On 22 July 2020, the Finance Bill 2020 received Royal Assent and became law. The Finance Act 2020, as it is now known, contains measures to ensure that Coronavirus Job Retention Scheme ("CJRS") or other COVID-19 support payments can be clawed back where they were not properly due. Any business or individual that has previously received a COVID-19 support payment to which it was not entitled has been given 90 days (until 20 October 2020) to notify HMRC of any issues or else may also face penalties (up to 100% of the amount of the payment received).
Below we set out the key points on the new measures and what steps all businesses should be taking now.
What payments are affected?
The Finance Act 2020 measures apply to any payment made under any one of a number of UK Government schemes, including:
- the CJRS;
- the self-employment income support scheme;
- the coronavirus statutory sick pay rebate scheme; and
- a coronavirus business support grant scheme (any scheme under which a public authority makes a grant to businesses to provide support in connection to COVID-19).
The list of applicable schemes can also be expanded by the Government. If you are in doubt about any support payment you have received, please let us know.
How does the clawback work?
Schedule 16 of the Finance Act 2020 imposes a tax liability on any person who receives a COVID-19 support payment to which they are (either wholly or partially) not entitled.
As well as cases where the payment was never in fact due, in the case of the CJRS an employer business would be treated as not being entitled to a payment where:
- there has been a change in circumstances after the payment was made; or
- the business has not, within a reasonable period, used the amount to pay the costs which it was intended to reimburse (i.e., employee salaries).
The payment becomes liable to tax at the time at which it was received (or, if a recipient of a CJRS payment ceased to be entitled to the payment after it was received, at the time it ceased to be entitled).
Any payments caught by the clawback tax will be taxed at the rate of 100% (as income tax or corporation tax, as applicable), meaning they can be clawed back in full. Critically, the clawback mechanism will not only apply to cases where the CJRS and other support schemes have been deliberately abused – HMRC will be able to reclaim the money in full even for genuine errors.
In the case of businesses that have since become insolvent (or where insolvency is considered likely), officers and managers can themselves become liable for the tax where they knew that the company was not entitled to the payment.
When will HMRC begin their investigations?
Normally, HMRC can only issue assessments for tax in certain circumstances (i.e., where an enquiry has been formally opened). Under the new measures, an HMRC officer is allowed to make an assessment at any time where they consider that a person has received a payment to which they were not entitled.
Although HMRC will be able to investigate claims for up to four years (or longer in the case of careless or deliberate behaviour), we expect HMRC to be aggressively pursuing their investigations within the next few months. The UK Government has paid more than £27 billion through the CJRS to more than 1 million employers, as well as billions more on other schemes, and will obviously be keen to claim back amounts wherever and as soon as possible. HMRC have also received thousands of reports of potential deliberate abuse of the CJRS and will want to send a very strong statement that such behaviour will not be tolerated. As reported earlier this month, HMRC have already begun criminal investigations – see here.
Will penalties apply?
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, businesses have been granted a short window in which to come forward to avoid further sanction. Under the new measures, a person should notify HMRC of any issues by no later than 20 October 2020 (or, for payments made after that point, within 90 days of the tax liability being triggered). If they do so, they should avoid any wrongdoing penalties.
For the most serious cases, criminal prosecutions are likely and there are a number of (statutory and common law) offences that may be relevant, including the strict liability corporate criminal offences under the Criminal Finances Act 2017 – again, see our earlier article here.
What action should businesses take now?
All businesses would be well-advised to use the short window being offered to pre-empt an HMRC investigation and review their own position as soon as possible.
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.
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. Moreover, 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.
The Tax Disputes and Investigations team at Bird & Bird 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. We have a wealth of experience leading complex tax disclosure projects, undertaking forensic internal investigations with clients in order to submit detailed representations to HMRC for the purpose of tax error disclosure and mitigation. Our expertise in tax disclosure projects means we are able to quickly understand and advise clients on how to deal with tax risks that arise in difficult circumstances, in particular where deliberate or fraudulent behaviour is alleged or suspected.
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.