HMRC have revealed that up to £3.5 billion in Coronavirus Job Retention Scheme (CJRS) payments may have been claimed fraudulently or as a result of error, and confirmed that enquiries have been opened into 27,000 "high risk" cases.
During his annual report to the Public Accounts Committee on 7 September 2020, HMRC's Chief Executive, Jim Harra, disclosed that HMRC are working on the assumption that 5-10% of CJRS claims were paid out incorrectly. This includes all claims from employers who have not met the formal conditions of the scheme, ranging from instances of genuine error through to deliberate fraud.
The CJRS enables employers to claim a grant to cover a substantial portion of the wages of their workforce who remain on payroll but who are not working (widely referred to as "furloughing"). The latest data shows that approximately £35.4 billion has been claimed through the scheme since its introduction in March 2020, supporting approximately 1.2 million employers and 9.6 million furlough jobs. Furloughed employees are not permitted to work for their employer but can, if they wish, volunteer, undertake training or take on new work with a different employer.
Given the scale of the scheme and the haste in which the first payments needed to be made, the CJRS has long been considered a minefield for errors and a tempting target for abuse. But how might HMRC determine an "error" from "fraud" in their investigations approach?
HMRC ramps up enforcement action
HMRC have been helped in identifying potentially fraudulent claims by over 8,000 whistleblower reports, meaning HMRC can deploy faster than they otherwise usually would. Accordingly, HMRC have begun enquiries into some 27,000 “high-risk” cases, which are likely to be cases where HMRC suspect a claim is fraudulent, for example where:
• employees have been asked to work whilst on furlough;
• claims have been made for employees who were never aware of being furloughed or even for non-employees; or
• claims have been artificially inflated in some way.
Certain initial enquiries are being pursued by writing to employers to notify them that HMRC have concerns about payments made to them under the CJRS, and asking them to engage with HMRC to correct their claims. It is understood that HMRC are contacting up to 3,000 employers each week in this way. For those employers who do not engage with the correction requests, HMRC will begin one-to-one investigations.
Where there are grounds to suspect fraud, HMRC will usually take more immediate action. HMRC announced their first "furlough fraud" arrest in July 2020, when an individual was arrested for suspected £495,000 CJRS fraud as well as other fraud and money laundering offences (along with eight other individuals as part of a linked investigation involving the deployment of more than 100 HMRC officers to multiple locations). HMRC clearly hoped the arrest would make a statement of intent, noting at the time that they "will not hesitate to act on reports of abuse". More recently, on 10 September 2020 a company director and accountant were arrested on suspicion of fraud by false representation, money laundering and fraud by abuse of position in relation to fraudulent applications for CJRS. The value of the fraud is suspected to be £70,000.
Victims of a genuine mistake
As the pressure on the UK Government increases to close the tax gap, it is clear that even businesses that acted in good faith may be caught by HMRC enforcement action. Although Mr Harra confirmed that HMRC’s current strategy is not to target such employers, the Prime Minister’s spokesperson clarified on 8 September that HMRC still expect employers to identify mistakes and seek to correct their claims where genuine mistakes have occurred.
To that end, the Finance Act 2020 introduced new measures to ensure that CJRS payments (and other COVID-19 support payments) can be clawed back where they were not properly due (even if as a result of genuine error) and an "amnesty" window for those who identify, and voluntarily disclose, an error in their CJRS claims. If an employer notifies HMRC by no later than 20 October 2020 of an error in its CJRS claims, the employer will be able to repay the financial support received without sanction or penalty. Critically, if the error is later discovered, a penalty of up to 100% of the relevant payment may be imposed on those who knew that they were not entitled to the payment on the basis that their wrongdoing was “deliberate and concealed”. It has been reported that as of 15 September 80,433 UK firms have voluntarily returned more than £215m to the government in furlough scheme payments that they did not need or took in error. However, this is far short of the amount that HMRC believe has been taken in error or as a result of fraudulent claims. Further detail on the new Finance Act measures can be found here.
What action should I take now?
The combination of recent announcements by the Government and the "amnesty" window offer a short window of opportunity for businesses that have made errors in their CJRS claims.
Those who have received payments under the CJRS should take this opportunity to pre-empt any HMRC investigation and review their own position as possible. This applies to all businesses, even those that think they have acted in good faith. We say this because HMRC's starting assumption is likely to be that all errors were made knowingly and so the evidence gathered in the internal investigation would form a "defence pack" against that assumption in case HMRC decide to start their own enquiries.
An internal review will include looking at all relevant records and payments, as well as employee sampling where evidence is gathered from employees to show they were not asked or requested to work whilst on furlough. Where anomalies are detected, a more forensic investigation (such as reviewing internal communications) might be required to help determine the behaviour involved and make a disclosure to HMRC.
In cases where HMRC already suspect that fraud has been committed, a warning is unlikely to be given. As part of their criminal investigations, HMRC can carry out searches of home and business premises under a warrant (these are often referred to as "dawn raids" because they generally take place in the early hours of the morning). As well as being alarming and intimidating for any members of staff or family present, HMRC searches can be potentially time-consuming and complicated affairs. In the event of a search, it is critical to examine the search warrant and to seek appropriate legal advice as soon as possible (and those faced with a search should politely request that HMRC do not begin the search until their legal team arrives). However, the search warrant will generally restrict the amount of time for the search to take place and so HMRC will likely be reluctant to delay. HMRC officers are not obliged to wait for your legal team and it is critical that they are not physically obstructed in any way. During the search, it is important to ensure that HMRC officers are accompanied where possible whilst on premises and a record kept of all documents examined, copied or removed. HMRC officers are not permitted to examine or seize any material subject to legal professional privilege and your legal team will be able to assist with identifying any such material. An article focusing upon a recent High Court judgment allowing HMRC searches during lockdown to continue can be found here.
In the event of a dawn raid or a letter from HMRC which suggests you have made any errors that are being investigated, please contact us as soon as possible.
If you would like further information on any of the above or how Bird & Bird can assist you prepare for a potential audit in the future, please do contact a member of our specialist Tax Disputes and Investigations team. Our team is dedicated full time to the resolution of disputes with tax authorities and offers unique access to tax specialists in addition to strength in defending complex criminal prosecutions brought by HMRC.