Have you used a company to claim a refund and HMRC are now asking you to pay it back?

Tax is complex so it is understandable that many taxpayers want to both review whether they have paid the correct amount and also ask a tax agent to help them do this. However, it is important that taxpayers think about the risks before claiming tax refunds and are careful when selecting a tax agent.

In many of the cases we have been told that:

• the agents have made large tax refund claims via a tax return;

• taxpayers say they did not always know or agree to the details of the claim;

• HMRC have paid the tax refund to the agents, who have deducted their fee and then paid the balance to the individuals;

• however, at a later date, HMRC have investigated the claims and decided the individuals were not entitled to the tax relief being claimed and asked them to repay the whole amount of the tax refund (including the amount the agent took as a fee).

What is the issue?

Some companies contact taxpayers out of the blue and claim they can obtain a tax refund - an idea that is likely to be attractive to many! The companies may advertise on social media or obtain leads from taxpayers who have already ‘successfully’ claimed (and who can be incentivised to refer family and friends to the companies).

Usually the refund company will want a percentage of the tax refund obtained as their fee and will say things like ‘You have nothing to lose’ and ‘no refund = no charge to you.’

We have seen posts on internet forums of ordinary employees receiving five figure refunds from HMRC. Even if the refunds relate to more than one tax year, for average earning employees, this is likely to represent most, if not all of, the tax that was deducted from their wages in the first place.

However, often these refunds are not what they seem. Some unscrupulous companies knowingly inflate or make up tax refund claims as they have a vested interest in securing a large refund for you because it means they will get a bigger fee. Some agents make incorrect tax refund claims by mistake if they do not properly understand the law - as tax agents are not regulated, not all have the technical expertise you might expect.

It is important to understand that anyone can set themselves up and interact with HMRC as a tax agent – HMRC do not check an agent’s training or the standards under which they operate.

Am I entitled to claim a tax refund?

Maybe, but in general, tax refund claims will be for relatively small amounts. Opportunities to legitimately claim large tax refunds are limited.

Examples of the kinds of claims that are unlikely to be valid for many employees include:

• Travel and subsistence expenses – for more information see our guidance

• Sophisticated tax reliefs such as for Enterprise Investment Scheme (EIS) – for more information see our guidance

What questions might I want to ask of an agent before engaging them?

Before you engage the services of an agent to make a tax refund claim on your behalf, you may want to find out more about them. It is especially important to check that your agent adheres to high professional and ethical standards.

More generally, you should ask about things like:

• their terms and conditions for providing their services – these should be clear

• whether they do identity checks on who you are (in accordance with requirements under anti-money laundering rules)

• how they will correspond with you – this should be via traditional channels to ensure there is an audit trail (not just via WhatsApp for example)

• whether they are a member of a professional body that has signed up to the Professional Conduct in Relation to Taxation

Even if a tax agent does not belong to a professional body, HMRC’s general Standards for Agents also require agents to work to prevent errors in their clients’ tax calculations or claims and avoid including figures in returns or claims which are unsubstantiated or speculative.

WARNING: You would expect a good agent to use the HMRC facilities provided for agents/their own tax return software and not use your government gateway credentials to submit your tax return via HMRC’s online services (as if you had done it). You should never give your government gateway account details and password to any third party.

You may also want to find out more about their approach to making tax refund claims.

In particular, you should ask the agent to explain to you:

• the basis under which the claim is made, with links to HMRC guidance.

• tax return entries and provide further information (if you want it), about any of the claims made, for example by providing a link to HMRC guidance.

• any areas where the tax treatment is uncertain.

The agent should be able to easily explain any of the above to you.

However, if you still do not understand, ask them to explain again, particularly where claims relate to travel and subsistence, as this is complex, but as a general rule tax relief cannot be claimed on travel from home to the normal place of work. This is known as ordinary commuting.

What questions/evidence should a compliant agent be asking for in relation to these claims?

A tax agent with high ethical and professional standards (for example, those that are members of a professional body and have signed up to the Professional Conduct in Relation to Taxation) should be taking steps to assure themselves that tax refund claims are valid. This is so that they can provide a proper service to their clients and act in good faith towards HMRC.

They may do this by:

• doing a proper fact find – for example asking you to complete a questionnaire to find out more about your circumstances including your work and any other income you may have.

• asking more questions. Although agents are not required to audit figures or information provided, they must not present an incorrect or misleading picture to HMRC or put a position forward that has no sustainable basis. This means that some agents will want to ask further questions to ensure you understand what information is relevant and that they understand your position;

• asking for supporting evidence, for example receipts for travel and subsistence claims or certificates of shares in cases where you claim to have made an investment. If you do not have all your receipts, usually, a sample will be acceptable or an entry on a bank or credit card statement may suffice;

• asking you to review your tax return before it is submitted and checking that you understand the entries on the tax return;

• obtaining evidence of your approval of the claim.

