The benefits of tax liability cover
Posted on 21st November 2019
Dealing with HMRC is rarely the most pleasant experience, but when the UK tax authority believes that it has the legal power to extract more money from you than you’ve paid in dues, then it can lead to severe legal and financial troubles (not to mention, a huge headache)!
HMRC can launch an inquiry in which the taxman rifles through your accounts, looking for opportunities to gets his hands on more of your money.
Facing a tax inquiry can be a stressful experience. We all know that HMRC is a large public body with all the legal expertise and force of the state at its back and it can be relentless in its pursuit of money that it thinks you owe.
Actions like these usually follow differing interpretations of tax law. You and your accountant may feel that you have complied with a particular piece of tax legislation, but HMRC may take a different view.
The purpose of tax liability cover is to protect you against these differing viewpoints. Any business with an income tax, corporation tax, PAYE, VAT or IR35 inquiry can benefit from this type of insurance. Even if the tax authority believes that the law says that you owe tax, tax liability insurance can cover any outstanding liability and pay it off for you, should the worst happen.
So what are some of the benefits of tax liability cover for individuals and corporate entities?
It eliminates the need to hold money in escrow
One of the tragedies of the modern tax system is the need for companies to hold money in escrow, purely because of the threat HMRC poses. And if HMRC believes it has found a loop-hole, it may pursue you. This fact means that you have to hold money in reserve or escrow just in case - capital that you could be using to invest in your enterprise, but can’t.
Tax liability insurance eliminates this need. You pay it alongside your regular premiums, get ample coverage, and can put all of your capital to work.
It gives peace of mind about historic tax positions
When you first start paying tax, you’re not always aware of all the rules and liabilities. You can sometimes, therefore, file incorrect accounts, or accounts that don’t precisely match up to the demands of the law.
If you believe that you might have made a mistake on a prior filing, it can lead to high levels of stress and anxiety. You never know whether HMRC might launch an investigation into your returns, find mistakes, and then claim that you owe them money. Again, tax liability insurance can help.
It removes uncertainty when restructuring
Restructuring an organisation, especially mergers and acquisitions, can be a tax minefield. The rules are rarely straightforward to interpret and you have to have your wits about you.
In these cases, tax liability insurance can contribute to legal and tax costs in the event of an investigation. It can also give you time to focus on the restructuring itself, without having to worry about unforeseen tax implications.
It returns investment funds to investors
The people who invest in your organisation would prefer to see profits from your operations in their own back pockets. Leaving money in a reserve account, just in case HMRC takes a disliking to your interpretation of tax law is far from ideal! It cuts investor earnings and makes your organisation a less attractive investment proposition for future investors.
If you believe that you might get into an income tax, corporation tax, VAT, IR35 or payroll dispute with HMRC, you could be liable to pay additional money, necessitating the reserve funds. Again, tax liability insurance can help. It allows you to liquidate any money that you might have in reserve, hand it out to shareholders, and improve the dividends that your firm offers. It is, therefore, a powerful tool for attracting additional investment.
You should note that tax liability cover won’t cover you if the reasons for your tax irregularities are not defensible. What this means is that the insurer needs to see evidence that you’ve done everything you can to meet your tax obligations. You’ve hired accountants, declared all sources of income and consulted with the appropriate professionals where required.
Tax liability cover won’t provide you with insurance to cover tax costs if there is evidence that you’ve been avoiding paying tax. It isn’t a substitute for well-maintained accounts. Unless you move your company offshore, you’re stuck.
So, in summary, tax liability cover can protect you from the threat of an HMRC dispute and can support any business with income tax, corporation tax, PAYE, VAT or IR35 inquiry.. It gives you more power to fight the tax authorities, protect your business, and win your case if it goes to court.
How can you get tax liability cover?
We highly recommend that you take out this important insurance if you're a limited company director, especially with the new IR35 rules that are set to come in next April. Tax liability cover also supports any business with an income tax, corporation tax, PAYE, VAT enquiry as well as IR35 so it is important that you consider taking it out.
We partner with Qdos Contractor to supply this insurance, and if you use this link here and speak to us, we can provide you with a 10% discount code!
As always, please do get in touch if you have any questions about tax liability cover or any other insurance related questions.
Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
Tagged as: Budget & Tax Rates
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