Tax  

Should your client use a tax refund company?

  • Describe how tax refund companies work
  • Explain how they can be problematic
  • Identify why deeds of assignment can be problematic
CPD
Approx.30min
Should your client use a tax refund company?
Photo by Nataliya Vaitkevich from Pexels

We are not alone in witnessing increasing numbers of taxpayers contacting us who claim to be duped by tax refund companies.

This explainer sets out how tax refund companies work, what the benefits and pitfalls are and what to look out for if you want to use one. 

What are tax refund companies? 

Tax refund companies are businesses that help people who are due a tax refund to claim the tax refund from HM Revenue & Customs. Such people will include, for example, employees who have spent their own money on tax deductible employment expenses, people who can claim the marriage allowance, and people who are due a tax refund on their payment protection insurance compensation (where the flat rate 20 per cent tax deducted on the interest element may be too much).

These companies generally make their money by making high volumes of low value, simple claims that they charge fees for. Running a tax refund company is legitimate and it can provide a useful service for those who choose to pay someone to deal with their refund claim. But, while some tax refund companies make sensible claims with transparent fees and processes, others are less scrupulous. 

Do I need to use a tax refund company?

No. You can make claims directly to HMRC free of charge. The process is fairly simple and we have lots of guidance on our website to help you.

How do they work?

Tax refund companies are mainly online businesses, typically with ‘fun’ and appealing websites. Some companies claim they are ‘approved’ by HMRC or some kind of recognised provider of the service; this is just likely to mean they are registered as an agent with HMRC.  

Often they target people on social media or pay for advertising space so that they appear at the top of search engine results above organic search results. 

The companies will usually ask individuals to complete a short questionnaire and from that decide if they are owed any money back. This work tends to be done for free as a low-risk hook. If they find a refund is due, then the tax refund company will charge the individual for helping them. 

What do they charge? 

Costs vary, but there are often two elements: a minimum admin fee, and a charge based on a percentage of the refund. We have seen percentage fees of up to 48 per cent (plus VAT) for relatively straightforward claims. 

Often the two fee elements taken together will outweigh the tax refund if it is only small. Sometimes they will also add on charges, for example, for transferring money into a bank account, which they are not always transparent about. 

A percentage-based fee can in theory protect clients who end up entitled to only small refunds. But particularly if it is a large percentage, it can incentivise poor practice on the part of the refund company, with the most unscrupulous companies putting in inflated or fraudulent claims, for example.