Businessman's 8p tax bill costs £770

An Inland Revenue investigation of a West Country businessman's annual return left him with a £770 accountant's bill to pay - even though his unpaid tax amounted to just 8p.

Philip Ghazala of Taunton, Somerset, said: "This is an example of red tape gone mad. I am extremely angry and will be pursuing the Inland Revenue to pay my accountant's bill, which is nearly 10,000 times more than the 8p additional tax they said I owed."

According to press reports, fears are growing that a new "get tough" approach by the taxmen may prompt more investigations to be launched - whether or not there is any evidence to support them or costs can be justified by the revenue raised.

There were 38,228 "full investigations" of taxpayers last year of which about a quarter were random inquiries with no grounds for suspicion.

However, some accountants have claimed that the number of "full investigations" gives a misleading picture as there are many more "aspect inquiries" where fewer questions are asked, but the Revenue says it does not record the number of aspect inquiries.

One accountant told the story of a guesthouse owner where the tax inspector counted all the eggs used over a three-month period and argued that because there were more eggs than guests, the client had been under-declaring. The case was made by the accountants that if a guest asked for scrambled eggs, more than one egg could be used in the process!

Crack units

Francesca Lagerberg of accountant Smith & Williamson said: "The taxman has made it very clear that more government resources are going into tax investigation work and the Revenue is getting smarter in how it deals with these cases by setting up specialist 'crack' units to target certain sectors, such as those with complex returns.

"The new disclosure rules making taxpayers put reference numbers on their returns when they have used certain registerable tax schemes is bound to increase the risk of that person being subject to closer scrutiny.

"One response is insurance to cover the fees incurred in the enquiry. It will not usually cover any tax, interest or penalties due but could still mean a large portion or all of the cost burden is met."

As reported in the Daily Telegraph, Rupert Chapman of Qdos Consulting, who provides insurance cover through UKTECH, said: "We are the only provider to also insure the tax liability, interest and penalties as well as fees.

"The main variable in fee protection insurance is who does the work in the event of an Inland Revenue enquiry. All trade association schemes and most direct to client covers will only insure for the work to be done by a consultant appointed by the provider of the insurance. Accountancy schemes and the Qdos direct to client cover will provide for the work to be done by the client's own accountant.

"The next major variable is 'aspect enquiry' cover. These can be simple inquiries into one or two 'aspects' of the tax return but can also be lengthy inquiries into many aspects of the returns and can be as costly as full inquiries.

"We cover aspect inquiries as standard unless specifically requested not to and, in fact, 45 per cent of our claims costs are on aspect inquiries."