HMRC’s plan to increase the number of tax investigations emphasises the need for Fee Protection Insurance.
The average HMRC investigation lasts more than 16 months with more than 500,000 sole traders, partnerships and small companies being investigated according to the information given to The Treasury Select Committee in Parliament. This can result in additional fees having to be paid to accountants and tax advisers, even if the eventual additional tax payable is very low, or nil. This highlights the importance to businesses of Fee Protection Insurance to cover the additional cost.
HMRC believe there is a “tax gap” of £34 billion. The “tax gap” is the difference between what HMRC believes it should collect and the amount it actually collects. They also believe that nearly half of this “tax gap” (46%) is because of underpaid tax by small businesses.
The importance of Fee Protection to Small businesses is crucial as they are an easy target for HMRC because they do not have the resources or knowledge to successfully fight HMRC.
Some MPs have criticised HMRC’s decision to target many more small businesses pointing out that tax returns, and the rules surrounding them, have become more complex over the years. This, combined with the closure of local tax offices, has made it much more difficult for business owners to get it right. Many errors are probably the result of genuine error or misunderstanding.
Here at Central Business Services our experience is that more of our clients are being targeted but the amounts involved are often very small. We believe there is a greater risk of businesses which submit their own tax returns being the subject of an enquiry because, while we are experiencing an increase, it is not as great as we would expect judging by HMRC’s published figures.
One recent case we dealt with concerned VAT where the enquiry was conducted relatively quickly over about five months but resulted in no actual VAT being collected.
Another resulted in a £1 million turnover company having to pay about £180 extra tax – after a six month enquiry.
Fortunately, we automatically provide Fee Protection insurance for all our clients as standard so our cost of contesting the enquiries was covered by the insurers.
For any advice please contact us on (01509) 816150 or via our website and we will be happy to assist.
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