The UK Government has implemented a number of unprecedented initiatives to help the economy weather the COVID-19 pandemic. This includes various tax-based measures aimed at helping businesses experiencing cash flow issues as a result of social distancing (where customers are unable to make purchases in the normal way and employees are unable to work).
The best known of these measures is the Coronavirus Job Retention Scheme which, subject to conditions, enables employers to claim a grant from HMRC to cover a substantial portion of the wages of their workforce who remain on the payroll but who are temporarily not working during the COVID-19 outbreak. The Self-Employment Income Support Scheme was introduced to provide similar support for self-employed individuals or members of partnerships.
Please also see here for our recent article on HMRC’s announcement that almost 800 individuals have reported their employers for fraudulently claiming money from the Coronavirus Job Retention Scheme.
HMRC have now published a consultation on draft measures to ensure that, where these or other COVID-19 support payments were not properly due, such payments can effectively be clawed back (even in the case of genuine errors). The proposed measures would also introduce penalties in certain circumstances and, potentially, criminal offences for the most serious cases.
Once introduced, UK taxpayers should expect HMRC to enforce the new measures vigorously and relatively soon. All businesses who have taken the help provided by the UK Government need to take action now to ensure that they are fully protected.
THE PROPOSED MEASURES
In summary, the measures being proposed by HMRC will confirm that COVID-19 support payments (including, without limitation, those made under the Coronavirus Job Retention Scheme, the Self-Employment Income Support Scheme and any other payments made to businesses in response to the pandemic – including potentially business loans) are taxable payments. Where a recipient was not properly entitled to the payment, it will be subject to corporation tax or income tax (as applicable) at a rate of 100%. In short, HMRC will be able to clawback the money they have spent in cases of non-compliance in full.
Critically, the clawback mechanism will not only apply to cases where the support schemes have been deliberately abused. The confirmation of the support payments as taxable will also mean that HMRC can enforce repayment through their extensive powers and that taxpayers will be obliged to notify HMRC if they become aware of errors themselves. Penalties will apply for failing to notify HMRC.
Company directors should also be aware that they can be held personally liable for the amounts owed to HMRC where a company has become insolvent since a payment was made and the director knew at the time that the company was not entitled to the payment.
HMRC will also be able to charge penalties in cases of deliberate behaviour, and, where there has been dishonest or fraudulent behaviour, even pursue prosecution. There are a number of (statutory and common law) offences that may be relevant, including potentially the strict liability corporate offences under the Criminal Finances Act 2017 (where the only defence in law would be the have “reasonable preventative procedures” in place).
BIRD & BIRD COVID-19 enquiry support
Our Tax Disputes and Investigations 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. We can offer a range of services to ensure that your business is fully protected against the new measures being brought in by HMRC.
Investigation and disclosure
Given the clawback mechanism will apply irrespective of whether a business acted deliberately or not, all businesses should ensure they are prepared for an HMRC enquiry relating to COVID-19 support payments in the short term.
Businesses would be well-advised to pre-empt an enquiry by instructing legal counsel to conduct an internal interrogation of their own position (under the protection of legal professional privilege) as soon as possible and assess their risk exposure. We say this because, whilst the majority of businesses were grateful recipients of payments from the UK Government, there were many 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.
This work will include a review of 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 to mitigate any potential penalties.
The evidence gathered would then form the basis of a ‘defence pack’ ready to be used if HMRC decide to start an enquiry. Businesses will be obliged to disclose errors within 30 days of the new measures taking effect (likely to be in July or August) or else face penalties.
Our Tax Disputes and Investigations team has 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 purposes of tax errors disclosure and mitigation. We also have extensive experience in dealing with HMRC enquiries and challenging the use of information powers.
As the measures are proposed to include criminal action, corporate criminal prosecution should not be ruled out for cases of dishonesty, which could mean severe reputational damage and unlimited financial penalties. However, the new corporate criminal offences under the Criminal Finances Act 2017 might also be relevant. These are strict liability offences, meaning that it is not necessary for a prosecutor to show that a company's Board or senior management knew of the facilitation of tax evasion by one of its associated persons. Only those businesses that can show that they have “reasonable preventative procedures”' in place have a defence in law against the CFA offences. Earlier this year, we launched the CFA Toolkit to help a wide range of clients implement their procedures in a low cost and time effective manner. For further information, please see here.
Any businesses who 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.