Genuine Error or Fraud? Why getting it wrong could land you in hot water with the tax man.

The Coronavirus Job Retention Scheme (“CJRS”), which has been in place since March 2020, has proven to be a crucial initiative to seek to stave off economic disaster that could otherwise have been caused by mass redundancies and corporate insolvencies occurring through the darkest days of the coronavirus pandemic. The Government recently announced the CJRS will continue until the end of October 2020 with new rules in place from August onwards intended to seek to wean employers off the scheme gradually.

Background

The CJRS has enabled employers to continue to keep employees on the pay roll whilst claiming up to 80% of their pay (up to a maximum of £2,500) from the Government or, more precisely from HM Revenue & Customs which is administering the CJRS. The quid pro quo is that the employee/s are furloughed which means that, at least up to 30 June 2020, the employee cannot do any work or provide any services that makes money for the employer or any organisation linked with or associated with the employer. From 1 July onwards, employees will be allowed, in general terms, to flexibly furlough meaning they can return to work on a part time basis with the employer being allowed to continue to claim under the CJRS up to 80% of normal pay (still capped) with the employer paying the employee for the hours they actually work. This will reduce to 70% and 60% in September and October respectively with the employer also having responsibility to pay NIC and pension contributions from August.

When the CJRS was initially put in place, the Government indicated that it was intended to apply to employees who would otherwise have been made redundant or laid off. This wording reflected the very serious economic consequences that were being envisaged towards the end of March and early April 2020 when the infection and death rates were rising and businesses were trying to cope with the immediate and dire effects of lockdown. As the lockdown became established and the long term economic effects of the pandemic started to be understood, the Government widened the scope of this guidance by saying the coronavirus must have severely affected the employer’s business operations.

Throughout the whole period the CJRS has been available, the onus has remained on the employer to engage with its employees and with HMRC to make sure it has done everything it needs to do to furlough employees properly, keep records of the furloughed status and submit all relevant documents to HMRC to make furlough payment claims – such records need to be kept for 6 years. As we move from into the furlough “lite” period, the onus will remain on employers and become more onerous with the need to monitor part time working and ensure claims are made only for the time when the employee is not working.

Some businesses have had no choice but to shut their doors during the pandemic, others have not. Employers are under enormous strain, with resources stretched to the extreme and under pressure to maintain a viable business with the landlord wanting the rent paid, suppliers chasing for payment and tightening up credit terms, clients stretching payment terms to the max and their bankers/lenders keeping a close eye on the balance sheet and bad debt risk. As the lockdown rules are relaxed, employers will be tested as to whether the business remains viable and can survive as the CJRS is gradually withdrawn up to October 2020, when it disappears completely.

Have employers got this wrong?

HMRC is alive to the possibility that the CJRS is open to abuse. Up to the end of May 2020 it had received an astonishing 1,900 reports from the public alleging furlough fraud. It has now set up a whistleblowing hotline and will take a hard line going forward not just against the business but also directors who are knowingly involved in such fraud. Furlough fraud may arise where, for instance:

• An employer claims under the CJRS on behalf of an employee and does not pay the employee what they are entitled to;
• An employer requires the employee to continue to work whilst furloughed;
• An employer makes backdated claims including periods when the employee is working.

It is understood HMRC’s hard line approach is driven by the discovery of seemingly more egregious conduct including reports of staff carrying out their duties as normal oblivious to the fact they had been furloughed and where businesses have been submitting claims for ghost employees (i.e. people who have never worked for the business).

It is expected that a large proportion of the reports have been made by employees, and in raising cases of suspected fraud, such employees are likely to be protected as whistleblowers and therefore how the employer reacts to an employee’s allegation is crucial to prevent employment tribunal claims for detriment or even automatic unfair dismissal from staff.

Reports made by employees might be genuine, they might not. Reports may be made by disgruntled employees who have been furloughed as well as those who have had to continue working. Whatever the cause, there are going to be circumstances where the person who has made the report has got it wrong. The last thing an employer wants is to face scrutiny from HMRC about whether it has made incorrect claims under the CJRS. In an effort to try to manage the situation, HMRC has stated that, whilst it will pursue recoveries and criminal prosecutions in the most serious cases where amounts are deliberately over claimed, it is not looking to catch people out and will assist employers rectify cases where a genuine mistake has been made. In addition, it is a fact that some companies will move into insolvency and business owners will cease to have control and access to company documents. What might have been a genuine mistake could be mis-interpreted by a liquidator as an instance of deliberate wrong doing and business owners could find themselves on the wrong end of personal recovery actions.

HMRC’s semi-conciliatory tone in relation to news of these fraud reports will provide some level of comfort for those who might realise a genuine mistake has been made. However, there is an enormous chasm between what amounts to deliberate criminal wrong doing and demonstrating to HMRC a genuine mistake has occurred. Engagement with HMRC in relation to a suspected instance of furlough fraud will be time consuming and an enormous distraction for any business trying to get back on its feet and notwithstanding the conciliatory tone, HMRC will no doubt exercise rigour in verifying the circumstances.

What’s next?

The situation is likely to play out over a long period of time as the furlough scheme is withdrawn, employers businesses are tested in whatever the “new normal” looks like and HMRC works through the furlough fraud reports. At this stage, Employers will be best served by:

• Making sure they continue to maintain documentary records relating to the decision to furlough staff and the ongoing monitoring of the situation. This should be kept for six years;
• When we move into furlough “lite” ensuring record keeping for part time employees is crystal clear, and evidence of agreement with employees to flexibly furlough them is kept;
• Continuing to monitor the use of work email accounts and phones (subject to the usual data protection rules in place) to ensure furloughed staff are not carrying out any work when they are not supposed to;
• Know what training you asked your employees to do (businesses are allowed to ask people to do certain training whilst on furlough provided they are paid at least the National Minimum Wage);
• Ensuring senior and middle management are not seeking to utilise furloughed resources;
• Maintaining and reinforcing whistleblower policies and procedures.

If you realise you’ve done something wrong in relation to the CJRS or face enquiries from HMRC in relation to a report of a suspected instance of furlough fraud, we can help you work through the suspected problem and, where appropriate, engage constructively with HMRC to seek to rectify it. If a major problem is discovered, we can provide advice and assistance in relation to the potential liabilities under both the civil and criminal law, in particular, in relation to any engagement with the criminal authorities through managing the exercise of search warrants of business and personal premises and representation in interviews under caution for affected members of staff.

Authors:

Jonathan Brogden is a fraud specialist with expertise in civil proceedings and defending criminal prosecutions.

John Dunlop is head of the firm’s tax team specialising in all areas of UK tax applicable to businesses and their owners.

Louise Bloomfield is an employment law specialist who has been extensively advising large businesses on the CJRS and their furloughing decisions.