HMRC say I have been set up as self-employed to claim the refund – but I don’t have a business

It is possible that an unscrupulous agent might tell HMRC something that isn’t correct, for example by suggesting you have a business when you do not. However, often there is just a misunderstanding about the difference between Self Assessment and self-employment.

People often think of the Self Assessment system as being the process by which self-employed people report and pay their taxes. If a tax agent has used the Self Assessment system to make claims, then people may mistakenly believe it had something to do with self-employment. This is probably not the case – the Self Assessment system is also used for many other reasons, for example to reconcile someone’s tax position where there is a complexity or where someone wants to claim tax relief for employment expenses worth over £2,500. As explained above, it would be relatively rare for an employee to incur employment expenses worth over £2,500 – the exception might be employees who travel a lot in the course of their work (as opposed to getting to work) – care workers for instance who move from client to client using their own car and who are not fully reimbursed by the employer. 

HMRC paid out the claim – so I must have been entitled to it?

No - receiving a refund from HMRC does not mean that HMRC agree with the refund claim. HMRC operate a ‘process now, check later’ system for refunds to help them process refunds quickly. This means that HMRC do not fully consider whether a claim is actually valid before issuing a refund. HMRC may carry out checks on some initial claims, but many claims are processed automatically without anyone looking at them. They may then carry out checks on tax returns at a later date.

Can HMRC ask me for the money back?

Yes – this may not be straight away. In fact, it may be many years later, when you least expect it.

Even though the claim was made by your agent, HMRC say that the claim is still your responsibility and so they will ask you for the money back directly because it is your tax return. We explain below the ways that you may be able to challenge this.

How far back can HMRC go?

Where someone puts in a Self Assessment tax return that HMRC believe contains an inaccuracy that has resulted in a loss of tax, HMRC will normally ‘enquire’ into it.

HMRC usually have a period of 12 months after the day on which a tax return is submitted to notify their intention to enquire into the tax return. Where a tax return is submitted late, this ‘enquiry window’ extends a bit.

In addition to this normal enquiry period, HMRC are also able to make a "discovery assessment" in certain circumstances and demand a refund over a much longer period. How far back HMRC can go depends on the behaviour that caused an inaccuracy. There is a basic period of four years, increased to six years if there was carelessness or to 20 years if the loss of tax was deliberately brought about.

Can I appeal a discovery assessment?

Yes – you can appeal a discovery assessment, either in its entirety or just the numbers that HMRC have assessed.

You can read more about why a discovery assessment may be invalid in our article (although this is related to a different subject, the same principles apply. However, in a refund context, we think HMRC are less likely to get the numbers wrong).

Although whether or not you can appeal a discovery assessment is highly fact specific, you may also want to see if your circumstances are anything like those in this case that went to the First-tier Tribunal. In this case, HMRC issued a discovery assessment to recover tax which had been repaid after a fraudulent EIS claim, made by an ‘agent’ on the taxpayer’s behalf. But the assessments were held to be invalid because the taxpayer hadn’t properly instructed the ‘agent’ to submit a tax return on his behalf – the judge found that the taxpayer ‘had not seen the return, he had not confirmed the accuracy of its contents and he had not given authority for its submission’.

Please be aware that First Tier Tribunal cases do not generally set a precedent – that means that although the parties involved in the case have to follow the decision made by the Tribunal (unless they appeal to a higher court) HMRC are not bound to follow the decision when dealing with other taxpayers. The First-tier Tribunal are also free to decide something different in any other cases (even with very similar fact patterns), although they will usually take seriously and may be persuaded by earlier First-tier decisions on a similar issue. In any case, HMRC may appeal this particular decision to a higher court. However, cases like this one (and, indeed, this one), suggest that the First Tier Tribunal are often more aware than HMRC that the overriding principle that ‘taxpayers are responsible for their own tax affairs’ is an oversimplification.

Can I be charged a penalty and asked for interest?

Yes. If you receive a refund where the amount you claimed was not due, and this was due to an inaccuracy in your tax return, then you:

• will have to pay back the tax refund (likely including the proportion that the agent kept as their fee),

• will have to pay any interest due, and

• may have to pay a penalty.  

HMRC interest rates are linked to the Bank of England base rate. Over the last year, the interest rate for late payment of tax has more than doubled and, at the time of writing, is at 6.75% per year – the highest it has been for a long time. If the amount of the refund is large and was paid out incorrectly a while ago, interest can be a significant consideration.

For information on the penalty position for inaccurate returns, please see our guidance.

