Are you a furlough fraudster?

Will it be guilty until proven innocent?

Financial support has been provided at an unprecedented level by the Government during Covid-19, and one of the most popular support mechanisms has been the Coronavirus Job Retention Scheme (“CJRS”).  By the end of June, 9.3 million employees of 1.1 million employers had been furloughed under CJRS at a cost of £25.5 billion to the Treasury.

HMRC as agent for the government have performed remarkably getting funding out to employers so that employees can receive 80% of their pay up to £2,500 per month.  It really was a case of leopards changing their spots, HMRC as a tax collecting authority became a benefits distribution agency overnight.

Leopards don’t change their spots

But as we all know, leopards do not change their spots, and there are a couple of legislative changes which really bring this home:

• The Coronavirus Act 2020 provided that employees are not allowed to undertake any work for their employer, save for directors performing their statutory functions.  Employees can undertake training, volunteer or work for someone else, but they cannot volunteer for the employer which furloughed them.  Likewise, an employee has not ceased all work for an employer if the employee works for a person connected with the employer or otherwise works indirectly for the employer.
• The Finance Act 2020, currently being rushed through Parliament, gives HMRC greater powers to investigate employers to recover payments made under CJRS which are later found to not be due, to penalise those employers who have incorrectly claimed, and to criminally prosecute those employers who have deliberately claimed.

To aid this legislative support, HMRC have opened a CJRS fraud helpline and have received some 4,000 reports already. Typically this is from employees reporting employers, with a notable lack of collusion.

In putting down a marker for future investigation activity, HMRC’s Chief Executive, Jim Harra, described the CJRS as a “magnet for fraudsters” when speaking before the Public Accounts Committee.

The legislative approach is not entirely unhelpful for those employers who come to realise they have made a mistake.  It is likely that there will be a 90 day grace period for employers to self-report and repay the furlough sums back without penalty.  But thereafter, HMRC will revert to type and employers can expect investigation activity to increase.

In addition to paying back furlough amounts incorrectly claimed, the minimum penalty is likely to be 30% where the employer has been careless but puts matters right promptly, and 50% or more if HMRC initiated the investigation possibly because of a tip-off.  HMRC will also have the power to make the directors of insolvent companies personally liable for their CJRS penalties if their company does not pay.

Where HMRC consider the employer has deliberately misused the scheme, there is the risk of a criminal prosecution under either the Theft Act for cheating the public revenue or the Criminal Finances Act 2017 for failure to prevent tax evasion and it will be open to HMRC to commence a criminal prosecution or offer the taxpayer the Code of Practice 9 investigation procedure. 

Although it is likely a criminal investigation will take several years to arrive in Court due to the backlog in cases exacerbated by the Covid-19 pandemic itself, no employer will want the “Sword of Damocles” hanging over them awaiting HMRC’s attempt to make them a “trophy scalp” even though the CJRS scheme will have long closed by then.  It is reported that the first furlough fraudster has already been arrested over a claim for just shy of £0.5 million.

There are many obvious examples of furlough fraud including:

• Asking employees to keep working when you have told them they are furloughed
• Furloughing employees without telling them
• Claiming furlough for “ghost” employees
• Not paying furloughed employees the full amount claimed under the scheme

Now is the time for all employers who have claimed under CJRS, possibly in haste when the scheme was first introduced, to carefully review the claims they have made to ensure they are in compliance with all the rules and they have a clear documented audit trail should HMRC commence an investigation.  This will be all the more important with CJRS as whilst HMRC will launch targeted investigations for higher value claims and where they have tip-offs, given the large number of smaller claims made, for once it is likely that randomly selected CJRS claims may become the norm for tax investigation. 

Whilst HMRC have promised leniency for genuine mistakes, the issue is HMRC often treats innocent mistakes as deliberate unless you can prove your innocence – and proving a negative can be difficult indeed.

If you would like help with your tax affairs or a tax dispute, please contact us at Ritchie Phillips.