COVID-19 EXPERT LEGAL INSIGHTS

Insolvency and furlough fraud – directors beware!

Insolvency Litigation

10 November 2020

There has been much mention in the press in recent times about the amount of allegedly incorrect or fraudulent claims made by employers under the Government’s Coronavirus Job Retention Scheme (“CJRS”) (furlough scheme).

It has been suggested that as much as £3.5 billion may have been wrongly paid out, either because of a mistake on the part of the employer or because the claim was fraudulent.  We understand that HMRC is currently investigating approximately 27,000 “high risk” CJRS grant claims where abuse or fraud is suspected.  HMRC also has a CJRS fraud hotline and encourages people to come forward to report furlough fraud when they become aware of it.

What is not getting much press attention at the moment is the exposure to personal liability of directors of insolvent companies which are found to have claimed incorrect CJRS grants/committed furlough fraud.    

What are the consequences of furlough fraud?

The first arrest for furlough fraud (with suspected fraud in the amount of £495,000) occurred in July and was widely reported.  Two other individuals in London were arrested in September over suspected furlough fraud in the amount of £70,000 and it is likely that there will be more arrests in the coming weeks and months as investigations continue.

The Finance Act 2020, which came into force on 22 July 2020, gives HMRC powers to investigate and claim back CJRS grants employers were not entitled to receive.  Where HMRC determine that a company has received CJRS grant it was not entitled to, it will seek to recover those amounts by way of a tax charge (regardless of whether the amounts were claimed in error or deliberately).

HMRC also has powers to issue penalties for incorrect grant claims, although there is a grace period within which employers can “own up” to incorrect CJRS grant claims and avoid a penalty.  The amount of the penalty is up to the amount of the wrongly claimed grant, so the employer can potentially get hit with the same amount twice (as a repayment (tax) charge and as a penalty).

The grace period within which to notify HMRC of incorrect claims and avoid a penalty is the later of:

  • 20 October 2020 (now passed);
  • 90 days from the date the employer received the incorrect CJRS grant; and
  • 90 days from when circumstances changed meaning that the employer was no longer entitled to the funds received.     

If employers do not “own up” to incorrect claims and are later caught out, HMRC will treat the failure to notify as “deliberate and concealed”, which means its starting point when determining the amount of the penalty to issue will be at 100% of the incorrectly claimed grant.

If employers come forward after the grace period has expired, they will be liable to pay a penalty, but the amount of the penalty may be reduced.  If they “own up” without being prompted by HMRC, the amount of the penalty may be reduced to 30% (but no less) of the incorrect grant claim amount.  If, however, the employer comes forward after being prompting by HMRC, the penalty may only be reduced to 50% (but no less) of the incorrect grant claim amount.

Consequences for directors of insolvent companies

If HMRC deems that a company has received CJRS grants that it was not entitled to (and is therefore subject to the tax charge to pay them back), but that company is:

  • subject to an insolvency procedure; or
  • there is a “serious possibility” that it will become subject to an insolvency procedure;

and there is a serious possibility that some or all of that tax liability will not be paid, persons responsible for the management of the company will be jointly and severally liable (with the company and each other) to repay the relevant amounts. Where this is the case, HMRC will issue a joint and several liability notice to the individuals concerned.

Persons “responsible for the management of the company” include directors, shadow directors and those who are directly or indirectly concerned or take part in the management of the company.

For personal liability to be triggered in this way, the director/individual in question must have:

  • been responsible for the management of the company at the time the relevant tax first became chargeable (i.e. when the incorrect/fraudulent grant claim was received); and
  • known at that time that the company was not entitled to receive the CJRS grants it was claiming.

Wider implications for directors

Personal liability to repay fraudulently claimed CJRS grants and applicable penalties is not the end of the matter for directors. 

A director who is found to have engaged in furlough fraud is also at risk of criminal sanctions.  Further, they are exposed to action for misfeasance and breach of their statutory duties (breach of the duties to exercise reasonable care, skill and diligence and to promote the success of the company, for example). 

