HMRC's new powers to investigate furlough abuse

The Government's Coronavirus Job Retention Scheme (CJRS) was announced on 20 March 2020, with the aim of safeguarding UK jobs during the coronavirus pandemic. The CJRS has undoubtably assisted in protecting jobs but it was, by necessity introduced quickly, with little and complex guidance, which has made it, in the words of HMRC's Chief Executive Jim Harra: "a magnet for fraudsters".

This blog is based on an article first published in Taxation magazine on 10 August 2020. A copy of that article can be found here.

What is the CJRS?

Under the CJRS, businesses have been able to furlough staff rather than make them redundant. Furloughed staff are able to receive up to 80% of their wages from the Government in the form of a grant, with an upper limit of £2,500 per month. Furloughed employees are not permitted to undertake remunerative activity for their employer while making use of the CJRS but may, if they wish, take on new work elsewhere with a different employer. Training and volunteering are permissible under the CJRS, although what constitutes training and volunteering is something of a grey area. 

The CJRS had been originally set to end on 30 June 2020, however, following lobbying from various industry groups the Government has extended it and it is now due to end on 31 October 2020.  

From 1 July 2020, the Government introduced a new flexible furlough scheme which permits employers to bring furloughed employees back to work for any amount of time and any shift pattern, while still being able to claim the CJRS grant for the hours not worked.  From 1 August 2020, the level will be reduced each month.   

How popular has the CJRS been?

HMRC has confirmed that, as at 2 August 2020, the total number of jobs furloughed was 9.8 million, with 1.2 million employers furloughing staff members and the total value of claims to date being £33.8 billion.  The British Chamber of Commerce has stated that, since its inception, CJRS has been used by two thirds of British businesses and that 56% of businesses still have some staff who are furloughed full time. 

How might the CJRS be abused?

Various factors have left the CJRS vulnerable to abuse. The speed with which the CJRS was announced and implemented resulted in inevitable confusion amongst both employers and employees, compounded further by the complexity of the CJRS rules. HMRC has acknowledged the inevitability of some employers inadvertently falling foul of the rules and that, as the CJRS is dependent on its users' honesty, there is ample opportunity for fraudsters to abuse it. In its guidance on the CJRS, HMRC encourages employees to report fraud and provides links to an online form through which they can do so.

Examples of how the CJRS might be abused include: 

i. placing employees on furlough and then requesting that they continue to work as normal; 

ii. pressurising or encouraging employees to work on a 'voluntary' basis; 

iii. claiming on behalf of an employee without their knowledge and recovering 80% of the employee's salary, while the employee continues to work as normal; 

iv. claiming on behalf of a 'ghost' employee – someone who has been dismissed before the CJRS's start date of 19 March 2020, or a non-existent employee who commenced work following this date; 

v. employers misrepresenting the working hours of staff, so that they can maximise payments recoverable from the CJRS. 

In which industries might furlough fraud be prevalent?

The full extent of any furlough related fraud is difficult to accurately determine atthis juncture. However, HMRC published some statistics in June 2020, which confirmed that the following industries are making the greatest use of CJRS: 

• wholesale and retail, with claims totalling £3.3 billion;
• accommodation and food, claiming £2.6 billion in support; and
• the construction sector, with claims of £1.8 billion. 

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, with 59% of its cases since 23 March 2020 being in relation to furlough fraud. The top three industries affected, according to Protect, are hospitality (20% of cases), manufacturing (12%) and retail (12%). Interestingly, 63% of calls have come from individuals working for organisations with less than 50 staff members. This is likely to be due to greater economic pressures felt by smaller businesses as a consequence of the coronavirus pandemic. 

HMRC has acknowledged the inevitability of some employers inadvertently falling foul of the rules. However, HMRC has also stressed that it will be proactive in its investigation of anyone who is suspected of abusing CJRS. To this end, it has been reported that HMRC has recently written to around 3,000 employers querying claims that they have made under the CJRS. 

HMRC has written to employers who may have: 

• claimed more in CJRS grants than they were entitled to; or
• not met the conditions to receive a CJRS but have made a claim regardless.

HMRC has said that it is considering 8,000 cases of potential misuse of the CJRS, including cases where employers have asked employees to work while on furlough, or have withheld funds.  

On 8 July 2020, HMRC made its first CJRS related arrest of an individual based in the West Midlands as part of its investigation into a suspected £495,000 CJRS fraud. This arrest demonstrates that HMRC is taking abuse of CJRS seriously and will pursue those who have abused the scheme.  

