I know I have mentioned this a couple of times before but it still annoys me the number of clients that either refuse to pay out the £100 per year or so for the cover, or justify their non-action by thinking “it will never happen to me”.
Since April 2009 the investigation regime has changed. There were few trumpets and dancing girls to announce the change and consquently, 99% of business people have no idea things have changed and what it might mean for them.
HM Revenue & Customs are catching up to the 21st century[private_basic]. Instead of the old fashioned “lets ask some questions and if we like the answers, we will go away for another 10 years or so”, now they start with an innocent letter asking to see the books and records. They make it clear an investigation isn’t starting – yet – as long as they don’t find anything awry with the records. But…I can almost guaranteee you that they will find something, no mater how trivial, and a full blown investigation commences.
We still have the “old” aspect enquiries. Where three or four items are looked at in detail, but these are now in the minority.
I think the changes have come about because the government is short of money because the approach is more direct and aggressive than it was. The problem is that although the government is short of money, in the depths of a recession, most businesses are feeling cashflow tighten as well. As it tightens, HMRC knows, as do we all, that people will do what they need to do to allow their business to survive, including cutting corners and dumping established proceedures.
In a recession it is easy then for HMRC to find fault with records and as soon as they do, your business is in trouble. All your records become meaningless and the declared results based on them, entirely questionable. They may only find one mistake, but that one will cause the mindset of HMRC to assume that one will be simply one of many and they will look hard and long for evidence to corroborate their assumption.
This is why the fee insurance is so important. An investigation may be over really quickly and only cost you around 2 times your normal accounts fee. However, even if your books are good, fighting a long and determined HMRC driven assault will cost you dear just to eventually prove your innocence. By dear I mean anything up to 10 times or more of your normal accounts fee. If more professional help is needed to fight technical points such as a tax barrister, the sky is no limit to what costs could be incurred.
Please don’t think you are immune from investigation. HMRC have sophisticated ways to look at the figures you submit on your self assessment or corporation tax return each year. If they think you are running your business slightly differently from others in your industry, they will investigate; if they think your figures are too perfect, they will investigate; if you have not been looked at for many years, they will investigate; if you buy any large equipment which distorts your VAT return, they will investigate; if you consistently declare profits they deem too low for you to live on, they will investigate; if a friend/foe tells them you are up to no good, they will investigate; if you make losses over several years, they will investigate…
Basically you can expect an investigation at any point for any reason.
Why then do businesses think it will never happen to them – it will at some point.
Look at the costs of proving yourself to be innocent – much more than an average yearly accountant’s bill – and the costs will be more if HMRC find faults and ommissions in your records because you will be trying to limit the damage of additions that will be added to your profits and consequently your tax bill.
Why not just insure against this inevitable event for £100 per year or so.
You can get professional fee insurance from membership of the Federation of Small Business (along with a host of other benefits), from your local insurance broker, even from some household policies. It doesn’t cost much but the peace of mind is more than worth it when HMRC come calling.
And don’t forget, the premiums are tax deductible from your profits – so it’s even cheaper than you thought.
Finally, if you are not insured and run up a huge bill in defending yourself from the attentions of HMRC – if they find any faults in your information that mean you pay some extra tax as a result – NONE of the fees you pay will be allowed for tax purposes. Not a penny. Doesn’t that make the insurance option look a little more appealing?
Go and get the insurance. I will shortly be rejecting clients that do not have this insurance in place for 2 reasons. Firstly, trying to get money out of someone who has been hit by a large additional tax bill for defending them and limiting the damage is REALLY difficult. Secondly, if a business person doesn’t appreciate the impact that the inevitable investigation can have on their nerves, their wallet, their reputation and the survival of their business, I don’t think they are the type of client I want to work with.
Go check your policies now and make sure you are covered. Your own accountant may be contacting you soon asking for evidence that you are covered – so be prepared. It is the responsible thing to do.