Companies which have wrongly received furlough payments may find themselves facing a severe penalty, writes ROSS WEBB
Businesses will be familiar with the UK Government’s Job Retention Scheme, essentially a job saving scheme, allowing employers to claim a substantial part of the employment costs of furloughed employees through PAYE.
Over 9.4 million employees have been placed on furlough, with 1.4 million employers having made at least one claim. The total claimed this far exceeds £26 billion and the scheme has certainly played a significant role in keeping many businesses afloat, and many people employed.
The programme was due to finish at the end of October but at the last minute it was extended by the Chancellor. Despite this, HMRC believe that up to £3.5 billion in claims may have been made fraudulently or paid out in error so far.
The original scheme was swiftly introduced for good reason but it was undoubtedly complex to manage, requiring employers to grapple with the meaning and intention of three not insubstantial (and at times inconsistent) guidance notes, and one set of Treasury directions, twice revised.
It is to the credit of firms across the country, many of whom were small and medium sized businesses, that most got a handle on what was required. However, in trying to focus on this major piece of employment legislation, it would have been easy to miss the Finance Bill, introduced in October, which gave HMRC investigatory powers, and in turn it has announced its intention to investigate furlough claims in depth.
The clock is already ticking to make corrections and employers had until 20 October, or 90 days from the date of the claim, (whichever was the later) to self-report overpayments of furlough grants and companies must repay overpayments to avoid a penalty. However, with the extension of the scheme it remains to be seen how closely HMRC sticks to these deadlines.
HMRC has the right to retrospectively audit claims with scope to claw back payments via income tax assessments in order to recover funds it considers fraudulent or erroneous.
There were a plethora of conditions for employers to meet to ensure compliance with the scheme, one of the most critical being the retention of written records.
As for the penalties for not getting it right, they are not insignificant.
Directors can be jointly and severally liable with the company for penalties and repayments if the director has deliberately made a claim to which the company was not entitled or where the company becomes or is likely to become insolvent.
Specifically, the Finance Act 2020 makes a business in receipt of a coronavirus support payment liable to income tax (at 100%) if it was not entitled to it under the CJRS (or JSS).
‘Ignorance is not a defence when it comes to HMRC investigations, so the choice is simply to make sure you are playing it by the book’
The same Act provides for an individual (responsible for management of the company) to be jointly and severally liable for that liability where the company is subject to an insolvency procedure, or there is a serious possibility of the company becoming insolvent and: (i) the individual was responsible for the management of the company at the time (ii) the individual knew (at that time) that the company was not entitled to the amount of the coronavirus support payment and (iii) there is a serious possibility that some or all of the income tax liability will not be paid.
How HMRC will go about assessing the state of knowledge is not clear. The concern is that knowledge might be assumed and it would then be for the individual to demonstrate that they didn’t know at the time, which might be difficult in the absence of a paper trail or subsequent audit.
Furthermore, directors who have deliberately facilitated a fraud on the scheme could also face criminal charges. In addition there are strict liability corporate offences where a corporate body fails to prevent tax evasion by an employee or anyone who performs services for it, unless it can show it took reasonable preventative measure.
As anyone knows, once you are on the HMRC radar it can be extremely tough to avoid ongoing scrutiny, and the professional, financial and reputational damage of any conviction can be severe.
Ignorance is not a defence when it comes to HMRC investigations, so the choice is simply to make sure you are playing it by the book, or find someone who can help you do so.
Ross Webb is a partner in dispute resolution at Aberdein Considine