Taxpayers pursued for scam refund claims

04 May 2022
There is no formal requirement for someone claiming to be a tax adviser to be qualified to do so and, as The Rt Hon Lucy Frazer QC MP noted in last year’s consultation on raising standards on tax advice, there are a “minority of incompetent, unprofessional and malicious advisers whose activities harm their clients, reduce public revenue, and undermine the functioning of the tax advice market”. Two recent cases highlight the plight of taxpayers impacted by this and the need for improvements to tax advice standards.  

In the cases of Shaun McCumiskey vs HMRC and J Huntly vs HMRC, the taxpayers involved an adviser to assist with the preparation and submission of their personal tax returns. Both Mr McCumiskey and Mr Huntly had worked as electricians and needed to declare their income and claim any relevant expenses. However, unbeknownst to them, tax returns were submitted on their behalf claiming income tax relief for investments that qualified for the Enterprise Investment Scheme (‘EIS’) and the Seed Enterprise Investment Scheme (‘SEIS’).

EIS and SEIS are valuable tax reliefs which help encourage individuals to make investments into businesses which might otherwise struggle to raise funds from investors due to the risk involved. EIS can provide 30 per cent income tax relief and SEIS can provide 50 per cent income tax relief in respect of amounts invested into businesses that qualify.

However, no such investments had in fact been made and as noted in his case, Mr McCumiskey had never even heard of SEIS. HMRC did not check the validity of the claims for tax relief, which were sizeable relative to the taxpayers’ annual earnings, and paid out over £30,000 to bank accounts under the control of Capital Allowance Consultants Limited (‘CAC Ltd’) who had submitted the returns in the taxpayers’ names.

Once HMRC spotted its error, it was too late to open an enquiry into all of the tax returns which included the claims for relief. Instead, it sought to rely on additional investigative powers known as ‘discovery powers’ to try and recover the lost tax from the taxpayers themselves. As the title suggests, these powers should only be available when an HMRC officer ‘discovers’ that tax has been underpaid and that is due to careless or deliberate behaviour by the taxpayer or their agent.

In the case of Mr MrCumiskey, it was found that no return had strictly been made by him as his engagement for advice was with a business called Alpha Tax Consultants Limited, whereas it was CAC Ltd that actually submitted the return. There was therefore no valid tax return for HMRC to look into. The judges also questioned whether HMRC could use their discovery powers to make an assessment as there was arguably sufficient evidence for an HMRC officer to open a standard enquiry during the normal 12-month period allowed. The case of Mr Huntly focused on his ability to make a late appeal claim against HMRC’s decision and again found in favour of the taxpayer.

These cases highlight the perils faced by individuals seeking tax advice as no regulation exists to ensure their advisers are qualified and insured. In both cases, the taxpayers were earning relatively modest amounts and HMRC might reasonably have been able to spot the repayment claims made were not legitimate due to the size of the supposed investments made. HMRC has left itself exposed to fraud due to its ‘pay now, investigate later’ approach, making it too easy for tax refund scammers and causing pain for taxpayers who are left holding the bill.