The multimillion-pound service bringing accountancy into disrepute

Tax refund services are an easy money-maker, but customers are getting angry about misleading adverts and HMRC is taking notice.

As many accountants know, claiming a tax rebate on behalf of a customer is a fuss-free process: either direct them to HMRC where they can do it for free via a couple of clicks, or submit the info yourself using all the usual compliance/anti-money-laundering (AML) checks.

Maybe because it is so easy, some firms – many unregulated – are now offering tax refund services, often neglecting AML and taking a sizeable chunk of the customer’s rebate. Indeed, some are charging fees as large as half of the value of the money owed. As Helen Barrett, Professional Standards Manager at AAT says, “It’s big money for not much work.”

Customers are wising up though. Many are arguing they were tricked by unclear advertising which failed to inform them fees would be so high. HMRC is also on the case, recently teaming up with the Committees of Advertising Practice (CAP) to issue an enforcement notice to clamp down on misleading advertising. 

Here, we explain what tax refund services are, along with the checks you should carry out if you wish to offer them yourself.

What are tax refund services?

Tax refund (or repayment or rebate) services are provided by many accountancy firms and other agents in the UK, usually on behalf of individuals who may be owed a refund on overpaid tax from HMRC. Customers may need tax refunded by HMRC for many reasons. This usually happens if they’ve paid too much tax, such as on payment from a job, expenses for working from home, their pension or self-assessment return.

With members of the public realising they can claim unclaimed marriage tax allowance, or tax relief for working from home during Covid, a spate of tax refund services have sprung up in recent years.

Why are tax refund services controversial?

Tax refund services make money by taking a percentage of any tax repayment claimed for their clients. Sometimes this cut can be as much as 50% or more. It can leave customers out-of-pocket, says Barrett, who notes “some people have signed up expecting a tax refund of £1,000, but by the time the agent has taken their 40% commission + tax, the customer is left with just £200.”

Many members of the public don’t realise that they can claim a tax refund themselves by using the portal on HMRC’s website. Others, says Barrett, have been hoodwinked by websites which “shout about getting a tax refund from HMRC, but bury the info they’ll take half your claim in the small print… They have no idea what commission or percentage the agent will take.”

Processing tax refunds for the public might be lucrative work for agents/accountants but it’s a relatively quick and effortless procedure. This has led many to be blasé about the compliance checks they should be making on customers, such as AML.

“Many of these agents are carrying out AML and collecting the client’s photo ID after they’ve procured the tax refund, when they should be doing it well before obtaining any money from them,” says Barrett. “If you’re an accountant regulated by AAT, we’d expect the same AML checks as any other procedure.”

“We’d also want them to consider the code of ethics at all times,” she adds. “In terms of principles, act with integrity, behave professionally and be transparent about what you’re doing. This includes letting the client know what they’re signing up for.”

Occasionally, firms can fall foul of authorities. Last year, tax rebate firm Tax Credits Ltd was closed by HMRC after ignoring their AML measures and using adverts which had similar green fonts to official HMRC adverts. The vague terms and conditions on Tax Credit Ltd’s website also meant many customers didn’t know what they were signing up for.

If AAT suspects any members are scrimping on their AML or misleading the public, it will act. Says Barrett: “If there’s a breach of the code of ethics, or we find out you’re not doing your AML, or if we get a complaint about a member not being transparent about their fees, we’d investigate it as professional misconduct.”

Are these services legal?

Put simply, yes. “Sadly, these firms can charge what they want,” says Barrett. “We’ve had people call AAT asking if we can ask these firms to give them the money. However, if they’ve signed up for it, there’s little we can do. It’s like them paying to use cowboy builders for their house extension.”

Because the contract the client has signed with the tax refund company is legally binding, HMRC is obliged to pay personal rebates directly to the agent (rather than the individual).

But being negligent about AML is not legal and could result in some harsh penalties. At best, a disciplinary remand from AAT; at worst, a fine or custodial sentence.

 “Your client could be a criminal,” points out Barrett. “And if you’re obtaining a tax refund for them without asking who they are through due diligence/risk assessment, you could be obtaining a tax refund for criminal money. This means you’ll be part of their crime.”

Would tax refund services still be profitable with the required AML checks?

When it comes to those currently ignoring their AML obligations, Barrett thinks not. “We appreciate AML is time-consuming – the average professional service firm spends four days a month on compliance according to the SRA,” she says. “If they did their compliance checks – such as obtaining passports, utility bills and doing a risk assessment – it would slow them down, impacting their income. The fact is that it’s the law, so they have to do it.” 

What is HMRC doing?

In December, the HMRC and CAP (which writes the codes advertisers need to follow) issued a joint enforcement notice warning tax refund firms (and their advertisers) that they must take steps not to mislead the public through their ads.

Adverts will need to inform people about any fees payable and that HMRC can provide this the service to customers for free. The enforcement notice also states that “They mustn’t imply that their ‘online calculator tools’ can determine if consumers are entitled to a refund by oversimplifying the rules.”

What could stem the tide of tax refund companies?

A regulated accountancy industry in the UK would help: at present, a third of the sector is unregulated, meaning anybody can offer tax refund services without having a qualification or being a member of a professional body such as AAT.

“The unregulated sector is a minefield, which has led to this lack of transparency,” says Barrett. “Whereas AAT members adhere to a code of ethics and our disciplinary/policy framework, so if somebody does have a complaint against them, we can investigate it.”

If customers wish to hire a firm to claim their tax refund on their behalf, Barrett recommends they find one via AAT’s directory of licensed accountants/bookkeepers.

Tax refund services checklist

Are you running – or planning to run – a tax refund service? Here are the mandatory procedures all AAT members must follow.

• Carry out customer due diligence (CDD) to assess the legitimacy of your client’s financial activities including background checks and business documentation such as financial statements and annual returns.
• Verify your client’s identity, which should include photo identification and a utility bill.
• Undertake a client risk assessment, which should include the client’s background, their business activities, the jurisdiction they operate in, plus whether they are a politically exposed person (PEP).
• Putting a signed letter of engagement in place.
• Ensure your advertising of the tax rebate services corresponds with HMRC/CAP’s enforcement notice, which includes:
  • Detail any fees the customer will be paying.
  • Inform customers they can also claim tax refunds directly through HMRC.
• Ensure the terms and conditions of your service are clearly defined and meet AAT’s Client Care policy.
• Whenever managing clients’ money, members should set up a Client’s Money Account (putting clients’ money into your usual business account will violate AAT’s Client Money Policy).
• Abide by AAT’s Code of Professional Ethics at all times.

Here’s more on AML procedures.

If you have any questions about tax refund services, contact an AAT adviser on +44(0)20 3735 2468 or email [email protected]

To discuss any questions you may have on AML procedures, call +44(0)20 7367 1347 or email [email protected]

Christian Koch is an award-winning journalist/editor who has written for the Evening Standard, Sunday Times, Guardian, Telegraph, The Independent, Q, The Face and Metro. He's also written about business for Accounting Technician, 20 and Director, where he is contributing editor.