiry into Section 660a which relates to the payment of dividends to a spouse or partner. Some policies may also cover any missed taxes, interest and penalties should HMRC be successful in their enquiry.

VAT Disputes

Covers professional fees into defending enquires into any VAT related dispute. Common types include correct application of the flat VAT scheme and the correct charging to overseas clients.

Judicial Review

There may be the need for a judicial review should there be no statutory right of appeal against a decision of HMRC or following a Commissioners’ Hearing. Some insurers will cover for professional fees in this instance.

IR35 Disputes

Cover for IR35 disputes is probably the main reason why this type of insurance is taken out. Policies will cover all legal and other professional costs in defending an individual’s position under IR35. It is also possible to include backdated taxes, fines, interest and penalties within the insurance policy; however the level of indemnity will depend on how defendable the insurers believe the insured’s contracts to be.

As with any insurance policy there are restrictions and exclusions that could affect the cover, or even if an individual gets cover at all. Among others they include:-

The individual failed to make aware the insurer of an incident that could lead to a claim once the insurance begins, or any potential claim is caused directly by an enquiry, investigation or dispute undertaken prior to commencement of the insurance.

The claim is in respect of a criminal prosecution.

The individual is question has not submitted a tax return, an amendment to a tax return or any other statutory return within the statutory time limits.

In the absence of a tax return, the individual has not notified HMRC of the chargeability to tax within the statutory time limits.

A correction is required to the individuals self-assessment return due to his/her or their accountant’s deliberate act.

The individual has refused HMRC’s reasonable request for rectification of a self-assessment return.

The claim is in respect of fees incurred preparing or amending self-assessment tax returns, accounts, P11Ds, P35s, VAT returns or any other statutory returns.

The individual has not observed the requirement of taxpayers to maintain records as required under the self-assessment regulations, or in the case of an incorporated company, maintain records and books of account in accordance with the Companies Act and for VAT, maintain records in accordance with Schedule 11 of the VAT Act 1994 and the Value Added Tax Regulations 1995.

Should an insured individual become aware of an impending enquiry or investigation, they should notify their accountant and insurer immediately so both can arrange for the necessary actions to be taken. It is advisable:-

Not to speak to any Inspector personally about the enquiry/inspection expect to arrange a suitable time and place to allow him/her to review the records. This should always be done at the individual’s accountant’s offices.

If requested to provide information via post, only supply the information asked for and check with the accountants/insurers that the Inspector is entitled to see what is asked for.

To avoid the Inspector asking leading questions, it is also advisable that the individual is not present when the records are viewed. This will force the Inspector to ask questions via post, which allows for careful consideration to be made when answering.

Risk Management - Insurances, Tax Inquiry

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