The Finance Act 2020 imposes penalties for furlough fraud.
The Coronavirus Job Retention Scheme (or CJRS) was introduced by the government so that companies could keep employees on the payroll even though they are not working – known as furloughing.
The HMRC furlough grant currently covers 80% of staff wages costs (capped at £2,500 per month), along with National Insurance and pension contributions (these latter amounts cannot be claimed after 31 July 2020).
Since the introduction of this scheme in March 2020, nearly nine million people have been furloughed, costing the Government £19.6bn in pay-outs. A further £7.5bn has been paid out to 2.6 million self-employed claimants through the Self Employment Income Support Scheme.
What is furlough fraud?
Employees on furlough cannot do any work for their employer. This is emphasised by the Treasury Direction under Sections 71 and 76 of the Coronavirus Act 2020 issued on 22 May 2020 which provides that the training activities a furloughed employee can undertake while on furlough must not provide a service to the employer, nor can they contribute to the business activities or generate income or profit for the employer. They must however be relevant to the employee’s employment. Employees can continue, or start, to work or to volunteer for unconnected organisations.
A growing number of people have reported their employers for abusing the scheme. There are three main examples of furlough fraud:
- Furloughing staff but asking them to continue to work from home or ‘volunteer’ unpaid.
- Furloughing staff without telling them.
- Claiming furlough money for a ‘ghost’ employee. This could be someone who had been dismissed prior to 19 March 2020, or for a non-existent employee who was ‘recruited’ after 19 March.
Other examples include:
- Making backdated claims for a period when an employee was working.
- Not paying furloughed staff the full amount that they are owed under the scheme.
How Common is Furlough Fraud?
HMRC launched a portal for reporting furlough fraud. By mid-June 2020, the reporting service had received over 1,900 reports of wrongful claims.
The charity Protect has said that around a third of its calls have been regarding furlough fraud, and numbers are rising each week.
Is furlough fraud a criminal offence?
Yes, furlough fraud is a criminal offence under the Fraud Act and other statutes. However, the Finance Act 2020 adds civil penalties where the CJRS payment has not been used to pay employees wages, PAYE, NIC or pension contributions. Under the FA 2020, HMRC have the power to recover payments, by imposing a 100% tax charge, from anyone who has received a payment under the SEISS or CJRS to which they are not entitled or anyone who has not used a CJRS payment to pay employment costs and to charge a separate penalty where a person has received a payment to which they are not entitled, had knowledge of the non-entitlement at the time the income tax charge arose and did not inform HMRC before the end of the notification period of 90 days.
This also applies to self-employed people who have received funding under the Self Employment Income Support Scheme.
What are the consequences of furlough fraud?
Under the legislation, companies who have dishonestly claimed furlough based on dishonest or inaccurate information will face penalties or criminal action. The civil penalties are 100% of the amount not used for employees’ costs. There is also a requirement to notify HMRC within 90 days of the non-entitlement to the COVID-19 payment and a separate penalty for failure to notify if the person knew they were not entitled to the payment. Added to this are powers for HMRC to make the directors of an insolvent company personally liable for the CJRS penalties if their company fails to pay.
Sarah owns a company that manages holiday lets for owners and employs five staff to manage the bookings and take care of repairs, maintenance and contract cleaners.
The staff were furloughed under the CJRS during lockdown but suggested to Sarah that they keep an eye on the properties they manage to guard against break-ins, leaky water pipes etc.
Sarah gratefully accepted their offer and saw no harm because they were volunteering unpaid. Unfortunately, she has broken the law and will be liable to the 100% tax charge under the Finance Act 2020 on the amount it received under the CJRS.
She should however report the position to HMRC within 90 days in order to be certain that a separate penalty will not be levied by HMRC. Because Sarah did not realise that the staff were not permitted to volunteer, her company cannot be prosecuted under the Fraud Act.
Giles owns a company which makes and sells gin and at the start of lockdown Giles furloughed its staff under the CJRS.
However, demand for the gin sky-rocketed and Giles did not want to lose out. Giles knew that furloughed staff could not do any work for the company while they were furloughed but he didn’t want to lose sales or give up the CJRS payments as he had his eye on an expensive lovely new copper still for the business. He therefore formed a new company with the shares in his wife’s name, to carry on the distilling and sales as a sub-contractor for his company.
