HMRC to clamp down on tax refund companies with shady practices

HMRC has announced a series of measures to 'better protect' consumers from unscrupulous third-party tax refund firms, following a 12-week consultation looking into the companies last year. 

While many firms operate transparently, a Which? investigation found some companies were charging fees as high as 48% of any rebate you receive, and found instances where the details of charges were hidden in firms' terms and conditions. 

We ran a nationally representative survey of 4,000 people in November 2022 and found that 18% of people have, at some point, been contacted by a tax refund company or come across one of these companies online. The main ways people were contacted by them, or found out about them, were by direct email (25%), through online advertising (19%), and a letter through the post (17%).

When asked if they went on to use a third-party company to claim a tax rebate, a third (33%) said 'yes'.

Here, Which? takes a closer look at the changes HMRC plans to introduce, and explains how to claim a tax refund for free.

How do tax refund companies work?

The tax office claims around 500,000 people used a third-party company to get income tax repayments in the 2020-21 tax year. 

Tax refund companies help customers access tax rebates owed by HMRC – in some cases, it might be money people didn't realise they could claim, or they may not want to go directly to HMRC themselves. 

The tax refund companies make the claim on the customer's behalf, and if it's successful, HMRC will usually send a rebate cheque to the company. The company deducts its fee from this amount, and pays you what's left. 

In order for a company to claim on your behalf, customers currently have to sign a 'deed of assignment' – this is a legal document, which can only be revoked with both customer and company agreement. Keeping it in place means the company can take payments from future tax rebates, even if it didn't make the claim for you. 

Our investigation found that customers were often unaware of what they were signing up for. 

In September 2021, the tax authority said it would repay 60,000 people who used the rebate firm Tax Credit Limited, after finding 'insufficient evidence' that people who had claimed through the company were aware they were entering into a legally binding agreement to hand over ownership of their funds.

What's more, as tax refund companies are unregulated, consumers can't turn to the Financial Ombudsman Service if they have a complaint. 

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What changes is HMRC introducing?

HMRC says it received up to 2,200 complaints about repayment agents between January and October last year. The majority of these complaints related to taxpayers not understanding, or not being made aware of, the terms and conditions used by the agent, as well as the use of 'assignments'.

After considering the results of a 12-week consultation, HMRC plans to tackle the issues by:

• Stopping the use of legally binding ‘assignments’: The deed of assignment is a legal contract that grants a company permission to operate with HMRC on your behalf. The fact that it automatically remains in place, and can be difficult to remove, means you could be charged again in the future, regardless of whether a firm carries out further work. 
• Introducing agent 'nominations': If a taxpayer chooses to use a repayment agent to reclaim overpaid tax and wants it sent to the agent, they will now need to make a nomination, which can be cancelled at any time.
• Bringing in a new registration process: Repayment agents are not currently required to register with HMRC, so it's difficult for the tax office to check if they are registered for anti-money laundering supervision and that they meet HMRC’s standards for agents. Further details on this will be announced at a later date
• Updating standards for agents: This includes the need for greater evidence of customer consent, and stricter transparency rules, such as a 14-day cooling off period for customers after entering into an arrangement with a tax refund company. 

Action on misleading advertising

In some cases, taxpayers have reported instances where they believed they were dealing with a company that was somehow affiliated with HMRC – an issue also highlighted in our investigation.

Under the new measures, firms will now be banned from featuring advertising that suggests they are acting on behalf of HMRC.

Angela MacDonald, HMRC’s deputy chief executive said: 'Taxpayers deserve better – we want to make sure they are better protected before choosing to enter into an agreement with a repayment agent. 

'HMRC’s updated standards for agents will level the playing field and provide the benchmark we expect all repayment agents to meet.'

The legislation will be introduced in a finance bill 'as soon as is practicable', according to HMRC.

• Find out more: tax free income and allowances

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Think carefully before using a tax refund company

The rule change around assignments is a positive step forward, but people still need to be wary before signing up with a tax refund company, as there could still be the issue of high fees hidden in their terms and conditions.

We found the fees charged by tax refund companies typically range from 25% to as much as 48% of any rebate you receive – sometimes plus extra admin fees and VAT. We found some companies didn't mention fees at all on their website or in advertising material.

HMRC has not announced any new rules on the level of fees that can be charged by these firms.

Sam Richardson, Which? Money deputy editor, said: 'Which? research has highlighted how people have lost hundreds of pounds after being lured in by third-party companies to claim tax rebates only to be hit with hard to justify fees, so it's good to see tougher rules in place to protect consumers. 

'For those with a rebate to claim, going to HMRC's website directly remains the best and safest option. HMRC will not charge you, it sends all of the rebate and in some cases will do so automatically.'

• Find out more: tax reliefs and how to claim them

How to claim a tax refund directly from HMRC

You'll be owed a tax refund if you've paid too much tax. There are a few common instances where this might happen, including:

• Starting a new job and being on an incorrect tax code
• Receiving foreign income
• Receiving interest from a PPI refund
• Receiving a redundancy payment
• Paying VAT for fuel or work clothing for your job
• Having more than one job
• Only working for part of the tax year
• Being eligible for backdated marriage allowance. 

In many instances, HMRC calculates overpaid tax automatically and sends a P800 form to explain how to claim that money back. 

If this hasn't happened and you think you're owed a refund, you can go through HMRC's step-by-step online process. You'll be asked what you paid too much tax on, before being taken through a series of questions to find out a bit more about your circumstances.