High Volume Agents (HVAs) who claim a significant number of tax repayments each year have been asked to sign a Memorandum of Understanding (MOU) by HM Revenue & Customs (HMRC). The MOU sets out 9 Agreements HMRC expects the HVA to adopt going forward, which are a combination of educational and compliance based assurance checks.
A typical HVA/HMRC MOU reads as follows (noting that the purely fictitious practice name A.N. Accountants Ltd has been inserted to protect the confidentiality of those firms who have signed an MOU):
On the xx xxxxxxxx 20xx, HMRC contacted A.N. Accountants Ltd outlining the risks they had identified when considering the returns submitted in significant numbers that result in a repayment of tax by a number of tax agents.
A follow up meeting was held on xx xxxx 20xx between HMRC and A.N. Accountants Ltd to discuss the risks. An amendment programme was agreed by A.N. Accountants Ltd.
In order to reduce the risks that submitting high numbers of income tax returns that result in an income tax repayment to HMRC, A.N. Accountants Ltd have agreed to a number of changes to their business operation.
- A.N. Accountants Ltd will undertake an exercise that will raise awareness with all their clients on their obligations to maintain and preserve adequate business records to support the submission of an accurate return.
- Prior to the submission of an income tax return A.N. Accountants Ltd will seek assurances from their clients on the records that are available to support the figures to be submitted. Some testing of this assurance should be embedded into their processes and include sample requests to see the records.
- Before submission to HMRC, the clients will view the completed returns and authorise with their signature their acceptance to the submission of the returns in the agreed figures.
- Particular attention should be given to obtaining supporting evidence for business expenses and CIS income and deductions.
- Checks to ensure the statutory tests are met and the expenses have been incurred and are wholly and exclusively for the purpose of the trade should be carried out.
- A.N. Accountants Ltd will not make any arbitrary claims for expenses for clients. A robust discussion should be made and records kept of all interactions to support any figures in the return.
- No return on behalf of a subcontractor, who has not maintained any business records to evidence levels of expenditure incurred, should be submitted with the expenses to turnover ratio exceeding 10%.
- A return on behalf of a subcontractor reflecting the expenses to turnover ratio in the range 10% to 20% should be based on kept records. Sample assurance tests should have been undertaken to confirm records are held to support the returned figures.
- Any return on behalf of a subcontractor reflecting the expenses to turnover ratio over 20% should only be submitted if all the records have been seen and are available to support the figures shown on the return.
Signed…………………………………………………On behalf of A.N. Accountants Ltd
Signed…………………………………………………On behalf of HMRC
Some HVAs have refused to sign an MOU and have promptly had a repayment stop placed on the SA Returns they submit to HMRC.
Other HVAs have highlighted the potential loss of clients if such stringent agreements are enforced. In response, HMRC has sought to reassure HVAs by saying in subsequent correspondence:
- Any client who chooses not to stay with you, moves to another agent, or files returns personally without an agent, will not be offered the benefit of these terms;*
- HMRC has the ability to identify and track returns filed by all agents and taxpayers.
HMRC has given an undertaking to review the returns of any clients who leave you as a result of this engagement. Where we believe the return is incorrect enquiries will be made to ensure the returns are corrected and it is likely we will seek to reopen all appropriate earlier years, and seek interest and penalties on any additional duties found to be due.
* The terms being a two-year adjustment for 2011/12 and 2012/13 for tax, class 4 national insurance and interest only.
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy Team.