Furlough Fraud: CJRS Post-transaction Review Phase Started

05/09/2020 - 9 minutes read
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The first wave of compliance letters regarding the Coronavirus Job Retention Scheme (CJRS) was issued last week as HMRC moves into the post-transaction review phase of the scheme. The first batch of letters started to land on doormats from Wednesday 18 August.

HMRC will be asking questions where they have concerns over the validity of claims. This could be because claims have been miscalculated, or claims were made for ineligible employees.

CJRS: Focusing on fraudulent claims

HMRC have said that they will be concentrating their compliance activity on those who have been abusing the system. They will be focusing on fraudulent claims and not cases where the employer has made an innocent error.

We understand that HMRC will be sharing more details of its compliance approach in the coming weeks.

Authorised agents of employers who receive a letter should also receive a copy. Where the employer does not have an authorised agent, the letter will suggest that they show it to their agent if they have one.

Deadline for correcting an over-claim

In the meantime, where an employer becomes aware of an error in their claim, to avoid penalties they should contact HMRC to correct the position. The deadline for correcting an over-claim is the later of:

  • – 90 days after the date the employer received the grant they were not entitled to
  • – 90 days after the date the employer received the grant that they are no longer entitled to keep because their circumstances have changed
  • – 20 October 2020

Provided corrections are made in time, penalties can be avoided. HMRC have also produced a factsheet setting out the penalties for over-claiming under the scheme.

There are a few issues which are likely to amount to furlough fraud, such as:

  • – furloughing staff and not paying them the full 80% under the scheme, for example only paying 60-70% of usual pay and pocketing the rest;
  • – employers making backdated claims that include periods in which the employee was not working;
  • – pretending to hire staff (ghosting) in order to take advantage of the support payments;
  • – asking employees to work, whether as a ‘volunteer’ or ‘paid on the side’ or in order to get their wages ‘topped up’ to 100%;
  • – furloughing staff (without their knowledge) while they continue to work as normal; and
  • – using the payments to pay for redundancy pay.

Bounce back loans are also subject to fraud

It is not just CJRS that is subject to fraud, though. The ease of obtaining bounce back loans is likely to make it attractive to fraudsters, or even just naïve business owners. An insolvency practitioner I work with has already seen a number of frauds which have been reported where the bounce back loans were used inappropriately including:

  • – a restaurant business that received £50,000, promptly repaid family loans, leaving other suppliers and HMRC behind, then deciding not to re-open;
  • – a director received that £50,000 and then purchased a luxury car for his personal use; and
  • – one director who has a group of five companies applied for the loan on each company. Upon receipt of the loan funds, he withdrew the lot (ie, £250,000) and redeemed his residential mortgage.

Indeed, it could be that the BBLS was applied for fraudulently in the first place, even if funds were then properly used. This could be, for example:

  • – falsifying trading turnover when applying to borrow more than you would otherwise be entitled to;
  • – not declaring the business was in trading difficulties on 31 December 2019 – a key point of the facility, which is to support otherwise viable businesses struggling with Covid-19, not prop up already failing ones; and
  • – using the funds for a purpose other than for the benefit of the business. This may be for a personal asset or for a property purchase.

So, what happens if a business has committed coronavirus support scheme fraud?

Inspection, investigation & prosecutions for misuse

The government brought forward legislation specifically to address inspection, investigation and prosecutions for misuse of the various coronavirus support schemes. The new legislation gives HMRC rights such as:

  • – ensuring HMRC can use its information and inspection powers to check coronavirus support claims have not been overpaid and that a CJRS payment has been used to pay furloughed employee costs;
  • – giving HMRC powers to raise an income tax assessment on anyone who has received a SEISS or CJRS payment to which they are not entitled, or anyone who has not used a CJRS payment to pay furloughed employee costs. Penalties will be 100% of the sums incorrectly claimed;
  • – giving HMRC powers to charge a penalty where a person deliberately makes an incorrect claim for a SEISS or CJRS payment. It also gives HMRC powers to charge a penalty where a person who has claimed a CJRS payment deliberately does not use it for the costs it was intended to reimburse. The penalty will only apply if the person fails to notify HMRC about the situation within 30 days, or 30 days after the Finance Bill receives Royal Assent if it arose before that (currently this looks like it might become a 90-day window); and
  • – giving HMRC powers to make a company officer jointly and severally personally 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. Those circumstances are where the officer is culpable for making a deliberate CJRS claim to which the company was not entitled.

This is embedded within the Finance Act 2020, Schedule 16. 

This new legislation is, of course, supplementary to existing legislation for tax fraud such as:

  • – Conspiracy to defraud; a common law offence – maximum 10 years’ custody, with a sentencing range from low level community order to eight years’ custody.
  • – Fraud Act 2006 (section 1); a statutory offence – maximum 10 years’ custody, with a sentencing range from low level community order to eight years’ custody.
  • – Cheating the public revenue; a common law offence – maximum: life imprisonment, with a sentencing range of three to 17 years’ custody.
  • – Criminal Finances Act 2017; liability for corporates for the offence of failing to prevent tax evasion.

What you should do – Grace period

There is a 90-day grace period to report potential wrongdoing, so if you are a business owner and are concerned about the situation, then you may want to take legal advice and may wish to self-report to HMRC before 21 October 2020.

Contact MCL Accountants Southend on 01702 593 029 to optimise your tax position or if you need any assistance with your company accounts or furlough claims.

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