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Why tax insurance could be worth it for you!

A new client recently questioned my advice to take out tax enquiry insurance for £90 per year.  He took the view that as he was in a low risk sector, keeping excellent records, he had nothing to worry about.  I advised him that the way HMRC operates this logic had a serious flaw in it.

Nothing demonstrates this better than Oaktree’s only tax insurance claim in 2014 so far, which concluded on 8 August.  The costs of this claim were nearly £900, the only tax insurance claim Oaktree has so far made for over £400.

The case started in March when HMRC wrote to my client to say she should have registered for VAT six years ago, and hence over £58,000 of VAT was due.  Given that my client’s annual sales are around £100,000 finding such a large sum would have been terrible news, but my advice to her was that HMRC had less than a 1% chance of winning the case.

She was a sole trader dance teacher, and when she first became a client I asked her a series of questions which satisfied me that most of her sales were exempt from VAT, hence she was not obliged to register.  So in April we replied accordingly, citing the section of the VAT Act which applies, a similar VAT case where the dancing school had won, and enclosing my client’s detailed profit and loss account which made it crystal clear she was below the VAT threshold.

At this stage I should say that I rang the HMRC officer in Liverpool before writing the letter to her.  I was shocked to learn on the phone that she did not know the section of the VAT Act relating to dancing schools, and I had to repeat it twice to her on the phone before I got her to understand it.  I believe that what followed was more to do with the officer saving face within her department than a prudent use of the public purse.

The officer wrote on 9 May requesting 18 separate pieces of information, such as full details of the classes, where they took place and when, how many pupils and so on.  When challenged about this on the phone, she said it was “background to form my opinion on whether the threshold was exceeded.”

My policy is play the “nice guy” for two letters, so I got the answers to the 18 points and replied in May.  Then in July we got another letter, asking for eight pieces of information.  Three of these we’d already given in the May letter, the other five were ridiculous items to request by post, for example “prime records used to calculate turnover in the business for the past four years.”

No more “Mr. Nice Guy” this time.  I replied pointing out that she already had answers to three of her questions, and offering four days in August when HMRC could visit my client with me present to see the other records.  In addition, I expressed my view that the officer had all the information she needed to close the case in April, and that the subsequent letters amounted to a waste of scarce public funds and tax insurance funds.  I stated that if this approach continued I would raise a formal Complaint Case and publicise what was going on in the case.  The officer replied on 8 August closing the case and confirming zero liability to VAT.

This sort of thing is why traders need accountants.  We know only too well just how poor the quality of HMRC staff is these days.  This one kicked off with someone who did not know the VAT Act opening up a case.  She should have been big enough in April to accept her mistake and close the case.  Instead, four months and £900 later the case gets closed, but in the meantime my dancing teacher client has been stressing out about the potential £58,000 tax bill.

Saturday 9 August 2014