Click here and here to catch up on our previous furlough fraud coverage.


In the Budget 2021 presented in March, the Chancellor announced the establishment of a taskforce as part of the crackdown on those defrauding the COVID-19 support schemes. The new Taxpayer Protection Taskforce, supported by £100m investment and manned by more than 1,250 HMRC employees, will be dedicated to detecting and investigating wrong or fraudulent claims including those under the Coronavirus Job Retention Scheme (“CJRS”), colloquially known as the furlough scheme. With £3.5bn of the schemes reportedly claimed either fraudulently or mistakenly,[1] it is expected that HMRC’s taskforce will be relentless in their pursuit of such cases. Therefore, businesses that have claimed under the furlough scheme should make sure they comply with the obligations and prepare for potential enquiries by HMRC

What is “furlough fraud”?

Furlough fraud involves an employer deliberately claiming back wages they were not entitled to from the furlough scheme. Some typical examples include putting an employee on furlough when that employee still carries out work for the employer, overstating the number of pre-COVID work hours, or making claims for individuals who do not actually work for the employer.

Whilst, understandably, mistakes or errors could have been made owing to the intense and unprecedented nature of the pandemic’s climate, HMRC expects that businesses should self-report and rectify the matters in time, or face the penalties imposed.

What are the HMRC powers relating to furlough fraud?

HMRC has a broad range of powers to open an investigation into claims that are allegedly fraudulent. Depending on the suspected nature of the fraud, HMRC can, for example, request business records, including emails, to verify if an employee has continued to work despite being furloughed. HMRC can also conduct spot searches on businesses and seek to use their criminal investigation powers, including interviewing a suspect under the Police and Criminal Evidence Act 1984.

The recent enactment of the Financial Act 2020 provides HMRC with new powers, such as clawing back the payments to businesses they were not entitled to. It means that HMRC can recover the full over-claimed amount through a tax assessment. They can also impose financial penalties of up to 100% of the wrongful and/or fraudulent claims. The penalties are applicable to the employer as well as the company officer personally. HMRC may also “name and shame” the deliberate offenders, risking severe reputational damage for the business.

Meanwhile, the Finance Act 2020 introduced an amnesty period of 90 days[2] where employers can correct any errors and repay their claims without penalty. After this point, businesses that wrongfully claimed under the furlough scheme would then be subject to HMRC enquiries and potential liability.

What are the criminal offences relating to furlough fraud?

Serious furlough fraud may lead to investigation and prosecution for criminal offences, including fraud by false representation,[3] false accounting[4] and cheating the public revenue. The corporate may also face the strict liability offence for failing to prevent the facilitation of tax evasion under the Criminal Finances Act 2017.

What should businesses do?

Businesses using the furlough scheme should carefully review their furlough payments to ensure the claims made were legitimate. If any discrepancies are unearthed, businesses may need to conduct a detailed examination or forensic investigation to consider whether a disclosure to HMRC should be made.

Businesses should collate any documents to justify the claims, such as financial forecasts and procedures used in managing the actions during the furlough period. Businesses have to ensure proper records are kept for six years as required by HMRC and are ready to answer any enquiries if needed. 

Conclusion

Given the economic pressure on the Government as a result to the pandemic and serious exploitation of the furlough scheme, it is expected that HMRC will increase scrutiny on the claims under the COVID-19 support schemes to enforce penalties and contribute to HM Treasury.

It is reported that HMRC has already opened around 10,000 investigations into suspected wrongful claims, within which some are criminal investigations.[5] Therefore, businesses should act now to ensure compliance under the schemes and rectify any mistakes as soon as possible. To avoid corporate liability, businesses should also strengthen their internal procedures, such as audits on furlough claims, and seek legal advice where necessary.


[1]  BBC, ‘Coronavirus: Up to £3.5bn furlough claims fraudulent or paid in error – HMRC’, 8 September 2020 [link]

[2] 90 days after the day on which Royal Assent on the Finance Act 2020 was granted, i.e. 22 July 2020 or 90 days after the day on which the income tax on the payment made becomes chargeable.

[3] The Fraud Act 2006

[4] The Theft Act 1968

[5] Financial Times, ‘Job support scheme fraudsters face HMRC crackdown’, 6 October 2020 [link]


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