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Fraud and opportunism during COVID-19
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.
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:
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.
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:
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:
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).
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.
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.
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