HMRC to clampdown on businesses that have abused the Furlough scheme
The employer can then apply for a grant to cover part of the regular wages for any time spent on furlough. The rules are complicated and have changed a number of times since implementation on 1 March 2020.
However, the government believes that as much as £3.5 billion has been paid out in wrong or fraudulent claims. This blog explores what happens if you wrongly claim under the CJRS. Given the significant investment by the government, it is expected that HMRC, which is responsible for administering the grants, will be relentless in pursuing those who have taken unfair advantage of the government's generosity and will deploy new investigation and enforcement powers recently introduced under the Finance Act 2020 (enacted on 22 July 2020) to do so.
While this blog only deals with the CJRS, the ramifications are the same for most of the other COVID-19 support schemes or grants.
Mistakes happen and HMRC understands that. So if you have made an error in your claim or you are not planning to use the money provided to pay wages, tax, national insurance or pension contributions then to avoid a penalty you must notify HMRC by the latest of the following (referred to as the notification period):
The new provisions confirm that CJRS payments are revenue receipts chargeable to either income tax or corporation tax in the hands of the employer and so the over-claimed amount must be repaid within "the relevant time period". If you are a sole trader or a partner, this period ends on 31 January 2022. If you are a company, the relevant time period ends 12 months from the end of your accounting period.
HMRC can recover the full amount of the over-claimed amount by way of a tax assessment, which has to be repaid within 30 days (late payment penalties can be charged). HMRC may also charge you a penalty of up to 100% of the amount of the CJRS wrongly received as a punishment for not telling them about the over-claim within the notification period. Importantly, the law states that failure to tell HMRC of the overpayment within the notification period is deemed to be deliberate and concealed. This is the starting point when addressing the amount of the penalty.
Note also that HMRC can seek repayment and penalties against individual partners of a partnership and company officers of insolvent companies.
HMRC has stated that its priority is to tackle deliberate non-compliance and criminal attacks on the system. In some cases, these acts will be considered too serious to just levy a penalty and only a criminal investigation will be appropriate (and indeed some arrests have already been carried out).
Examples of "furlough fraud" can include:
Moreover, it is anticipated that as the CJRS winds down towards the end of October and since greater flexibility was introduced in July, there is greater scope for "abuse" or erroneous use of the scheme.
HMRC can use information and inspection powers to check a claim has not been overpaid and that a CJRS payment has been used to pay furloughed employee costs.
It is also expecting to do spot checks on businesses and "whistleblowing" is encouraged. We know that HMRC has been inundated with reports of fraud in respect of this scheme so they are sitting on a lot of information.
While HMRC can perform spot checks and compel the disclosure of information, they can also obtain account freezing orders while they carry out their investigations.
They also have the power to arrest and interview individuals.
Whether erroneous claims were made as a result of a mistaken understanding of the rules, or deliberately, businesses currently have a narrow window to rectify matters, or risk facing serious consequences. It is undoubtedly time now to audit those furlough payments, and take advice where necessary, to minimise the far-reaching consequences of any claims that with the benefit of hindsight should not have been made. Turning a blind eye or hoping HMRC will not find out is foolhardy and a stance which can lead to a criminal conviction, imprisonment and a damaged reputation.
For further information on the issues raised in this blog post, please contact a member of our criminal litigation team.
Nicola Finnerty is a partner in the criminal litigation team. She has experience of fraud, corruption (including the Bribery Act) and cartel matters, financial compliance, money laundering, asset seizure and confiscation cases, through to sexual offence cases, drugs, murder and offensive weapon crimes.
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