HMRC have made their first arrest in connection to alleged Coronavirus Job Retention Scheme ("CJRS") fraud. It was only a matter of time and it is not only fraudsters who should be concerned – all businesses that have accepted financial help from the UK Government during the COVID-19 pandemic should expect scrutiny and would be well-advised to take action now to ensure that they are fully protected.
Furlough fraud arrest
On 9 July 2020, HMRC issued a press release announcing that a 57-year-old man had been arrested as part of an investigation into a suspected £495,000 CJRS fraud. Computers and other digital devices were seized, and funds held in a bank account relating to his business have been frozen. The individual was also arrested in relation to a suspected multi-million pound tax fraud and alleged 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).
The CJRS is perhaps the best known of the various tax-based measures introduced by the UK Government to help businesses and individuals weather the COVID-19 pandemic. Subject to certain conditions, 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 (known as "furloughing"). According to HMRC, more than £27.4 billion has been claimed through the scheme, supporting approximately 1.1 million employers and 9.4 million furloughed jobs. HMRC have previously acknowledged that the CJRS is open to abuse and so this latest announcement was perhaps only a matter of time. Nevertheless, this is a relatively rapid response when compared to other tax-related criminal initiatives that often take some time to gather momentum.
HMRC criminal investigations
Although the Crown Prosecution Service (the "CPS") is the body ultimately responsible for deciding whether criminal charges should be made against a taxpayer, HMRC are responsible for investigating suspected tax fraud or evasion and then making a charging recommendation to the CPS. Criminal investigations will take a very different route to HMRC's civil enquiries and usually take a long time to prepare. However, the UK Government is obviously very keen to stamp out any abuse of the CJRS and other COVID-19 support payments (such as the "bounce back" loans and the Covid Corporate Financing Facility) and we may now be seeing investigations being expedited in order to send a clear public message. Indeed, HMRC's press release announcing the arrest encouraged those with any information to come forward and made it clear that they "will not hesitate to act on reports of abuse". A "self-reporting" portal is available and you would assume that those reports will become important pieces of evidence for prosecutors. Such reports will increase the speed at which HMRC can deploy in relation to CJRS fraud, meaning that anyone arrested will likely have less time than usual to prepare their defence.
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.
The arrest in this case was of an individual who is alleged to have carried out CJRS fraud in relation to a business. It is most likely that we will see criminal investigations like this for individuals rather than for a corporate body in areas such as cheating the revenue or fraud given the long-standing difficulties with piercing the "corporate veil" in criminal prosecutions. However, it is not only individuals who should be wary. As well as a number of (statutory and common law) offences that can be applied to a corporate body (subject to the "corporate veil" issue mentioned above), the strict liability corporate offences under the Criminal Finances Act 2017 (the "CFA") may be relevant to CJRS fraud. In short, the CFA offences apply where a "relevant body" (any body corporate or partnership, wherever formed) fails to prevent the facilitation of tax evasion by an "associated person". For these purposes, "associated persons" will include employees – but the definition is drafted widely to include anyone who performs services for and on behalf of the relevant body. This means the legislation can potentially catch any business that has indirectly assisted persons suspected of tax fraud. Knowledge or active involvement by senior management is not required – the only defence in law is to have "reasonable preventative procedures". With HMRC now making arrests in relation to the CJRS, it has never been more essential for all businesses to ensure that their procedures are in place and still fit for purpose in the new COVID-19 landscape.
It is also worth noting that this risk is not only faced by the businesses who may have committed any wrongdoing in relation to the CJRS themselves but also those independent persons who assist businesses such as accountants and tax advisors. We may see cases in the future where those persons have unwittingly assisted clients to make claims and are under investigation to understand the level of their knowledge The CFA will also apply in that respect.
The vast majority of CJRS claims will not be dealt with by dawn raids, arrests and prosecution. HMRC have recently published draft measures in the UK Finance Bill to ensure that, where CJRS or other COVID-19 support payments were not properly due, such payments can effectively be clawed back by retrospectively taxing them as income tax or corporation tax at the rate of 100%. Critically, the clawback mechanism will not only apply to cases where the CJRS or other support schemes have been deliberately abused (i.e., HMRC will be able to reclaim the money in full in cases of non-compliance, even for genuine errors). In cases of wrongdoing (i.e., where a person knew that they were not entitled to a payment), a penalty may be imposed on the basis that such wrongdoing was "deliberate and concealed" for penalty purposes - meaning a maximum penalty of 100% of the amount improperly claimed. However, under the latest amendments, if a person notifies HMRC within 90 days of the later of when (i) Royal Assent is granted to the Finance Bill or (ii) the income tax or corporation tax becomes chargeable, it should be able to avoid further sanction.
The Finance Bill is currently before Parliament and Royal Assent is expected to be received later this month. Although HMRC will be able to investigate claims for up to four years (or longer in the case of careless or deliberate behaviour), in the current climate all businesses should ensure they are prepared for an HMRC enquiry relating to COVID-19 support payments in the next few months. All businesses (even those that think they have acted in good faith) would be well-advised to pre-empt any enquiry by reviewing their own position as soon as possible, particularly as the 90-day period for all pre-July claims is likely to start this month. We say this because penalties may apply even for genuine or careless errors under existing legislation, and errors when claiming COVID-19 support payments are to be expected when one considers that businesses will have had more important issues ongoing at the time and it may be that full evidence of the criteria was not always available or collected for future examination.
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, if relevant, a disclosure made to HMRC. Otherwise, the evidence gathered would form the basis of a "defence pack" ready to be used if HMRC decided to start an enquiry.
If you would like further information on any of the above or how Bird & Bird can assist you, 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.