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BLOG: Has HMRC closed a window but opened a door?

01/11/2020

The furlough scheme was established at the start of the Covid-19 pandemic and many employers have taken advantage. There is however a potential problem in that the rules for admission were perhaps not well thought out.

Mark Watson considers the implementation of the scheme now that it has ended, and the consequences for those who wrongly claimed grants.


At the beginning of the coronavirus pandemic in March 2020, a large number of types of tax relief and business support schemes were introduced in order to attempt to help and protect businesses and individuals from the economic consequences of what was about to happen.

Of those schemes, the Coronavirus Job Retention Scheme (“CJRS”) was the scheme that cost the Government the most amount of money. This scheme allowed a business to retain an employee even if that employee had no, or very limited, work due to Covid-19. 

After a successful application, that employee was placed on furlough and the Government covered part of the employee’s wages. The amount covered by the Government and rules have changed during the year. 

The awards came with the requirement that the employee must not generate any income, either on their own initiative or at the request of the employer. 

£35.4 billion has been paid out under the scheme.

In an environment where businesses have experienced dramatic falls in income, the scheme was open to abuse. 
Meg Hillier MP, the Chair of the Commons Public Account Committee said: “Our finding of the astonishing lack of economic planning for a pandemic shows how the unacceptable room for fraud against taxpayers was allowed into the government’s hastily drawn up economic support schemes….I would like to see the government publish a list of the companies which received furlough money. Where taxpayers’ money is being used, transparency should be a given.”

HMRC has told the Public Accounts Committee that it estimates that 5-10% of the awards under the scheme have been awarded wrongly, which would amount to approximately £3.5bn.

This figure should be seen in the context of the Public Accounts Committee’s estimate of £30bn as the overall loss in tax revenue in 2019 through error and fraud. 

Combined with what will be the estimate for other revenue loss through error and fraud in 2020 – a year when the country’s economy has shrunk – and the impact upon public finances will plainly be material. 

HMRC has been given very wide-ranging powers to pursue those who have received wrongfully awarded sums under the CJRS, over and above the possible criminal sanctions that were already available to it. 

The Finance Act 2020 (“the Act”) received Royal Assent on 22 July 2020. This unassuming title belies its true intentions and content. 

Where businesses have received a wrongly claimed furlough payment, the payment will be taxed at a rate of 100%, allowing HMRC to recover the payment through tax pursuant to Schedule 16 of the Act. 

The legislation also has more serious, and far-reaching consequences for businesses and for directors. 

HMRC can now compel employers to provide information regarding incorrect claims and, where appropriate, can hold directors personally liable for the tax where the business is no longer solvent pursuant to s100 and Schedule 13 of the Act

Further, in Schedule 16 of the Act, there is now a burden placed upon businesses, in a similar manner to the Bribery Act, to notify HMRC of any awards that have been wrongly claimed.

It is important to note that these wrongly awarded sums do not have to be fraudulent to be caught by the Act. 

A 90-day amnesty period, or “correction window” was introduced, which  concluded on 20 October 2020. 

The correction window is the latest of either:
    
1.    90 days from the receipt of the grant;
2.    90 days from circumstances changing meaning the employer is no longer entitled to retain the award; or,
3.    20 October 2020. 

The Act may have serious implications for employers who fail to properly review the awards they have received. 

Each employer who has received a grant now has the positive duty to declare any wrongly received awards and any failure to declare, under the Act, will be treated as deliberate and concealed by virtue of Schedule 16. There is no statutory defence. 

HMRC has recognised that not all of the wrongly awarded sums have been obtained dishonestly, and in certain “nudge” letters that HMRC is sending to employers, they have said “mistakes happen”.

3,000 organisations have been written to, per week, from 20 August 2020 asking the employer to check the accuracy of the claims made. 

At the least serious end of the actions available to HMRC, the full amount of the award can be recovered by way of a tax assessment. This has to be paid within 30 days or further penalties will apply. 

More than £215 million received through the CJRS not wanted or needed has already been voluntarily returned by various employers.

In addition to the assessment, however, a penalty may also be charged, which can be up to the full amount of the award. There will be adverse reputational consequences as well for the business.

At the more serious end, arrests and investigations into alleged furlough fraud have already begun. 

A 57-year-old man has been arrested as part of an investigation into an alleged furlough fraud valued at a suspected £495,000, along with eight other men across the West Midlands as part of a linked investigation.

A company director and accountant have also been arrested over allegations of a £70,000 abuse of the CJRS. The accountant was arrested on suspicion of fraud by false representation, fraud by abuse of position and money laundering before being released under investigation, while the company director was arrested on suspicion of fraud by false representation and money laundering.

Employees who have been pressured to work by their employer whilst a claim has been made covering their income may fall foul of the rules themselves, and even expose themselves to criminal proceedings. 

Even those employees who are trying to help their employer by doing some work or even having virtual team meetings to raise staff morale may be in breach as they would be undertaking work duties. 
  
If such an individual failed to notify HMRC, then under the Act their failure to report themselves would be deliberate and concealed as per Schedule 16. 

HMRC have said that where there are genuine mistakes, they will be lenient. Failure to notify, however, is not a mistake. 

Where an employee had failed to notify and gained salary-equivalent payments under the scheme to which they were not entitled, they would risk committing an offence under s327 of the Proceeds of Crime Act 2002, or an offence under the Fraud Act 2006. 

It is likely that once we are through the pandemic period, there will be a significant wave of furlough fraud prosecutions. HMRC will wish to establish a strong public interest in prosecuting offences in this category, and it is unlikely that alternatives to prosecution such as Deferred Prosecution Agreements would be considered. 

The language in the Act of “deliberate” and “concealed” implies that the approach is going to be aggressive. 

Now that the window has closed, business should scrutinise their claims under the CJRS to ensure compliance and seek legal assistance immediately should the claims fall foul of the Act.


Mark Watson is a member of Carmelite Chambers who specialises in financial crime and was called to the Bar in 2011. He defended in the largest counterfeit cigarette production operation that HMRC has ever prosecuted.

01/11/2020

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