HMRC powers to tackle furlough fraudsters – take action now!
At the time of writing, over 25% of the UK workforce is being supported by the Government's Coronavirus Job Retention Scheme (the furlough scheme) at a cost of around £20 billion. In addition to this, some 2.6 million people are enrolled on the Self-Employment Income Support Scheme (the SEISS) at an additional cost of £7.5 billion.
How has the scheme been abused?
Furloughed employees are not permitted to undertake remunerative activity for their employer while furloughed. They may, however, take on new work elsewhere with a separate employer if they wish to do so. Various factors have left the furlough scheme open to abuse and, with HMRC receiving over 3,800 reports of fraudulent claims since April, HMRC's Chief Executive, Jim Harra, has described it as a "magnet for fraudsters".
Examples of furlough scheme abuse might include placing employees on furlough and then requesting that they continue to work as normal or on a voluntary basis, or where they claim on behalf of an employee without their knowledge recovering 80% of the employee's salary from the furlough scheme, while the employee continues to work as normal. Please see our recent webinar for more details on furlough fraud and how to prevent it.
What is being done to help HMRC pursue scheme abusers?
To help deter further abuse of the scheme, draft legislation granting HMRC greater enforcement powers under the new Finance Bill 2020, is being rushed through Parliament and is expected to become law this month. The proposed legislation will not only allow HMRC to pursue those who have broken the furlough scheme rules, it will also include powers to enable HMRC to hold company officers jointly and severally liable where a business has become insolvent. The general public is being encouraged by HMRC to report companies who are abusing the scheme.
How will these measures work?
The new legislation is expected to provide for a window in which employers can self-report if a mistake has been made. They will then be able to repay the furlough sums back without incurring any penalties. The window was originally going to be 30-days from the date of enactment of the legislation, however, it is likely that it will now be 90-days. After this 90-day period of grace, where HMRC considers that an employer has failed to notify it of a mistake, the employer will be investigated and required to demonstrate that they are innocent of any wrongdoing, either under the furlough scheme or the SEISS.
Penalties for wrongdoing will start at 100% of the sums incorrectly claimed. Where remedial action is taken swiftly this may be reduced but the penalty will not fall below 30%. In cases where HMRC has already commenced questioning then the minimum penalty will be 50%. HMRC has also warned that in cases of deliberate misuse of the scheme, it will consider criminal charges and it is likely that it will be seeking a 'trophy' scalp in the coming months to make an example of. There is also a real risk that HMRC will seek to bring prosecutions against corporates for the offence of failing to prevent tax evasion, under the Criminal Finances Act 2017. This was considered in our recent blog which you can find here. Further, given the strains on the criminal justice system, prosecutors have been told to downgrade less serious cases in order to manage the Covid-19 pandemic, however, Covid-19 related offences are to remain as an immediate priority.
The timeframe in which to self-report to HMRC in order to avoid significant penalties or a criminal investigation is short. There will also be substantial reputational damage for businesses that are found to have falsely claimed under the furlough scheme or the SEISS. It is therefore critical that all businesses, many of whom may have implemented claims in haste when the scheme was first introduced, take the time now, before the proposed legislation is enacted, to carefully review any claims they have made under the furlough scheme and/or the SEISS to ensure they have acted in compliance with all the rules and can evidence this with a clear audit trail, should HMRC come knocking.
How we can help
We are well placed to guide you through the review process and ensure you comply fully with your legal obligations. RPC is a leading law firm with extensive experience of both contentious tax and regulatory/criminal matters. Dealing with an HMRC enquiry or criminal investigation requires specialist advice from advisers with the appropriate level of expertise, which is not readily available in most professional practices. Our team includes former senior members of HMRC Solicitor's Office. We understand how HMRC operates, what strategies it may deploy during its enquiries and criminal investigations.