Caught in the act
The furlough scheme has become ‘a magnet for fraudsters’. Adam Craggs and Alice Kemp outline the extensive powers HMRC can muster to investigate ‘high risk’ claims and to claw back any undue payments.
The government’s coronavirus job retention scheme (CJRS), colloquially known as the ‘furlough scheme’, first announced on 20 March 2020 to help protect UK jobs during the global coronavirus pandemic and originally set to end on 30 June 2020, is now due to end on 30 September 2021. Under the CJRS, businesses have been able to furlough staff rather than make them redundant, with furloughed staff receiving up to 80% of their wages, capped at a maximum of £2,500 a month. This is a payout from the government in the form of a grant to employers.
HMRC has reported that, as at 13 December 2020, the total number of jobs furloughed in the UK was 9.9 million, with 1.2 million employers furloughing staff members at a cost of some £46.4bn.
‘High risk’ furlough claims
The furlough scheme, while achieving its aim of helping to protect UK jobs during an exceptionally difficult time, was, by necessity, introduced in haste and with little guidance. It subsequently became complex and technical making it, in the words of HMRC’s chief executive Jim Harra when addressing the House of Commons Public Accounts Committee in June 2020, a ‘magnet for fraudsters’.
The full extent of any such fraud is, by its very nature, difficult to accurately estimate, but according to figures held by HMRC and obtained pursuant to a Freedom of Information request, the number of digital tax evasion whistleblowing reports increased from 66,017 in 2018-19 to 72,617 in 2019-20 and the 2020-21 figures are expected to show a further increase.
Similarly, the number of whistleblowing reports to HMRC concerning suspected fraud has increased from 3,000 reports in April 2020, to an unprecedented 21,378 by January 2021. In September 2020, HMRC confirmed to the Public Accounts Committee that it is currently investigating more than 27,000 ‘high risk’ furlough claims.
Protect, the whistle-blower protection charity, has stated that furlough fraud is the single biggest issue that it has dealt with in its 27-year history and Policy Exchange, a UK think tank, has said that fraud in relation to the government’s various Covid-19 financial assistance initiatives could result in losses to the Exchequer of as much as £7.9bn.
On 8 July 2020, HMRC made its first furlough scheme related arrest of an individual as part of an investigation into a suspected £495,000 CJRS fraud and, on 10 September 2020, HMRC arrested a further two individuals (a company director and an accountant) as part of an investigation into a suspected £70,000 abuse of the furlough scheme. These arrests demonstrate that HMRC is taking abuse of the CJRS seriously and, given the large sums of public money involved, HMRC can be expected to dedicate significant resources to tackling abuse of the furlough scheme.
- lAs at 13 December 2020, the furlough scheme had cost the UK £46.4bn.
- lHMRC has wide powers to obtain documents, communications data and to conduct covert surveillance activities.
- lUnder FA 2020, the Revenue has powers to claw back payments incorrectly made to businesses.
- lFA 2020, Sch 16 para 12 offers a limited self-reporting amnesty for fraudulent claims which may result in lower penalties.
- lHMRC’s criminal recovery (and asset-freezing) powers stem from POCA 2002, Pt 2.
- Under CFA 2017, HMRC could bring a prosecution for the offence of failing to prevent tax evasion.
HMRC criminal investigations
HMRC has swingeing powers to enable the department to obtain information and documents from both suspects and third parties, including by way of a disclosure notice issued under the Serious Organised Crime and Police Act (SOCPA) 2005, s 62 – which can require the recipient to answer questions and/or provide information and documents – or a production order issued under the Police and Criminal Evidence Act (PACE) 1984, s 9 and Sch 1.
These investigative powers of the department are well known, but what is perhaps not so well known is the extent to which HMRC is able to obtain communications data and conduct covert surveillance.
HMRC has made it clear that tackling fraud is a priority for the organisation and access to communications data and directed surveillance have a vital role to play in that process.
