Inflated refunds and unscrupulous advisers
If your profits as a CIS subcontractor are under about £30,000, you will normally get a tax refund at the end of each tax year. This is because the 20% which has been deducted from your income is greater that the final tax and class 4 National Insurance liability based on the income and expenses shown on your tax return.
Because CIS subcontractors often obtain tax refunds, they are a target for unscrupulous advisers. Such advisers might inflate the tax refund due, by including fictitious or non tax-deductible expenses and thereby reduce the taxable profits (and so increase the tax refund given and their fee – which is often a percentage of the refund).
Non-allowable expenses can include mortgage interest on a domestic mortgage, accommodation and travel costs for private travel, home to office or workshop travel, which are not allowable business expenses. Occasionally entirely fictitious expenses are included.
Sometime later, perhaps after 12 months or so, HM Revenue and Customs challenge the figures and seek to reclaim the fraudulent refund. At this stage, the accountant is ‘unavailable’, having closed their business in that area and moved on somewhere new. In law, you are responsible for the actions of your accountant. So you must pay the bills from HMRC or face possible bankruptcy. You may have a legal right against the accountant, but often such firms do not carry the right insurance to pay such a claim.
Often these firms will arrange for the tax refunds of their subcontractor clients to be paid to themselves, so that they can then deduct their fees before passing the balance to you. They do this by asking you to sign a special authorisation on the tax return.
Unscrupulous firms may charge high fees, or even run away with the entire refund, once they have received your money from HMRC. In many cases the subcontractor does not know the size of the refund due, and so is happy to receive whatever the firm says due.
In extreme cases, the firm may even send in tax returns without your knowledge. If refunds cover a number of years it could amount to £20,000 or more, and you may see little or nothing of it.
Watch out for the following warning signs :
- You are not given a copy of your tax return
- You are not given a tax computation that tells you what refund you are due
- You do not recognise the expenses shown on your tax return
- The firm does not want to see receipts for your expenses or your income
- Communication with the firm is by phone and/or there is no printable record of any advice you receive
- The firm does not follow basic professional practices, for example, when you first appoint the firm, there is no letter setting out what the firm has agreed to do for you, and how their fees are calculated
- The firm has been recommended to you because it always gets big refunds; or the firm is advertised as a ‘refund specialist’ who gets bigger refunds. (The best adviser is not the one who gets you the biggest refund; the best adviser is the one who gets you the right refund)
- The adviser is not qualified or registered with a recognised accountancy or tax professional body. Qualified advisers are regulated by their professional institute. This gives added reassurance as to their honesty and capability – as well as giving you somewhere to turn if you are not satisfied with the service you have received
It is therefore important to obtain advice from a reputable and regulated accountant. The major reputable tax and accounting bodies in the UK are: