The furlough scheme
The government introduced a number of schemes to protect individuals and businesses due to restrictions resulting from COVID-19. Various grants were made available for different types of business, including the self-employed. The most used and the most expensive scheme is the Coronavirus Job Retention Scheme (CJRS). This allows an employer to keep an employee on the payroll even if they have had no or, since 1 July, limited work to do because of COVID-19 (hence being “on furlough”). The employer can then apply for a grant to cover part of the regular wages for any time spent on furlough. The rules are complicated and have changed a number of times since implementation on 1 March 2020.
However, the government believes that as much as £3.5 billion has been paid out in wrong or fraudulent claims. Below we explore what happens if you wrongly claim under the CJRS. Given the significant investment by the government, we expect that HMRC, which is responsible for administering the grants, will be relentless in pursuing those who have taken unfair advantage of the government‘s generosity and will deploy new investigation and enforcement powers recently introduced under the Finance Act 2020 (enacted on 22 July 2020) to do so.
While we only deal with the CJRS, the ramifications are the same for most of the other COVID-19 support schemes or grants.
What if you have inadvertently claimed under the CJRS and received a COVID-19 support payment which you were not entitled to?
Mistakes happen and HMRC understands that. So, if you have made an error in your claim or you are not planning to use the money provided to pay wages, tax, national insurance or pension contributions then, to avoid a penalty, you must notify HMRC by the latest of the following (referred to as the notification period):
- 90 days after the date you received the grant.
- 90 days after your circumstances changed resulting in you no longer being entitled to keep the grant.
- 20 October 2020.
The new provisions confirm that CJRS payments are revenue receipts chargeable to either income tax or corporation tax in the hands of the employer and so the over–claimed amount must be repaid within “the relevant time period”. If you are a sole trader or a partner, this period ends on 31 January 2022. If you are a company, the relevant time period ends 12 months from the end of your accounting period.
What if you do not repay it or fail to declare that you have been overpaid within the notification period?
HMRC can recover in full the over–claimed amount by way of a tax assessment, which has to be repaid within 30 days (late payment penalties can be charged). HMRC may also charge you a penalty of up to 100% of the amount of the CJRS wrongly received as a punishment for not telling them about the over–claim within the notification period. Importantly, the law states that failure to tell HMRC of the overpayment within the notification period is deemed to be deliberate and concealed. This is the starting point when addressing the amount of the penalty.
Note also that HMRC can seek repayment and penalties against individual partners of a partnership and company officers of insolvent companies.
HMRC has stated that its priority is to tackle deliberate non-compliance and criminal attacks on the system. In some cases, these acts will be considered too serious to just levy a penalty and only a criminal investigation will be appropriate (and indeed some arrests have already been carried out).
What is furlough fraud?
Examples of “furlough fraud” can include:
- Where furloughed employees are asked to do “a little bit of work on the side” to help the company out (conduct that was strictly forbidden by the rules before 1 July), or “helping out” with ancillary work to their mainstream role.
- Claims that have been made for individuals who no longer work for the company, or their return to work from maternity leave or sickness absence has been manipulated in a manner that is in breach of the applicable rules, specifically to benefit financially from the scheme.
- Other red flags are where an employer has claimed furlough payments, without passing on all of the monies to the employee, or where an employer has claimed for furlough payments, but the employees concerned were not aware that the claims had been made and so continued to work as normal.
- Backdating claims.
Moreover, it is anticipated that as the CJRS winds down towards the end of October and since greater flexibility was introduced in July, there is greater scope for “abuse” or erroneous use of the scheme.
What are the criminal offences covering furlough fraud?
There are a myriad of serious offences for which individuals could be investigated and prosecuted. These include:
- Fraud by false representation under the Fraud Act 2006.
- False accounting.
- Conspiracy to defraud.
- Cheating the public revenue.
- Money laundering.
In addition, a corporate may be investigated for the strict liability offence of failing to prevent the facilitation of tax evasion. This is a relatively new offence introduced under the Criminal Finances Act 2017. Recent figures suggest a number of investigations, across various sectors, are underway.
HMRC can use information and inspection powers to check a claim has not been overpaid and that a CJRS payment has been used to pay furloughed employee costs.
It is also expecting to do spot checks on businesses and “whistleblowing” is encouraged. We know that HMRC has been inundated with reports of fraud in respect of this scheme so they are sitting on a lot of information.
They also have the power to arrest and interview individuals.
What should employers be doing now?
Whether erroneous claims were made as a result of a misunderstanding of the rules or deliberately, businesses currently have a narrow window to rectify matters, or risk facing serious consequences. It is undoubtedly time now to audit those furlough payments, and take advice where necessary, to minimise the far–reaching consequences of any claims that with the benefit of hindsight should not have been made. Turning a blind eye or hoping HMRC will not find out is foolhardy and a stance which can lead to a criminal conviction, imprisonment and a damaged reputation.
Nicola Finnerty is a partner in Kingsley Napley LLP’s Criminal Litigation team.