Surveillance is defined in the Regulation of Investigatory Powers Act (RIPA) 2000, s 48 as ‘the monitoring, observing and listening to persons, including their movements, communications, conversations and any other activities, and the recording of anything being monitored, observed or listened to’. As might be expected, such surveillance, due to the level of intrusion involved, is highly regulated under RIPA 2000, Pt II.
Surveillance can be conducted in a multitude of ways and in a variety of locations ranging from observations of people in a public place through to recording a person’s activities in their private residence. As the level of intrusion into private life increases, so too do the statutory protections.
While investigating furlough fraud, HMRC may carry out surveillance of the entrance to business premises and monitor those entering or leaving the premises. If officers observe staff regularly attending business premises at a time when the business has claimed its staff are furloughed, this may lead to further investigation and the business may be asked to provide an explanation for this apparent inconsistency.
As well as powers to conduct surveillance, HMRC can, under the Investigatory Powers Act (IPA) 2016, Pt 3 request data held by telecommunication operators including the time, duration and location of a phone call, together with the number dialled. However, it cannot, without the authority of the secretary of state, ascertain what is being said on the call; this is sometimes described as the ‘who’, the ‘when’ and the ‘where’, but not the ‘what’. Information can also be requested from internet service providers in relation to websites visited, and the time and duration of such visits.
In 2019, HMRC made 18,464 requests to access communications data; this was a slight decrease from the 18,623 requests made in 2018 but a significant increase from the 14,381 requests made in 2011.
Given HMRC’s concerns in relation to the extent of suspected furlough related fraud, communication data requests from HMRC are likely to have increased in 2020 and will no doubt increase further in 2021, as the Revenue conducts more investigations into suspected fraud.
When investigating suspected furlough fraud, HMRC may be interested in when telephone calls were made and received by employees who are furloughed. The department will also wish to ascertain whether computers located at the furloughed employees’ home addresses were regularly logged on to remote working portals. Such data is likely to be a valuable source of information in identifying those who may be involved in fraudulent activity.
Once communications data information has been obtained by HMRC, the ability to challenge its collection is limited. The decision authorising the investigative technique might be challengeable by way of judicial review proceedings in the
High Court or, if the investigation leads to a criminal trial, the defendant may make an application to the court for the evidence relied on by the prosecution to be excluded under the court’s common law powers, or more frequently under PACE 1984, s 78 where, having regard to all the circumstances, including circumstances where the evidence was obtained illegally, improperly or unfairly, the admission of the evidence would have such an adverse effect on the fairness of the proceedings that it ought not to be admitted.
As well as extensive investigation powers, HMRC has civil and criminal recovery powers under FA 2020 and the Proceeds of Crime Act (POCA) 2002 respectively.
Given the opportunity for abuse of the furlough scheme it is not surprising that FA 2020 provided further powers to HMRC to enable it to recover money incorrectly paid to businesses.
Finance Act 2020, s 106 and Sch 16 provides HMRC with the power to claw back furlough payments made to businesses which were not entitled to receive such payments, or where the payments were not used to pay employment costs.
Further powers contained in FA 2020, Sch 16 paras 8 to 9, enable recovery by imposing an income tax liability equivalent to 100% of the furlough payments which the person was not entitled to. HMRC can issue an assessment to anyone who received a coronavirus support payment which they were not entitled to receive. As these are assessments, they can be appealed in the normal way.
“HMRC has swingeing powers to enable it to obtain information and documents from both suspects and third parties.”
Finance Act 2020 also strengthened HMRC’s recovery powers in relation to businesses in, or near, insolvency through the imposition of joint and several liability on the directors of the company for an assessment issued to the company, where there has been a deliberate act to claim or retain furlough payments which the company was not entitled to.
Under Sch 16 para 13, HMRC can impose penalties of up to 100% of the potential lost revenue for deliberate and concealed behaviour. If remedial action is taken swiftly this may be reduced, but the penalty will not be less than 30%.
