Owed a tax rebate? Beware the companies that charge up to half to claim it for you

People are losing hundreds of pounds by opting to use third-party companies to claim tax rebates rather than going directly to HMRC, a Which? Money investigation has found.

We also found instances where customers are not given the full picture of what they're signing up for, and a general lack of scrutiny over how these companies are operating.

Here, Which? reveals what you should watch out for before signing up to claim a rebate through a third-party company.

What is a tax refund company?

If you're eligible for a tax refund, you simply need to contact HMRC. The full amount will be paid directly to you, without you needing to pay any fees.

Tax refund companies offer to remove the hassle from this process. They can inform you about your eligibility to make a claim, and then make the claim on your behalf.

If the claim is successful, HMRC will usually send a rebate cheque to the company. It takes its fee, and pays you what's left.

It's a thriving industry; we counted 208 firms with 'tax reclaim', 'tax refund', 'tax claim' and 'tax rebate' in their names on Companies House.

One in five people told us they'd either been contacted directly by a tax refund company (by email, phone, letter or text message), heard of one by word of mouth, or found one online, according to our survey of 4,000 people in October 2021.

Of those who'd been contacted by a tax refund company, two in five said they used it to claim a rebate.

Fees are high - and sometimes hidden

We took an in-depth look at 14 tax refund companies that either appeared in the results of an online search for popular terms like 'tax rebate' (which gets an average of 40,500 Google searches a month), or that had been flagged to us after someone recounted a negative experience to Which? directly, or publicly on social media.

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.

Firms don't always make it easy to find their charges. Four companies we investigated made no mention of fees on their main website page, or in their FAQs section - only the term 'no win, no fee' was used in some cases.

The Consumer Rights Act 2015 says customers must be charged a 'reasonable price' for a service. However, if a couple were to receive the maximum £1,220 backdated marriage allowance rebate, it's questionable whether a £585.60 fee (48%) is reasonable - after all, the same service is provided to someone who receives a £100 rebate as someone who's owed £1,000.

Tax Credits Ltd, which charges an effective fee of 48%, told us: 'We spend a significant amount on marketing and providing access to this potential tax relief. In many cases it's our advertising, not HMRC's, that makes a person aware of it.

'We then present the claimant with a simple mechanism to access the potential overpayment of tax. Our remuneration is contingent on a repayment being secured, and the amount we retain is reflective of this.'

Unclear terms to watch out for

You could even be charged again in future, regardless of whether a firm carries out further work.

That's down to a contract that customers are typically asked to sign upfront, known as a 'deed of assignment'. This grants permission for a company to operate on your behalf to make the initial claim, which then stays in place unless you ask for it to be removed.

Wyndan Group's terms seem to push this even further: 'You also understand that our fee is due for each and every year you receive a tax benefit from HMRC both monetary or otherwise for the services we initially supplied'.

It isn't clear how far this term would extend. For instance, as the marriage allowance is applied to couples' earnings each tax year, the implication is that you are expected to continue paying Wyndan Group for the entire period you're eligible for the allowance after the firm makes one claim for you.

Are tax refund companies affiliated with HMRC?

When you look at the communications from some tax refund companies, it's easy to see why some customers aren't clear they're dealing with a third party.

One letter we've seen that Rebate Gateway sent a prospective customer bears several likenesses to those sent by HMRC, including similar fonts and the recognisable teal colour.

In bold, it says: 'Our records indicate that you might be entitled to a tax rebate for unclaimed marriage allowance of up to £1,188' - a phrase you'd expect in a letter from HMRC (although the maximum backdated payment you can get is in fact £1,220). It's unclear what Rebate Gateway's 'records' are.

The recipient and their partner are named in the letter, which also refers to an individual voluntary arrangement (IVA) they had in the past. It all combines to suggest authority, and could lead some people to believe they've been contacted by HMRC, rather than a private firm.

What's more, there's no mention of fees, or that Rebate Gateway would lodge the claim on your behalf.

Rebate Gateway then has a section on its website for those who have received a letter. It says: 'We appreciate that receiving a letter out of the blue may be unnerving, but Rebate Gateway are recognised as an agent of HM Revenue & Customs under registration number HY3075.'

Despite being registered as a tax agent, Rebate Gateway isn't an affiliate of HMRC.

Rebate Gateway told us that while it doesn't agree with the points we've raised, it said it was actively reviewing its marketing communications in response to our concerns. It also said it endeavours to ensure prospective clients are fully aware it is a private tax consultancy firm, and that they properly understand the services offered before accepting instructions.

Where can unhappy customers turn?

Tax refund firms aren't regulated so aren't subject to the same rules as claims management firms. They don't need to be registered with the Financial Conduct Authority, so you can't take complaints to the Financial Ombudsman Service.

While you can complain to HMRC, there's little it can do if you've signed a deed of assignment as this is legally binding; penalties and criminal sanctions could be imposed if a company fails to meet its obligations under anti-money laundering systems.

HMRC says: 'We don't accredit or in any way approve agents and take firm action against any not complying with the law. We encourage customers to come to us to make their marriage allowance claim.

'It takes only a few minutes to complete the online application and eligible claims receive 100% of their entitlement. It is important that people thinking of using a tax agent are clear in advance about fees and are satisfied they'll get the service they sign up for.'

If you were led to believe that a third-party company was an official government website, you can make a complaint to the Citizens Advice Consumer Service on 0808 223 1133.

How to claim a tax rebate with HMRC

You could be owed a tax rebate for - among other things - a past PPI payout, expenses arising from maintaining a work uniform, or tax that's been overpaid if it turns out you're eligible to claim marriage allowance.

If you're eligible, you can claim directly from HMRC for free.

Depending on what kind of tax rebate you're applying for, you'll likely need the following information:

• your National Insurance number
• your P60
• your UK passport details
• your UTR number, if you pay tax by self-assessment
• details of loans, credit cards or mortgages that appear on your credit file.

Find out more:tax-free income and allowances

The full investigation appeared in the January 2022 of Which? Money magazine. Try Which? Money to have our impartial, jargon-free insight delivered to your door every month.