Tax specialists at the Low Incomes Tax Reform Group (LITRG) have warned taxpayers who use third-party tax refund companies to reclaim tax money from HMRC to do so cautiously.

Although taxpayers can apply for a refund directly from the Government, some prefer to use agents to prepare their tax refunds only to discover their claims are invalid and have to subsequently repay HMRC plus interest.

As well as requesting repayments from taxpayers, HMRC can also issue penalties and potentially claim any overpayments dating back 20 years.

Furthermore, tax refund agents usually take a percentage of the refund as commission from taxpayers, even if the refund is ultimately unsuccessful.

To help taxpayers avoid invalid claims, LITRG has published some key information for consideration before applying for a tax refund.

1. Choose an agent carefully. LITRG stresses that while most refund companies are completely legitimate, others may not be. Taxpayers must carefully read through any terms and conditions set out by a company.
2. Carefully check your claims. Legitimate agents will ask for proof to support your claim. Once you have given it to them, you will then have to review your claim very carefully.
3. You're responsible for your tax return. Even if you use an agent, receive payment and settle the agent's fees, you will have sole responsibility for any repayments to HMRC if your claim is invalid.
4. Do not share your Government gateway details. A good refund agent will have their own software, so you should not have any need to provide your details.
5. If it looks too good to be true, it likely is. If a company approaches you about a tax refund out of the blue, it may not be legitimate. Most tax refunds will not be in the thousands, so don't assume the offer is genuine.

Joanne Walker, LITRG technical officer, said:

"Not all agents are equal, and there are serious consequences of getting caught up with an unscrupulous tax refund company that does not operate to the standards that many other agents abide by.

"If the promise of a tax refund sounds too good to be true, the chances are it probably is. Therefore, it is important that taxpayers think about the risks before using an agent to claim a tax refund on their behalf and take steps to understand more about how the company operates before asking them to act on their behalf."

HMRC cracks down on dodgy companies

Following a consultation, HMRC has dedicated itself to tackling ‘unscrupulous' tax refund companies.

Angela MacDonald, HMRC's deputy chief executive, said:

"It is crucial taxpayers understand the entitlements they can claim directly from HMRC and are properly protected from the misleading tactics used by some repayment agents.

"The greater protections we're bringing in will help to stop people unwittingly losing their hard-earned money to misleading agents."

While the LITRG acknowledges HMRC's steps to tackle these companies, Walker said she thinks "there is more HMRC can be doing to weed out problematic claims before refunds are paid out".

Talk to us about your tax refunds.