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By Ben Hart,

HMRC getting ready to pursue company directors for furlough fraud

HMRC are getting ready to go after company directors suspected of making fraudulent claims under the various Coronavirus support schemes, with draft legislation including new enforcement powers. HMRC insists that they are only targeting those who deliberately defrauded the system and are not just trying to ‘catch people out’. Meanwhile the government has received almost 1,900 reports of fraud via its digital reporting service it has been revealed.

HMRC has just published draft legislation, available on the government’s website here, that has outlined its plans to recover payments made under the various Coronavirus support schemes – the Coronavirus Job Retention Scheme, the Self-Employment Income Support Scheme, the Small Business Grant Fund, the Retail, Hospitality and Leisure Grant Fund, the Discretionary Grant Fund, (or their respective counterparts in the devolved administrations) – that the recipient was not entitled to.

According to the draft tax information and impact note, HMRC will have new “powers to make a company officer 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 furloughed employee costs in certain circumstances”. In other words HMRC will now have the power to charge a penalty where there has been “deliberate non-compliance” of the rules, even if partners in a firm had not known that another partner had made a claim under one of the support schemes, with them saying it would hold directors “jointly and severally” liable for a penalty under an assumption “each partner is taken to know anything that any of the other partners knows”.  These new powers are more stringent and invasive than before. Like any crisis, the government is seeking to take advantage of the Coronavirus pandemic to increase its powers over the people, ever more so.

While the proposed legislation is ostensibly intended to target directors who committed fraud, directors who had unintentionally not complied with the rules could also face penalties. Speaking to FT Advisor, Tim Stovold, head of tax at Moore Kingston Smith said “Although these rules apply to fraudulently claimed furlough grants, they will also apply where the company has not understood the complex rules of the scheme and claimed the grant in error. HMRC is paranoid about fraud but these powers could make a director liable to repay an amount they never benefited personally from in the first place.”

However, an HMRC spokesman later told FTAdviser that it would only use the new enforcement powers and penalties in the most serious of cases, whilst helping to rectify things in those cases where someone had made a “genuine mistake” saying: “This provision would only be used in the most egregious cases, where amounts are deliberately over-claimed with the officer’s knowledge, and where the company is insolvent or in serious risk of insolvency and there is a serious possibility it will not pay the tax liability.”

It remains to be seen how much leniency HMRC will truly be willing to show businesses who have fallen foul of the rules, especially when they are desperate to make up the estimated £300 billion shortfall left by the Coronavirus crisis. It’s unclear how regularly the furlough rules are being flouted, although some watchdogs have claimed that furlough fraud is rife. It is thought that the furlough fraud that HMRC is looking for generally fits into a few main types: A company furloughing staff but then asking them to continue working, or to ‘volunteer’ unpaid, whilst another type involves a company claiming furlough money for a “ghost” employee who may be someone they had previously dismissed or “recruited” for this specific purpose, so they could claim the money – in other words a ‘no-show’ job. Employers not paying on the full amount to employees has also been reported, as has employers making backdated claims to convert periods where the employee wasn’t actually working. However HMRC has not given any estimates of how many directors it believes is engaged in this type of fraud, so we cannot know for sure if this is truly a widespread problem, or are HMRC just being paranoid again.

The government has reportedly been on the receiving end of nearly 1,900 reports of furlough fraud, according to an article in Personnel Today. The government has reported on the large number of reports, having received 1,868 reports of fraud relating to the Coronavirus support schemes via its digital reporting service, as of 29 May, more than double the 795 reports it had received as of 12 May. This comes after an HMRC spokesman issued a plea for people to snitch on anyone they suspected of fraudulent furlough related activity. The spokesman had said:

“We’d ask anyone concerned their employer might be abusing the scheme to please contact us. It could be that you’re not being paid what you’re entitled to, they might be asking you to work while you’re on furlough, or they may have claimed for times when you were working. These reports are just one way that HMRC identifies fraud. Claims are checked and payments may be withheld or need to be repaid if the claim is based on dishonest or inaccurate information. We won’t hesitate to take criminal action against the most serious cases. We’re not trying to catch people out – if it turns out to be a genuine mistake then we’ll help put it right, and if it’s more serious then we’ll step in.”

HMRC’s plea for people to snitch seemed to work rather well, too well in fact, with HMRC becoming such a victim of their own success and having received so many reports that it has had to temporarily stop taking reports over the phone! They are now instead directing people to their anonymous online snitching system. Last week we reported that HMRC were targeting people who may have been trading on websites like eBay to raise a little extra cash during the lockdown, and this looks set to continue. The one hand giveth, the other taketh away. HMRC has also confirmed that they had restarted investigations, as we reported last week, that had been put on hold due to the crisis.

The government’s Coronavirus Job Retention Scheme is due to run until October, with chancellor Rishi Sunak announcing last week that the furlough scheme would start to be wound down over the summer, with employers having to start paying employers’ national insurance contributions from 1 August. The latest figures show that the government has paid out a total of £17.5 billion in grants so far to 8.7 million people who have been furloughed since the beginning of the pandemic. The Coronavirus Job Retention Scheme has been used by more than a million employers to pay employees wages. The government last week extended the Self-employed Support Scheme which will now offer a second payment in August, having already paid out £7.2 billion on 2.5 million claims made by self-employed workers.

Even before the Coronavirus crisis, HMRC had been increasingly aggressive, and seeking increased penalties for those caught out by the taxman. HMRC are only likely to continue on this war footing, ever more enthusiastically as the government attempt to claw back some money to fill that gigantic shortfall, whilst it continues to lose money left, right and centre, with diminishing tax revenue as businesses’ incomes and profits plummet due to the lockdown, while increased deferrals asked for by struggling firms pushes the total tax take even lower; it had fallen by almost £26 billion in April when compared with April last year, a 42% year-on-year-drop, on top of a £2.3 billion year-on-year-drop recorded the month before. Combined with the hugely increased public spending as the government pays for the costly Coronavirus Job Retention Scheme and other support schemes, and the government looks to be in a real financial mess; public spending is expected to plough past £1 trillion this year, for the first time in history, creating an estimated £337 billion deficit!

There’s no doubt HMRC, who are the biggest debt collector in the country, must be under an enormous amount of pressure from the government to fill some of that shortfall, and there’s no doubt of course that HMRC will attempt to pass on a large part of that enormous pressure to the taxpayers, by cracking down more heavily than ever before on tax avoidance and tax evasion. The taxpayers who will end up paying the price will of course be those very same taxpayers that the job retention scheme and the other support schemes had ostensibly been there to help. Perhaps these schemes were never about actually helping the taxpayers, but were rather there as a way of keeping the rotten system afloat (albeit barely) for a few more years, enabling the government to effectively pass the buck on to the next generation of lawmakers and taxpayers.

If you need any advice relating to the various support schemes offered by the government, or you are worried about HMRC investigating you, please feel free to contact us. We also have a dedicated page on our website here with information on the various schemes including both the Coronavirus Job Retention Scheme and the Self-employed Support Scheme.

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