Carousel_Arrow Chat icon_cookie IHT_trust_wills IR35 Combined Shape 2 Group 10 Login Mobile Menu Share Share Email SubMenuMobile Group 9 VAT View_Gallery View_List capital_allow Triangle 2 Copy Close construction cyberpro employment_tax_shares emplyer_solutions entrepreneurs_corps fee_protect Group 7 grant_fund Group i_Clock i_Consult i_Done i_Eligibility_Tick i_Enter i_Filter i_HMRC i_Negative i_Play i_Plus i_Reset i_Support_Legal i_Support_TaxDesk i_Support_VAT i_Tick noun_marketing_1872083 noun_online_2126759 i_download i_meet Group Copy 24 Group 18 noun_electrical_1240755 copy noun_Technology_2125422 noun_Science_2031115 i_tick_bullet_block international_tax patent_box private_client property_sdlt r_and_d reliefs_incentives Search specialist_tax status tax_indemnity valuation YouTube
Markel Tax

18 Dec 2020

Explainer: HMRC’s Approach to High Volume Agent Reviews

In the following article, James Cordiner provides an overview of HMRC’s handling of High Volume Agent (HVA) reviews and how such a review can result in unwanted consequences for the practice and their clients.

Background

HMRC’s review of agents’ processes under the banner of “Sharing Risk Concerns” has been an ongoing compliance project for a number of years.  From HMRC’s perspective, the process has been successful in addressing inflated repayment claims on a large scale, through a collaborative approach with agents and continues to send the message that proper checks and testing of the validity of repayment claims must be in place.

Each year, HMRC targets accountancy practices and tax agents who submit a high volume of Self-Assessment (SA) Returns, which result in a repayment of tax. HVAs, as referred to in HMRC’s Compliance Handbook are targeted due to HMRC’s underlying concerns about the quality of the business records maintained by end clients to support their repayment claims, as well as the work undertaken by the agent in testing the validity of the claim to certain expenses.

In general, HMRC have concerns that the expenses claimed are excessive or estimated resulting in an increased repayment which HMRC will seek to claw back.

The main focus for HMRC is agents who predominantly deal with sub-contractors working in the construction industry as these suffer a CIS deduction on which a repayment is subsequently sought.  They tend to submit high numbers of requests for repayments relating to expenses/deductions incurred in their clients’ trade.  These repayments are, in many cases, made to the agent as nominee from where their fees are then deducted.  In some cases the agent will take a commission based on the level of repayment claimed and HMRC consider these cases to be of higher risk.  Also, there may be little or no face-to-face contact with the clients with most of their business dealings carried out electronically.

In the main, once the review process is complete, HMRC will seek an amendment program for clients where they feel the expenses are overstated and this leads to one or two years being amended with statutory interest applied to the additional liability but no penalty.  The key thing to remember is that this is an informal process, this is not an enquiry into either the agent or their clients.  However, there is the threat that HMRC may choose not to recognise an agent as “trusted” moving forward which would have serious repercussions for the agent’s business.

Unwanted consequences

So, what happens when things don’t follow the “normal” process of an HVA review?

We have seen the situation where HMRC have been unhappy with the progress made in an HVA review and have withdrawn from the process citing a lack of co-operation from the agent.  HMRC have then launched into the formal process of issuing enquiry notices to hundreds of clients over a period of weeks with shorter than normal deadlines to respond.  This situation is overwhelming for any agent business and especially so for an agent working on their own.

This tough approach from HMRC is highlighted below:

  1. A formal S9A enquiry notice is issued to clients in batches with the agent notified of the enquiry.

  2. HMRC issue a request for all receipts/invoices in support of the expenses claimed in the SA Return.  These have to be submitted within a prescribed timescale, we have seen 21 days from the date of the letter being used as a “reasonable” timescale.  Given the delays in HMRC post being received, this can mean that realistically the window to comply is only 7-10 days.

  3. If no receipts are supplied, HMRC will generally allow a non-negotiable figure of expenses equating to 10% of the turnover which is significantly less than the expenses claimed.

  4. Without any evidence in support of the expenses claimed being supplied to HMRC, they see no reason to issue a Schedule 36 information request, and will move straight to assessment based on their view of the allowable sums.

  5. The strict line is that if no receipts or evidence is provided then the expenses will be restricted.  Furthermore, if no evidence is available, HMRC do not consider there are any grounds of appeal against the assessments raised.  This is in accordance with their internal Appeals, Reviews and Tribunals Guidance at ARTG2171 which covers invalid grounds for appeal. If this is the case, there is no opportunity to challenge HMRC’s position other than to appeal to the Tribunal.

  6. Assessments may be made going back 6 years based on careless behaviour. 

  7. HMRC will seek to charge at the very least a careless penalty for the inaccuracies in the Returns submitted. There is the possibility that HMRC could charge a higher penalty if they consider any errors are as a result of deliberate behaviour.

  8. HMRC will seek to wrap up the enquiry process in these cases with just a few letters setting out their view and putting the relevant assessments and penalties in place.  If there are no credible grounds for appeal and no challenge is made to HMRC’s view, the assessments will stand and the enquiry process is concluded.

As you would expect, trying to manage hundreds of these enquiries at the same time is virtually impossible.  The best advice we can give is to fully engage with the initial HVA review process to avoid the potential for this situation arising.

The effect of the review on agents

The HVA review process is quite intrusive and time-consuming for agents.  Non-cooperation with HMRC is unlikely to end well as we have outlined above with enquiries instigated into hundreds of clients simultaneously.   

It is frustrating when relatively low-level claims of a few hundred pounds, which ordinarily would not be challenged by an inspector during the course of an enquiry, are viewed differently.  However, this is small change when compared to the flip side scenario of 90% of clients’ expenses claims being rejected by HMRC.
Clearly, the overriding factor to consider is whether the original expenses claim made in the Returns can be justified with supporting documents.  Where this is difficult, a sensible and realistic adjustment will have to be agreed with HMRC, with a view to achieving the best possible outcome for the clients affected.
Where there are credible arguments to be made on the level of expenses incurred, this will help to minimise the additional liability (providing supporting evidence is available). 

Added to this, where a careless penalty is being sought, this can be suspended with SMART (Specific, Measurable, Achievable, Realistic and Time bound) conditions being put in place. 

It should be borne in mind that there is the right to have HMRC decisions reviewed independently where the opportunity exists, for example, the decision to disallow expenses when a higher figure can be evidenced and the decision not to suspend a penalty.

We also have to consider the use of Alternative Dispute Resolution and/or appealing to the Tribunal where this is appropriate and there is strong evidence to support this action.

The reality is that following an HVA review where an amendment programme is agreed with HMRC or enquiries into individual clients are instigated it is not unusual for the agent to lose a percentage of clients. HMRC are fully aware of this and will keep a close eye on where the clients go next to see if the pattern of higher repayment claims continues which is a point that all clients need to consider.

Assistance available  

Markel Tax has the expertise within their team of specialist consultants to assist with the HVA process. If HMRC’s Tax Agent Initiative Team has targeted you, contact us to discuss how we can assist you through the process to achieve the best possible outcome for you and your clients. 

Please call James Cordiner on 0333 305 3667​ or email him on james.cordiner@markel.com to see how your practice can benefit from our expertise in this and other areas.
 
Tagged HMRC
Next article in series

01 Dec 2020

Our specialist IR35 services