Who needs Tax Enquiry Insurance?
Any self-employed individual or small business can be subject to a tax enquiry or dispute with HM Revenue & Customs (HMRC). Did you know that tradespeople are more likely to be the subject of a tax investigation than most other professions? This makes this cover a must-have if you make your living as a self-employed contractor.
But just how common are HMRC investigations? The answer is very – just ask any contacts of yours who are also working as self-employed contractors. Even with no wrongdoing on the part of the taxpayer HMRC can conduct routine enquiries into their tax affairs. Contractors are especially vulnerable to this given the changes to off-payroll working (IR35) rules in recent years and the government’s agenda to clamp down on tax evasion in general. However, a good amount of inspections are at random with no apparent reason behind them to ensure good compliance in businesses across the board.
Remember, HMRC doesn’t always get it right and they do make mistakes. As a layperson (e.g. not a tax expert), you might find yourself agreeing to re-classification or accepting to pay charges that you don’t actually need to pay.
For example, where you use sub-contractors HMRC can go through and potentially re-classify your sub-contractors as employees and go back to earlier years and calculate the tax that should have been deducted. However, as tax legislation might not be your area of expertise, meaning you could end up with an incorrect decision from the taxman about your business status which is based on incorrect information.
Tax enquiry investigations can drag on for months, sometimes over a year, and it goes without saying that legal experts working on your behalf for this length of time aren’t cheap. The cost of defending such enquiries can potentially be significant and it is important to ensure professional representation should HMRC come knocking.