Furlough fraud and Government clawback: managing the risk
HMRC has the right to go back up to five years when considering businesses’ (including retailers’) records relating to the Coronavirus Job Retention Scheme (the “furlough scheme”) and will be able to clawback funds which have been claimed in error, or fraudulently, under new powers contained in the Finance Bill 2020, which is expected to become law in the latter half of 2020.
Why does it matter?
The furlough scheme is susceptible to fraud, for example, furloughed employees, or their employers, may be the victim of a phishing scam or ID theft by a third party.
Under the Criminal Finances Act 2017 (CFA), it is an offence for a corporate to fail to prevent a person associated with it from facilitating tax evasion. There is no requirement that the corporate assisted with the tax evasion, or in fact even knew it was happening. There is a defence if the corporate had in place reasonable procedures to prevent those providing services for, or on its behalf, from dishonestly and deliberately facilitating tax evasion. The reasonable procedures should be formulated using the following six guiding principles:
1. risk assessment
2. risk-based prevention procedures
3. top level commitment
4. due diligence
5. communication (including training)
6. monitoring and reviewing
HMRC provides its own whistleblowing facility for suspected furlough scheme fraud and it is understood that the number of notifications has increased dramatically in recent weeks.
Under the proposed new powers contained in the Finance Bill 2020, HMRC will be able to recover in full all furlough payments that the recipient was not entitled to. In addition, HMRC will be able to impose a 100% penalty if there has been deliberate conduct. The employer must pay funds to furloughed staff within “a reasonable period” and failure to do so can result in the payments being clawed back and penalties imposed.
Where a business or individual becomes aware that they received a furlough scheme payment in error, HMRC must be notified of the mistake within the time limit. The proposed deadline for notifying HMRC is the earlier of: (1) 90 days from Royal Assent to the Finance Bill; and (2) 90 days from the receipt of the payment (with special rules for CJRS payments). A failure to notify of an incorrect payment within this timeframe can result in the imposition of a 100% penalty.
The originally proposed timeframe was 30 days, but, following consultation, it was extended to 90 to allow for proper consideration and reporting. However, as the timeframe begins to run from the date of Royal Assent (currently estimated to be towards the end of July), there is potential for payments made in the later part of the re-jigged flexible furlough scheme to require notification within a much more condensed timeframe. As the flexible furlough scheme has more unknowns, there is a greater risk that a decision is made, resulting in an incorrect - and therefore notifiable – payment which may not be notified within 90 days of Royal Assent, triggering the clawback plus a 100% penalty for failing to notify.
What action should you consider?
The levels of furloughing in the retail sector means there is a greater risk of mistaken or fraudulent furlough payments being made. The reputational damage caused to a business as a consequence of it being involved in an investigation into suspected fraud (even if the business is completely innocent) should not be underestimated.
In order to minimise the risk of an investigation, we suggest you consider taking proactive steps, including:
- conducting a risk assessment to put in place reasonable and proportionate preventative procedures;
- assessing how associated persons operate in order to reduce the risk of exposure to furlough-based facilitation offences through the act of an associated person;
- checking carefully that they are eligible for any furlough scheme payments that they have received and have not over claimed (HMRC should be notified of any payments received in error);
- maintaining clear, auditable records to support the validity of furlough payments, such as details of amounts paid, which employees were furloughed (and who was carrying out any work performed); and
- having in place a comprehensive ‘dawn raid’ policy should the business be raided by HMRC. RPC has prepared a guide which can be found here.