If you are a CIS subcontractor and you earn £30,000 or less, you will usually receive a tax refund at the end of each tax year. This is because the 20% that is deducted from your income would be more than the tax you actually owe, based on the income and expenses shown on your tax return.
Scam risks
Because CIS subcontractors often obtain tax refunds they can be a target for unscrupulous advisers. Such advisers might inflate the tax refund due by intentionally filling out the expenses portion of the tax return incorrectly, by adding in false expenses or non-tax deductible expenses. In doing this, they will increase the tax refund given and often they increase their own fee, if this is a percentage of the refund.
Non-allowable expenses they might include could be mortgage interest on a domestic mortgage, accommodation and travel costs for private travel, or home to office or workshop travel.
Sometime later, even after 12 months or more, HMRC can challenge these figures and seek to reclaim the fraudulent refund. By this time, the adviser will be unavailable, having closed business in that area and moved on somewhere new.
By law, you are responsible for the actions of your adviser. 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 your tax refund as a subcontractor to be paid to themselves. This is so that they can then deduct their fees before passing the balance to you. They can 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. In many cases the subcontractor will not know the size of the refund that is due, so are happy to receive whatever the firm says they are owed.
In extreme cases, the firm may even send in tax returns without your knowledge. If refunds cover a number of years, you could be missing out on refunds that you are owed and may see little or nothing of it.
How to spot a scam risk?
There are a few warning signs that the adviser you are dealing with does not have your best interests.
- 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 have expenses on your tax return that you do not recognise
- You are not asked for receipts for your expenses or income
- Communication with the firm is only by phone and there is no printable record of advice you have received
- The firm does not follow standard 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 you do not receive anything about how their fees are calculated.
- The firm has been recommended to you because it always gets ‘big refunds’, or they are advertised as a ‘refund specialist’. The best adviser is the one who gets you the right refund, not the biggest one, as if the refund is not correct you will need to pay back the difference.
- 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 to their honesty and capability. It also gives you somewhere to go if you are not happy with the service you have received.
It is vital that you get your advice from a reputable and regulated accountant. The major reputable tax and accounting bodies in the UK are:
- Chartered Institute of Taxation – www.tax.org.uk
- Institute of Chartered Accountants in England & Wales – www.icaew.com
- Institute of Chartered Accountants of Scotland – www.icas.com
- Association of Chartered Certified Accountants – www.accaglobal.com