Action may also be taken to have directors disqualified under the Company Directors Disqualification Act 1986.  The effect of a disqualification order is that the individual cannot, without leave of the court, be a director of a company or in any way (directly or indirectly), be concerned or take part in the promotion, formation or management of a company for the period specified in the order (up to 15 years).    

Ranking of reclaimed CJRS grants upon insolvency

Crown preference with regard to certain debts is coming into force from 1 December 2020.  This means that certain amounts owed by an insolvent company to HMRC (such as PAYE income tax, employee National Insurance Contributions and student loan repayments) will have preferential status in the order of priority in insolvency procedures that commence after that date.  The relevant legislation putting this into effect does not, however, include within this group of preferential debts, tax owed to HMRC as a result of incorrectly claimed CJRS grants.  This means that HMRC will rank as an unsecured creditor with regard to reclaimed CJRS grants.  Thus, since HMRC may not get the money owed from the company, it may be more minded to seek repayment from directors personally. 

Other implications

HMRC has not held back in encouraging employees to report instances of furlough fraud and it was reported at the beginning of August that HMRC had received nearly 8,000 reports at that point.    

As the number of redundancies are expected to continue, we anticipate a surge in whistleblowing claims as employees may seek to challenge their redundancy on the basis that the termination of their employment was not due to redundancy, but because of them having raised concerns (blown the whistle) about being asked to work whilst on furlough, or other practices of their employer that may mean it is not entitled to the CJRS grants it has claimed.

It is strongly recommended that directors with any concerns about these matters and what it may mean for them seek legal advice as a matter of urgency to mitigate their personal exposure as much as possible.

COVID-19 related insights:

COVID-19 related insights:

Our COVID-19 statement

We recognise that these unique times are presenting unprecedented challenges for our clients and we are here to support you in any way we can.

Click to view

Can you get out of or suspend a contract because of Coronavirus?

Alex Torpey covers the key things to look out for if you are relying on the Force Majeure clause.

Watch the video on LinkedIn

Overcoming the challenges of co-parenting for separated and divorced parents

Rachel Freeman, Partner in our Family Law team, addresses some issues that we are seeing arise for separated parents in the current crisis.

Read the blog

Tech in Two Minutes - Episode 7 - The Coronavirus challenge for tech coworking spaces

Andrew Solomon speaks about the challenge for tech companies and coworking spaces during the current COVID-19 pandemic.

Listen to the podcast

The legal basis for lockdown

Alun Milford, Partner in our Criminal Litigation team, provides an in-depth look at the legal basis behind the current lockdown.

Read the blog

Managing your Migrant workforce in the COVID-19 crisis

On Friday 3 April, immigration partner and head of department, Nick Rollason, hosted a webinar looking at urgent issues employers are facing during the COVID-19 crisis and answered some of the key questions being raised.

Watch the webinar recording

Furlough leave and the Coronavirus Job Retention Scheme: key legal considerations for Employers

On Thursday 9 April, Andreas White, Partner in our Employment Law Team, delivered an overview of the scheme with a focus of the key legal issues for UK employers.

Watch the webinar recording

Coronavirus and the perils of signing your Will

Will instructions have apparently risen by 30% since COVID-19 reached our shores. What effect does COVID-19 have on Will signings? James Ward and Diva Shah in our Private Client team blog.

Read the blog

The juggling act of a single mother, home school teacher and head of a family team

Charlotte Bradley, Head of our Family Law Team, reflects on how the COVID-19 crisis has affected working parents like her.

Read the blog

The future public inquiry into COVID-19

Calls for a public inquiry are continuing to mount and are likely to prove difficult to resist. In this blog, Sophie Kemp considers the framework for such inquiries, and the key issues likely to form the core of its terms of reference.

Read the blog

Share insightLinkedIn Twitter Facebook Email to a friend Print

Email this page to a friend

We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

Leave a comment

You may also be interested in:

Skip to content Home About Us Insights Services Contact Accessibility