He instructed the staff to go into work as normal but regard themselves as now working for his wife’s company instead because “you aren’t allowed to work for the company that has furloughed you”. They were told that they would be fired if they refused. Fearing for their jobs, the staff did as they were told. Under the Treasury Direction “an employee has not ceased all work for an employer if the employee works for a person connected with the employer or otherwise works indirectly for the employer”.
The two companies were connected and so the first company will therefore be liable under the Finance Act 2020 to repay 100% of the CJRS payments and will also be charged a civil penalty unless the liability is reported to HMRC within 90 days. It is also possible that Giles may be investigated for fraud and prosecuted given the contrived nature of the arrangement he created using his wife and the threat to staff if they did not comply.
HMRC has promised leniency for genuine mistakes, and those penalties will only be charged for ‘deliberate non-compliance’. The problem is that in practice, HMRC often treats an innocent mistake as deliberate unless the taxpayer can prove their innocence.
The COVID-19 situation has revealed a high level of co-operation between all law enforcement agencies and prosecutors. When HMRC, the Financial Conduct Authority, Police, National Crime Agency and other investigators uncover furlough fraud, they are likely to regard it as very serious and consider prosecuting as a deterrence to others.
Frequently Asked Questions
If you or your company are facing an HMRC furlough fraud investigation, or you are reporting your employer, Patrick may be able to advise and assist you. Please contact him here for an initial discussion
Alongside this, Patrick Cannon can advise and represent individuals on:
Very harshly given the nature of the fraud and the generosity with which the money was made available. There are also provisions in Finance Act 2020 to claw back 100% of the payments and charge a 100% penalty unless you disclose the fraud to HMRC within 90 days.
The Finance Act 2020 gives HMRC powers to make a tax charge of 100% of the amount received where a person makes an incorrect claim for a self-employed income support scheme or SEISS or a coronavirus job retention scheme or CJRS (furlough scheme).
In addition to having to pay back the wrongly claimed payment, the legislation gives HMRC powers to charge a penalty where a person who has claimed a CJRS payment deliberately does not use it to pay furloughed employee costs and fails to report this to HMRC within 90 days.
However, to encourage reporting and to reduce HMRC’s workload, there is a 90-day period of grace in which an employer can ‘fess-up’ to HMRC and refund the payment without incurring a penalty if it has been wrongly claimed. The 90 days runs from the date that the Finance Act 2020 became law for situations arising before that, or for situations arising after that, 90 days from when the situation arose.
In addition to the FA 2020 furlough fraud penalty, the normal criminal penalties for dishonesty remain in the background and could be charged in serious cases involving either high profile companies or serial fraud. These include fraud offences under the Fraud Act 2006 and the overlapping offences under the Theft Acts including false accounting. Fraud under the Fraud Act carries a maximum sentence of 10 years in prison.
You won’t until you receive a letter from HMRC or in extreme cases, get arrested.
Mistakes do happen and sometimes HMRC pursue innocent taxpayers thinking that they have been dishonest. With limited resources, they focus mainly on those they believe are the worst offenders and by the time you are informed that you are under investigation the officer will have devoted considerable time and resources to investigating you. This means that while they say officially that they are keeping an open mind and are being led by the evidence, the reality is that they are pretty sure you are guilty.
If you find yourself as the innocent victim of an HMRC investigation for furlough fraud the best advice is to “lawyer-up” as soon as you can and channel all communication through them. You should also not attend any voluntary interviews (whether or not under caution) and insist on HMRC putting their questions in writing to which you will give written responses through your lawyer. If arrested, then you should insist on your lawyer advising you and “no comment” any questions until you have the benefit of independent legal advice. Ideally, you should instruct your own lawyer and not accept the help of the ‘duty lawyer’ if one is offered.
Finance Act 2020 gives HMRC the power to make a director of an insolvent company jointly and severally liable for the income tax charge raised in relation to any CJRS payment to which the company was not entitled or any CJRS payment which was never intended to be used to pay employee costs, PAYE, NICs and make pension contributions in certain circumstances. Those circumstances are where the officer is culpable for making a deliberate CJRS claim to which the company was not entitled and where the company enters insolvency. These powers also apply where HMRC can meet certain tests showing there is a serious risk that the company will be unable to pay the income tax assessment.