HM Revenue & Customs (HMRC) increased the number of High Volume Agents (HVAs) it targeted in 2012/13.
111 opening letters were issued, along with a Memorandum of Understanding (MOU) for signature. 67 HVAs have since returned signed MOUs and 40 have received follow-up visits (Source: Freedom of Information reply from HMRC-July 2013).
The opening letters issued by HMRC to HVAs in February earlier this year were typically generic in style and followed this format:
Dear Sir or Madam
Self Assessment Returns resulting in a repayment – Sharing risk concerns
I am writing to you on the basis that you submit significant numbers of Income Tax Self Assessment returns on behalf of clients resulting in a repayment of tax.
This letter does not constitute any type of formal enquiry or compliance check on you or your clients. We are only looking to work with you, with your co-operation, to explore new ways of tackling risks that may feature in the returns you file.
HMRC has already met with a number of agents who submit a high volume of returns generating repayments of tax. On review we found many of these returns submitted to be incorrect. The returns included either non allowable expenditure or estimated expenditure which could not be adequately vouched or rationalised. Such returns typically resulted in expenses to turnover ratios falling outside of the benchmarks we would normally expect to see in particular trade sectors.
The issues identified replicated across a significant client base repeated annually can represent a significant loss of duty to the Exchequer. To illustrate the size of the problem, the tax at risk projected from the visits we have undertaken this year stands at over £57million.
There will generally be a direct correlation between the completeness and accuracy of a return and the quality of the records that underpin it. We have asked agents to remind their clients of their obligations on record-keeping. We have asked that they do all that they can to ensure these requirements are met to at least the minimum expected standard. Our aim is to ensure all returns are based on kept records. You may already be aware that HMRC provides guidance on record-keeping on our website.
We have worked with the agents going forward to improve their processes to ensure appropriate standards of basic governance are applied. This means that before submission the agent is satisfied that returns are soundly based on kept records and meet statutory requirements.
What HMRC have identified so far
Our work so far has identified some basic issue concerns:
- The inconsistent application of the statutory wholly and exclusively incurred for the purposes of the trade expenses tests.
- Speculative, estimated or round sum non-allowable expenses claimed routinely without any attempt by the agent to test their validity.
- Little, often no assurance work carried out before the submission of the return to HMRC.
- Returns filed with an absence of evidence to support entries in it or where that evidence was available insufficiency of checking to validate.
While we do not wish to prejudge the work of your practice what I can say is that in a significant proportion of the agents we have visited we have agreed an extensive amendment programme on the many incorrect SA Returns that have been filed. This has resulted in the recovery of over-repayments and impacted on the agents and their clients.
Going forward we have then reached agreements with the agents we have met in order to reduce the risks that the issues identified will be repeated. The principles to be followed have featured in a Memorandum of Understanding.
Why are we writing to you now?
We are committed to addressing the risk that inappropriate repayments might be being paid out. To this end we have identified a number of further agents who we have not yet met, who submit significant numbers of returns which result in the repayment of tax. Your practice has been identified on this basis.
This will be an ongoing process. We intend to identify then engage with all Tax Agents who file returns that appear to meet our risk criteria.
Memorandum of Understanding
Initially we now ask you to confirm that you already, or if not will, apply the principles of the enclosed Memorandum of Understanding (MOU). This we believe will give HMRC some assurance in the short term that the risks we have identified will be minimised. Our aim is to significantly improve the correctness of the high numbers of repayments being issued by HMRC.
If you agree I would like you to sign and return the enclosed MOU document. The returns you submit in the 2012/13 filing programme will then continue to be handled under business as usual and any repayments will be processed following our usual security procedures.
Follow Up Visit to You
We intend to follow-up this letter and provision of the MOU with a visit to your business. We will write to you later about that. The purpose of the visit will be to confirm that the principles of the MOU have been applied prior to the submission of all SA Returns filed following the date of this letter. We will be looking particularly for you to show us that you applied these principals (sic) to your 2012/13 ITSA return filing programme.
What outcomes might I expect?
