'Bulletproof' advice vital for self-employed clients amid HMRC probe

Advisers have been warned to review clients’ tax affairs amid rumours HM Revenue and Customs (HMRC) is targeting the self-employed sector to further boost collection rates.

HMRC raised £255m last year by targeting self-assessment tax returns. Accountants UHY Hacker Young said the 2009/10 figure was 7% higher than the £238m collected in 2008/9.

Tax partner Roy Maugham (pictured) said HMRC would be targeting anyone it saw as "a bit too ‘entrepreneurial'".

Self-employed clients would be at "far higher risk" of investigation for both personal tax and business affairs, he said.

Daniel Cawley, an IFA at small-business specialist 121 Financial Services, said a number of his clients were taking out extra insurance for tax inspection.

"There is a potential for advisers to become much more involved [in HMRC investigations] over the next few years," he said.

Advisers should be particularly wary of relevant life policies (RLPs), he said.

Small businesses taking out these products, which usually come with generous tax benefits, would be "flashing up warnings" to the local tax office, according to Cawley.

"Our recommendation letters have to be bulletproof - and in advance you to have to get the provider, the client and their accountant all onside."

RLPs are commonly taken out by businesses too small to warrant a group life scheme, and allow both contributions and lump sums to be paid tax free.

A standard life insurance policy, taken out as part of a limited company, will pay out a tax-free lump sum, but will usually be liable for income and corporation tax.

"It's going to be a massive area, but all the providers will say you cannot do it specifically for the tax saving," Cawley said.

HMRC has recently cracked-down on doctors, dentists and plumbers, as well as British high-net worth taxpayers with money in Swiss bank accounts.

"The most headline-grabbing campaigns have centred on high-net worths but we are seeing an increasing number of investigations into middle earners," Maugham said.