What if I can’t afford to pay?

You should be able to make a Time to Pay arrangement. This means you can pay the amount owed over a period – the amount of time depends on your circumstances. For more information, see GOV.UK.

Can I take any action against HMRC?

This is tricky.

HMRC’s overriding general rule is that individuals are responsible for their own tax affairs and indeed, before submitting a tax return, a taxpayer has to ‘declare that the information I’ve given on this tax return and any supplementary pages is correct and complete to the best of my knowledge and belief. I understand that I may have to pay financial penalties and face prosecution if I give false information.’ HMRC also are under a duty to protect the Exchequer and have a wide range of powers that they can use to secure funds and claw back funds that should not have been paid out.

In most cases, this means that you will need to pay HMRC back and then take action against the agent if you feel that they mis-advised you or misled you in some way.

However, if you feel very strongly that HMRC’s actions (or inactions) have contributed to your problems then you can make a formal complaint to HMRC. Sometimes this can result in a compensation payment.

You should set out, in full, your experience and explain why you consider that HMRC have some responsibility for what has happened. There is no right or wrong way of setting things out – just saying things naturally, and letting the facts speak for themselves can be very powerful. This should allow HMRC to gather as full a picture as possible as to the situation and enable them to make any necessary decisions. When writing a complaint, it is always helpful to state clearly what you want HMRC to do in response. 

If you are not satisfied with the reply, you can escalate the complaint to the next stage (called Tier 2). If you are still unhappy with the response, you can ask the independent Adjudicator to review your case.  

In addition to complaining, or if you are unhappy with HMRC’s response to your complaint, you may wish to consider seeking legal advice (either individually or as a group) as to what civil remedies may be available. You can find a consumer solicitor via the Law Society website.  

Can I take any action against the agent?

Some agents will have professional indemnity insurance which usually covers them for giving incorrect advice by mistake. If you think that is what has happened, you can make a claim directly against the agent. You will likely need to get some legal advice about this. You cannot claim via their insurance directly – that is for the agent to do.

You should check if your agent is a member of a professional body. If they are, and you believe they have not upheld the high standards required of them, you can complain to the professional body.  

You can find some guidance on other avenues that you might want to explore in our guidance.

Your guidance says HMRC recently refunded customers of a refund company – TCL Ltd – does that mean I can also get a refund?

No. The issue that led to the refunds in the case of TCL customers is not the same as more recent cases we have heard about.

In the TCL Ltd case the agent appeared to be making valid refund claims on behalf of taxpayers but was using an ‘assignment’ document that the taxpayer had not understood, seen or approved. Assignments used by TCL meant they not only got paid the refund that was directly claimed (for example working from home), but that if HMRC paid out any other, unconnected refunds for those same tax years, they were also paid to TCL. This allowed them to take a fee from those other refunds as well, even though they didn’t do any work in relation to them. HMRC should not have been accepting the assignments and therefore should not have paid out refunds to the tax agent. They should have paid them directly to the taxpayer. Because the assignments were not valid, HMRC decided to pay the taxpayers their refunds directly, as that is what they should have done in the first place. See our news article and press release for more information.

Following a change in the law, it is no longer possible to assign repayments of income tax.

In the cases covered by this article, where claims for work expenses have been made via Self Assessment returns, they are unlikely to involve assignments. Instead, the agent will have filled in the nomination box in the tax return asking HMRC to pay that refund to the agent. This allows them to take their fee, but doesn’t allow them to receive other unconnected refunds.

However, the TCL case and the action taken by HMRC to restore the position of taxpayers and remove the agent from the market, perhaps indicates that HMRC may be starting to recognise they have a role to play in consumer protection.

What more can be done?

Agents are usually an important source of support for taxpayers. However, not all agents are equal – and there are some more unscrupulous agents who do not operate to the high standards that many other agents abide by.

In June 2022, HMRC issued a consultation on protecting taxpayers from repayment agents. They have recently issued a response, summarising the consultation submissions and outlining the steps that they plan to take, over and above banning the use of deeds or letters of assignment for income tax refund purposes (following the TCL case).

You can find a summary of the position and some comments in our press release. In brief we think HMRC need to reduce opportunity and incentive for poor agents to enter the marketplace, do more to check claims and processes used by high volume agents and do more to educate taxpayers around things that look ‘too good to be true.’ As we have said previously in relation to Enterprise Investment Scheme claims, we think part of the problem is the ‘process now/check later’ system and one would hope that HMRC wouldn’t continue to process tax returns from an agent once they suspected that there was a problem with the validity of the claims. Further work should be undertaken by HMRC to identify the characteristics of problematic claims, to allow them to be identified much earlier in the process – ideally before the claim is paid out.