Click here for the press release version.
HMRC Powers of investigation in relation to Errors and Abuses under the ‘Furlough Scheme’
The Furlough Scheme
The Coronavirus Job Retention Scheme (“CJRS”) was introduced by the Chancellor of the Exchequer – Rishi Sunak – on 20 March 2020 in order to support businesses feeling the effects of the coronavirus ‘lockdown’. The “furlough scheme” (as the CJRS is colloquially known) is a grant introduced for businesses to help safeguard jobs; keeping employees on payroll where they are unable to provide them work in light of lockdown rules. By receiving this support, businesses are able to retain employees whilst claiming a reimbursement of part of an employee’s monthly salary from the Government for the time not worked whilst on furlough.
According to the National Audit Office Report (the “NAO” report), by 20 September 2020, CJRS had supported 1.2 million employers and 9.6 million jobs, with claims totalling £39.9 billion. Since the latest government announcements to extend furlough support until April 2021, it has been estimated that furlough costs will rise by approximately £6.2 billion per month.
The complex rules relating to the furlough scheme have been through a number of iterations since their implementation on 1 March 2020 and are often changed at short notice.
CJRS susceptibility to Error and Fraud
The speed at which the scheme was introduced, implemented and later adapted has meant that the scheme is exposed to a high risk of error or fraudulent activity. Jim Harra, HMRC’s Chief Executive said: “We have made an assumption for the purposes of our planning that the error and fraud rate in this scheme could be between 5% and 10%.”
HMRC sought to mitigate the risk of fraud at the outset by limiting the scheme to claims being made by those who already held verifiable tax records. The furlough scheme is however reliant upon businesses correctly claiming payments and/ or not abusing the scheme. Given the urgent need for providing financial support many claims are being checked retrospectively in terms of validity.
Whilst HMRC are yet to fully assess or discover the extent of overpayments, it is currently estimated that the cost of fraudulent or erroneous claims could be as much as £3.9 billion and HMRC will undoubtedly seek to pursue those who have exploited the scheme.
HMRC approach to Recovery of Overpayments
In recognition of genuine erroneous claims arising from the complexity of CJRS rules implemented or changed at short notice, Harra indicated “What we have said in our risk assessment is we are not going to set out to try to find employers who have made legitimate mistakes in compiling their claims, because this is obviously something new that everybody had to get to grips with in a very difficult time. Although we will expect employers to check their claims and repay any excess amount, what we will be focusing on is tackling abuse and fraud.”
To mitigate the risks and losses caused by the schemes susceptibility to wrongful and fraudulent claims, fast tracked legislation was introduced to provide HMRC with powers of civil recovery and enforcement by way of The Finance Act 2020 (”the Act”) which received Royal Assent on 22 July 2020.
HMRC Powers of Civil Recovery
The Act provides an amnesty period to allow businesses to self-report and repay any over claimed payments without sanction. The amnesty period, defined as ‘the notification period’ runs 90 days from the day upon which a scheme payment was received or a change in circumstances meant that a business was no longer entitled to receipt of the same, or by 20 October 2020. Any repayments for over-claims are repayable to HMRC within ‘the relevant time period’, which differs depending upon whether a business is a sole trader, a partnership or a company.
Civil sanctions for non-compliance, allow recovery of over-claimed grants by way of tax assessment and are payable within 30 days. There are also late payment charges and a penalty of up to 100% of the amount of the furlough grant which was claimed and wrongly received; this includes recovery from company officers or partners of an insolvent company who would be jointly and severally liable for penalties.
Self-Reporting
Self-reporting where genuine errors have been made could avoid penalties being issued. The Act specifically sets out that a failure notify HMRC of wrongful claims within the amnesty period will be deemed as a ‘deliberate and concealed’ act. It is anticipated that HMRC will take a tougher stance with those not taking the opportunity to rectify mistakes within the notification period and with those who have deliberately abused the system.
If deliberate acts and omissions are suspected by the HMRC, civil penalties may be deemed too lenient and criminal investigations could be instigated.
HMRC Investigations
In an effort to tackle abuses and fraudulent claims, HMRC are encouraging employees to report employers where they believe the furlough scheme has been exploited. Over 10,000 reports have been received by HMRC’s fraud telephone hotline to date. A survey conducted by the Comptroller and Auditor General showed that 9% of employees who responded, admitted to working during furlough contrary to the CJRS rules. Other surveys considered
by the NAO Report suggested that the figure for those working whilst on furlough could be as high as 34%.
HMRC has already announced that it is investigating over 27,000 ‘high risk claims’ where they believe a serious error has been made in the amount an employer has claimed or is a possible fraudulent claim.
Those deemed to have made high risk claims likely face spot checks and inspections, particularly as the window for self-reporting closes. Where fraudulent activity is suspected, HMRC have a range of powers it can deploy to arrest and interview suspects.
Criminal Sanctions
To date there has already been several news reports of HMRC arrests for suspected furlough fraud, the first being in July 2020 with further arrests in September 2020, demonstrating its willingness to take serious action against those making fraudulent claims. It is understood that HMRC utilised its powers to search and seize and obtained freezing orders in both matters.
In the event that HMRC pursue a prosecution, there are a range of charges which may be brought against individuals and/or corporates: –
- Cheating the Public Revenue
- Fraud by False Representation
- Fraud by abuse of position
- Conspiracy to Defraud
- False Accounting
- Failure to Prevent Tax Evasion
- Money Laundering
Conduct which is likely to attract a HMRC criminal investigation include but is not limited to:-
- Employees continuing to work whilst on furlough contrary to the complex CJRS rules
- Report from employees facing pressure to work ‘voluntarily’ whilst on furlough
- Claiming a grant for employees who were previously on payroll but have since left employment
- Failure to pass on claimed payment to employee or deliberate delay in payment
- Claims for non-existent employees
- Misrepresentation of working hours to maximize grant claims
Those suspected of criminal offences face not only the inconvenience of lengthy investigations and business disruption, but may also face lengthy prison terms if convicted.
What can you do now?
With HMRC investigations set to continue through 2021, the window for self-reporting coming to a close, and with HMRC tasked with assessing the validity of many claims retrospectively, it is inevitable that more penalties and arrests will follow.
It is therefore imperative that businesses audit CJRS claims already made and take the appropriate corrective action, as soon as possible in order to avoid civil penalties or possible criminal sanctions. Seeking legal advice at the earliest opportunity is vital given the possible ramifications for individuals and corporates.
How Berkeley Rowe can assist
If you or your business require advice in relation to claims made under the CJRS scheme, including for possible errors in claim and self-reporting, a HMRC investigation and arrest or currently face HMRC penalties or prosecution; we are able to provide you with comprehensive advice and or representation at Berkeley Rowe.
The dynamic and experienced team at Berkeley Rowe is made up of top city lawyers: Gemma Redfern is a partner of the firm and Head of White Collar Crime.
Gemma’s expertise in tax investigations and prosecutions is reflected in the various high-profile financial crime cases that she has worked on. By closely working with, either personal accountants, or professional forensic accountants, Gemma will ensure that you get the best possible all-round advice.