Process now, check later regime is open to abuseby
HMRC’s policy of processing repayments and checking them later leaves taxpayers vulnerable to crooked claims agents. But will the Revenue let sleeping dogs lie?
HMRC generally processes repayment claims first and checks the validity of those claims later. This means possibly opening enquiries resulting in repayment, plus interest and sometimes penalties, months, often years, down the line. This is because of the “process now, check later” regime applied to self assessment tax returns as stated in HMRC manual EM0060.
Responsibility for checking the validity of claims is placed with the individual taxpayer, expediting the settlement of tax which, of course, is great for cashflow.
There are many instances where necessity demands it should be done in this order. For example, the self-employed income support scheme (SEISS) awarded much-needed cash to the many self-employed workers struggling to survive when business was forced to dry up at the height of the Covid-19 pandemic. Although invalid claims are now coming to light and HMRC is duly mopping up the repayment spoils, this article does not seek to suggest that legitimate SEISS claimants could or should have waited for HMRC to check their claim before receiving the money.
Open to abuse
However, the regime has unfortunately left the door wide open to shady practice, with crooks and cowboys masquerading as “claims agents” hiding around every corner ready to pounce on the unsuspecting, vulnerable taxpayer.
A recent BBC news story, covered on BBC One’s Rip-Off Britain, dealt with a claims agent by the name of Apostle Accounting. This Suffolk-based firm allegedly submitted bogus self assessment repayment claims for employment expenses on behalf of hundreds of taxpayers. These unsuspecting individuals are now being forced to repay significant amounts to HMRC, totalling an estimated £1.8m.
The real sting in the tail is that, as is often the case with these claims agents, the taxpayers themselves are liable to pay HMRC the repayment amount in full, including the fee that was deducted by Apostle, plus interest. For Lee Osborne, one of the unfortunate Apostle clients, that equates to a total repayment of £21,000 compared to the £14,000 he originally received.
Apostle Accounting accepts no responsibility for wrongdoing, stating that it was made “unequivocally clear” to clients that any inconsistencies in the information provided to HMRC on their behalf might lead to repayment being due.
Tweaks to the system
Measures were introduced in January 2023 to give greater control to taxpayers using repayment agents and better protect them from “unscrupulous tactics used by some operators”. Emphasis on the “some” – let’s not forget that most agents are honest, trustworthy individuals. But could a few tweaks to the filing process deter the dodgy ones from approaching potential victims in the first place?
Although a complete overhaul of the self assessment system and scrapping of the “process now, claim later” regime would be even more pie in the sky than Rishi Sunak’s scrapping of the non-existent meat tax and car-pooling policies, some subtle changes could be made.
HMRC’s internal manual self assessment contains a list of repayment inhibitor triggers at SAM113011. If any of these is present, the repayment leaves the automatic system and processing is delayed due to further checks. So the technology is there, but evidence suggests that many repayments are slipping through the net.
In the self assessment form, supplementary pages SA102 Employment include four boxes (17, 18, 19, 20) for deductible work-related expenses. For Osborne to have been entitled to £19,000 (before deduction of Apostle’s 24% cut) of repaid tax, the numbers in those four boxes must have been sizeable. A simple (hopefully, though I am in no way qualified to comment on IT design) IT control built into the self assessment system could flag amounts in those boxes – and others – above a certain threshold, or percentage of the taxpayer’s income, and subject claims above that threshold to compliance checks before paying out the tax rebate.
This would I’m sure require some time and resource upfront, but once up and running could save hours of HMRC time spent chasing down illegitimate claims, not to mention stress and in some cases financial ruin for the taxpayers.
Rogue traders lurking everywhere
Self assessment is far from the only area of tax where rogue traders take advantage of the “process now, check later” regime. Earlier this year HMRC warned care homes to beware of cowboy agents offering to make illegitimate research and development (R&D) claims on their behalf. The tribunals are peppered with cases of taxpayers being hoodwinked into making invalid stamp duty land tax (SDLT) reclaims where they have been convinced that their residential purchase qualified as mixed-use. In 2022 an electrician in his first year of trading narrowly escaped being stung for a seed enterprise investment scheme claim submitted on his behalf. He had never even heard of such a scheme and the tax refund was paid into a bank account unconnected to the taxpayer without his knowledge.
Not always so generous
In the construction industry, notoriously susceptible to fraud where sub-contractors disappear without settling their tax liabilities, the tax authority has taken a firmer approach. Contractors are obliged under the construction industry scheme (CIS) to pay subcontractors net of a deduction (30%, 20% or 0%) depending on the sub-contractor’s status within the scheme.
Reports suggest that HMRC is toying with the idea of extending a similar concept to the VAT treatment of e-commerce and overseas sellers.
So why is there such an inconsistency between these measures and the “process now, check later” regime?
There is the perhaps cynical consideration of the revenue generated by allowing liabilities to build up. From the moment a claim is paid over to the taxpayer the clock starts ticking on interest, currently set at 7.75%. Meanwhile, the agent’s cut will generally be subject to tax as income for the agent or agent company.
It could well be that between the resources required to implement a new methodology and the inevitable loss of interest income, it is in HMRC’s best interest to let sleeping dogs lie.
If it sounds too good to be true, it probably is
Responding to a request for comment on this article, an HMRC spokesperson told AccountingWEB:
“Our advice is consistently clear - people should always be cautious about promises of easy money, and if it sounds too good to be true, it probably is. Taxpayers remain responsible for any claims made on their behalf and HMRC can review claims from previous years to identify any errors, allowing us to collect the right amount of tax required by law.
“Anyone concerned about their tax affairs should contact us directly without delay - we’ll do everything we can to support taxpayers who engage with us to get their tax affairs in order, including offering payment plans.”
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Consulting Tax Editor for AccountingWEB.
I have spent the last 10 years teaching the accountants of the future, mainly ICAEW advanced level corporate reporting. I also cover tax news and write and edit tax updates for other publishers including PTP Limited.