The Policy Exchange, a UK think tank, has found that fraud or error in relation to the Government's various covid-19 financial rescue schemes could result in losses of as much as £7.9bn to the UK Exchequer.

Oxford, Cambridge and Zurich universities have conducted surveys of 9,000 people and the study found that the prohibition on working whilst furloughed was routinely ignored, with 63% of furloughed employees breaking the rules.  

What new powers do HMRC have to pursue those who have mistakenly or fraudulently made a claim under the CJRS?

Given the opportunity for furlough fraud, it is not surprising that Finance Act 2020 (the Act), which received Royal Assent on 22 July 2020, provides substantial enforcement powers to HMRC in relation to the CJRS. 

Section 106 and Schedule 16 to the Act, gives HMRC the power to claw back CJRS payments made to businesses which were not entitled to receive such payments, or where the payments were not used to pay employment costs. 

Under paragraphs 8 and 9 of Schedule 16, an income tax liability can now be imposed, by way of an assessment, on anyone who has received a coronavirus support payment to which they were not entitled. The charge is to income tax even if the recipient is a company chargeable to corporation tax.  The amount of income tax is equal to the CJRS grant the person was not entitled to and had not been repaid ie it is a 100% tax charge.  The timing of the income tax charge is:

(1) if the person was entitled to receive the amount when it was paid, but subsequently ceases to be entitled, at the time of ceasing to be entitled to retain the sum; or 

(2) in all other cases, at the time the payment is received.  

If an assessment is issued under paragraph 8 and is disputed, it can be appealed in the usual way pursuant to section 31, Taxes Management Act 1970.  

Where a business has become insolvent or insolvency is considered likely, paragraph 15 of Schedule 16 empowers HMRC to impose stringent individual accountability on company officers through joint and several liability with each other and the company for the company's income tax liability where there has been a deliberate act to claim or retain CJRS grants, to which the company was not entitled.  

Under paragraph 13 of Schedule 16, penalties will be imposed for failure to notify the chargeability to income tax where the person knew, at the time the income tax first became chargeable, that the person was not entitled to the CJRS grant.  Arguably, a person who makes a CJRS claim in good faith and then subsequently realises that it should not have been claimed, could repay the CJRS grant when they become aware that it should not have been made, and avoid a penalty. The penalty can be up to 100% of the potential lost revenue if deliberate and concealed.  If remedial action is taken swiftly then this may be reduced, but the penalty will not be less than 30%. HMRC has also warned that it will consider criminal charges in cases of deliberate misuse of the CJRS.  

HMRC has powers of investigation where it considers there has been a failure by an employer to self-report errors and, in more serious cases involving corporates, there is a real possibility that HMRC may seek to bring a prosecution for the offence of failing to prevent tax evasion, under the Criminal Finances Act 2017.  

How can employers who have wrongly claimed under the CJRS avoid significant penalties?

Paragraph 12 of Schedule 16, provides recipients of CJRS payments with an opportunity to self-report to HMRC if they have received, or retained, such payments erroneously. They must notify HMRC of a charge to income tax within: 

(i)   a 90-day window from when the CJRS grant was incorrectly received; 

(ii)  90 days after the day that any circumstances changed so that a CJRS claim is no longer valid; or 

(iii) the later of the date of Royal Assent (ie by 20 October 2020).  

This applies to knowing or accidental misuse of the CJRS. By self-reporting within the specified timeframe it should be possible to avoid any wrongdoing penalties.

The timeframe in which to self-report to HMRC in order to avoid significant penalties, or a criminal investigation, is relatively short. In view of this short window of opportunity and the fact that HMRC is already actively investigating claims, businesses should, as a matter of priority, carefully review their internal records and systems in order to identify any discrepancies. Where discrepancies are detected, a more detailed and forensic examination may be required before making a disclosure to HMRC. Employers should also ensure that any paperwork is up to date and consider collating any documentation which details the business rationale underpinning why certain roles or employees were furloughed. They should also carefully review any CJRS claims which have been made and ensure not only that they have acted in accordance with the law but also can evidence this with a clear audit trail. 

Conclusion

HMRC will wish to satisfy itself that any claim made under the CJRS was a valid claim and the more detailed the information gathered during any internal investigation the more likely it is that the business will be able to succesfully demonstrate to HMRC that its claim was valid. For those businesses that do discover that they have received, or retained, CJRS payments when they were not entitled to do so, they need to urgently consider what action they should take, including self-reporting to HMRC within the specified timeframe.  Now is the time for businesses to take stock, consider their position and, where necessary, take action!