There is a limited ‘amnesty’ period for self-reporting furlough payments which the recipient was not entitled to under Sch 16 para 12. In order to benefit from this amnesty, HMRC must be notified of a charge to income tax within the later of:
- 90 days from when the CJRS grant was incorrectly received;
- 90 days after the day that any circumstances changed so that a CJRS claim is no longer valid; or
- 20 October 2020 (which has now passed).
Although these provisions are aimed at inadvertent mistake and not fraudulent claims, if they are used to self-report and
repay fraudulent furlough claims, it is likely that such self-reporting will be a significant mitigatory factor when HMRC considers whether to take any further action.
There are a number of criminal and quasi-criminal recovery powers available to HMRC. The most commonly used of these powers is that contained in POCA 2002, Pt 2, which enables the court, either on the application of the prosecutor or on its own motion, to make a confiscation order against a convicted defendant ordering them to pay an amount equivalent to the amount of the benefit they obtained from the crime they committed.
“An increasingly commonly used power is the power to freeze and forfeit cash of more than £1,000 held in a bank account.”
An increasingly commonly used power, which does not require a criminal prosecution to be instituted, is the power to freeze and subsequently forfeit cash of more than £1,000 held in a bank account. This power is contained in POCA 2002, Pt 3B. HMRC has been increasingly using this power since its introduction on 31 January 2018 and has, to 25 March 2020, made 227 applications resulting in over £27m being frozen with close to £6m being subsequently forfeited. In the first arrests for furlough fraud made by HMRC (see above), cash and assets were frozen using the powers contained in Pt 3B.
Failure to prevent the facilitation of tax evasion
As an alternative to the usual offences which HMRC relies on when prosecuting those it considers to have committed tax evasion, HMRC could decide to bring a prosecution for the new corporate offence of failure to prevent criminal facilitation of tax evasion, which was introduced on 30 September 2017, by the Criminal Finances Act (CFA) 2017.
This offence is a strict liability offence and companies and partnerships may be guilty of the offence where they have failed to prevent their staff and associated persons from committing tax evasion.
A prosecution for this offence has yet to be brought. This has led to some criticism of HMRC and we would not be surprised if it considered prosecuting a corporate for this offence if there has been a failure to implement reasonable preventative procedures and a member of its staff, or an associated person, has facilitated furlough fraud.
COP 9 or criminal prosecution?
On discovering suspected furlough fraud, HMRC may carry out a criminal investigation with a view to a criminal
prosecution, or it may decide to go down the code of practice 9 (COP 9) route. This governs how HMRC investigates suspected fraud and sets out the rules and conditions of the contractual disclosure facility (CDF) policy. Under the CDF (HMRC’s regime for handling serious fraud cases), HMRC only guarantees not to prosecute where the person involved enters and fully complies with the terms on offer as part of the CDF.
The factors taken into consideration by HMRC when deciding whether to proceed by way of COP 9 or a criminal investigation in furlough fraud cases are many and varied. Given the issues surrounding the complexity of the furlough guidance, the speed of the introduction of the furlough scheme and the many iterations through which the scheme has passed, HMRC may prefer the COP 9 route, other than in the most egregious of cases.
That said, HMRC has already made several arrests of individuals suspected of furlough fraud and where the department has robust evidence of furlough fraud, perhaps as a result of using covert surveillance to obtain information or following a request for data held by telecommunication operators, it is likely that it will be considered to be in the public interest to initiate a criminal prosecution rather than offering COP 9 to the investigated person.
HMRC has said that it will not actively seek out those who have made innocent mistakes in relation to the furlough scheme and who have sought to repay any monies that have been incorrectly claimed. However, HMRC will not tolerate deliberate wrongdoing and will actively investigate those cases where fraud is suspected. It will no doubt wish to make an example of those who have sought to defraud the public purse at a time of national emergency.