Ready, set, compliance check!
Following a recent routine compliance check by HMRC, a client who is a full-time farmer was asked for detailed breakdown and proof of expenditure on a range of large and small transactions across his business. Upon submission, HMRC then sought receipts for the purchase of livestock and maintenance work carried out at the client’s farm in the previous six months. As he had paid for both by cheque, he had to request copies of both cheques from his bank, which was still not deemed sufficient evidence of expenditure by HMRC. By the end of the review, the client’s tax liability was only £180, yet the time spent on toing and froing between HMRC and the client amounted to almost £2,000 in professional fees! This is not an unusual occurrence unfortunately and with the roll out of making tax digital, it is likely that additional intense scrutiny of small business accounts will only become more frequent.
This incident demonstrates that businesses should seriously consider protecting themselves against incurring significant bills for professional fees in the case of inspections by HMRC. As per the case study above, should HMRC require additional paperwork, significant professional time can easily add up! While not referred to as an insurance, fee protection will cover the accountancy related costs incurred as part of a tax inspection, thereby removing a significant element of stress from the process.
The outlook? Medium to high likelihood of tax inspections
Tax inspections are more common than businesses imagine and cash businesses such as hairdressers, barbers, cafes and sometimes builders will be more susceptible than ever. Clients have recounted instances of tax inspectors carrying out mystery shopping and then delivering follow up letters to their premises requesting detailed records of income and expenditure! Like other business expenditures, fee protection is tax deductible. The cost will depend on whether the business is a limited company, a sole trader or an individual.
Of course, fee protection isn’t appropriate for every business; for example, if you’ve had a tax inspection in the previous 12 months you won’t be covered, as statistically you’re more likely to receive a follow up inspection. Similarly, if you’ve been late with a VAT or self-assessment tax submission in the previous 12 months you won’t be valid either and some membership bodies such as the FSB (Federation of Small Businesses) or Business First Network will offer fee protection as part of their member benefits. If however your business cannot afford to pay thousands of pounds in unanticipated professional fees, get in touch to discuss whether fee protection is appropriate for you firstname.lastname@example.org