If you apply all the principals (sic) of the MOU going forward there is no reason to expect any significant outcomes will arise from the meeting. You will have some assurance that you meet HMRC’s expectations of the professionalism to be exhibited by a paid Tax Agent.
If any significant issues are identified as a result of our assurance work we will talk about how the position for your clients can be remedied with the minimum impact to your practice. This would include looking to see if any issues could be resolved without the need for HMRC formal interventions for individual clients which, you will appreciate, would be resource intensive for both yourself and HMRC.
Other assistance and Guidance
To assist you with the submission of accurate returns we have produced a number of toolkits. These provide guidance on areas of error that HMRC frequently see in returns. They set out the steps you can take to reduce those errors. The toolkits can be found at
In addition we have produced the enclosed brief guidance for agents preparing returns.
On a general front if you are not already aware almost all of HMRC’s technical guidance to its staff is in the public domain so can be readily accessed. I very much commend you to the Business Income and Employment Income manuals which can be found at
I hope you find this useful.
Am I obliged to engage with you?
The completion of the Memorandum of Understanding is voluntary but if you have any concerns I would be pleased to hear from you to talk these through.
I or a colleague will then call you within 14 days to discuss your concerns so please ensure you leave a contact number.
Our aim is to ensure that:
- All the ITSA returns you submit are based on accurate information provided by your client.
- That you are then satisfied the content of the returns meets all statutory requirements.
- Finally that you hold formal client approval that the information in the return is correct and complete to the best of their knowledge and belief.
We believe returns filed on this basis may be assumed to be accurate unless HMRC have good reason to believe that they are not so. This should avoid the additional intervention costs for you, your clients and HMRC in checking more returns than is absolutely necessary.
As you are aware there are a number of options available to HMRC if you choose not to engage with us. We can:
- Start formal enquiries to test the accuracy or otherwise of a number of your client’s returns, or
- Place a temporary repayment stop on the SA Returns you submit on behalf of your clients until we undertake a number of assurance tests to confirm the returns are accurate and the repayments are due in the amounts claimed.
HMRC welcomes your cooperation in this initiative as an alternative to these alternative options.
The Role Tax Agents Play
HMRC recognise tax agents play a vital role in the delivery of Self Assessment as a tax system. We recognise the overwhelming majority of paid Tax Agents protect their clients’ interests by advising them correctly and representing them in their dealings with HMRC.
Equally we are aware that a small minority of tax agents who get it wrong can affect a large group of taxpayers. We ask only that agents recognise that HMRC needs to be able to deter or detect dishonest conduct and penalise it when it occurs.
Recent Developments Affecting Tax Agents
I am taking the opportunity, no more than that, to remind you that legislation has now been introduced, which provides for a civil penalty, in an amount of up to £50,000 to be charged where dishonest conduct by a paid tax agent occurs on or after 1 April 2013.
Dishonest conduct is where a tax agent does something dishonest to bring about a loss of tax revenue in the course of assisting clients with their tax affairs.
We are committed to helping you so that you can eliminate the risk of being subject to proceedings under this new legislation. This approach is part of giving you that help.
I look forward to working with you and achieving a positive outcome from this letter.
During the follow up visits, HMRC officers have reviewed the HVA’s working papers and paid particular attention to notes of discussions which have taken place between the HVA and their clients. A selection of business records have also been reviewed by the visiting HMRC officers, with those clients claiming an expenses to turnover ratio of 20% or more attracting closer inspection.
Once these assurance checks have been completed, the HMRC officers then compare their notes of what they have seen and make a judgement on whether the terms of the MOU have been complied with. More often than not, the visiting HMRC officers (there are usually a minimum of two) acknowledge progress has been made, but ask the HVA to participate in an amendment programme.
As with the HVA activity in 2011/12, adjustments are usually sought in respect of:
- Cleaning and laundry
- Motoring expenses
- Telephone/mobile costs
- Use of home
If the HVA agrees to undertake an amendment programme encompassing both 2011/12 and 2012/13 Returns, HMRC provide the HVA with an Agent Client Advice Letter to issue to their clients.
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy Team.
- HMRC High Volume Agent activity – 2011/12 (abbeytaxblog.co.uk)