While the Government’s financial schemes have been a real help to many businesses during the coronavirus pandemic, fraudsters are quick to find ways to take advantage. The Coronavirus Job Retention Scheme (CJRS), known as the Furlough Scheme, is no exception and along with other financial support such as the Business Bounce Back Loan Scheme (BBLS), they are opening up a whole new risk of prosecution to business owners. Steven Mather, a commercial lawyer with Nexa Law, writes.
The news recently reported that HMRC arrested a West Midlands businessman as part of an investigation into a suspected £495,000 Coronavirus Job Retention Scheme fraud. Although he was also arrested on the basis of tax fraud and money laundering offences, HMRC said it was the first arrest in respect of furlough fraud.
As of the 9th August, 9.6 million jobs had been furloughed at a cost of £34.7 billion (source) and we’re informed by HRMC that there have been over 8,000 reports of so called Furlough Fraud. Furthermore, a report from economists at the universities of Cambridge, Oxford and Zurich have identified that 87% of men and 77% of women who received a salary top up continued to work for their employer while on furlough even though work is expressly prohibited by HMRC rules. Among those workers who didn’t receive a top up, 69% of men and 52% of women routinely ignored this prohibition. Overall, 63% of furloughed people revealed they had spent some time working for the employer that had furloughed them, yet only 22% of furloughed men and 17% of furloughed women say they were formally asked by their employer to work.
If we take those stats and extrapolate them, approximately 1.9 Million employees were asked to work in breach of the scheme rules. My rough calculations would suggest that is some £6 BILLION of Furlough Fraud that has been committed.
There’s a few issues which I’ve seen which is likely to amount to “furlough fraud” such as:
– Furloughing staff and not paying them the full 80% under the scheme, so for example only paying 60-70% of usual pay and pocketing the rest.
– Employers making backdated claims that include periods in which the employee was not working.
– Pretending to hire staff (ghosting) in order to take advantage of the support payments.
– Asking employees to work, whether as a ‘volunteer’ or ‘paid on the side’ or in order to get their wages ‘topped up’ to 100%
– Furloughing staff (without their knowledge) while they continue to work as normal
– Using the payments to pay for redundancy pay
It is not just the Coronavirus Job Retention Scheme that is subject to fraud though. The ease of obtaining Bounce Back Loans is likely to make it attractive to fraudsters (or even just to naïve business owners). An insolvency practitioner I work with has already seen a number of frauds which have been reported where the bounce back loans were used inappropriately including:
– A restaurant where they received £50K, promptly repaid family loans (leaving other suppliers and HMRC behind) and have decided not to re-open.
– A director received the £50K and has purchased a luxury car for his personal use.
– One director has a group of 5 companies and applied for the loan on each company. Upon receipt of the loan funds, he withdrew the lot (ie £250K) and redeemed his residential mortgage
Indeed it could be that the BBL scheme was applied for fraudulently in the first place, even if funds were then properly used. This could be, for example:
– Falsifying trading turnover when applying to borrow more than you would otherwise be entitled to.
– Not declaring the business was in trading difficulties on December 31st 2019 – a key point of the facility, which is to support otherwise viable businesses struggling with COVID 19, not prop up already failing ones.
– Using the funds for a purpose other than for the benefit of the business. This may be for a personal asset or for a property purchase.
What happens if a business has committed coronavirus support scheme fraud?
The Government brought forward legislation specifically to address inspection, investigation and prosecutions for misuse of the various coronavirus support schemes. The new legislation gives HMRC rights such as:
– ensuring HMRC can use its information and inspection powers to check coronavirus support claims have not been overpaid and that a CJRS payment has been used to pay furloughed employee costs
– giving HMRC powers to raise an Income Tax assessment on anyone who has received a SEISS or CJRS payment to which they are not entitled, or anyone who has not used a CJRS payment to pay furloughed employee costs. Penalties will be 100% of the sums incorrectly claimed.
– giving HMRC powers to charge a penalty where a person deliberately makes an incorrect claim for a SEISS or CJRS payment. It also gives HMRC powers to charge a penalty where a person who has claimed a CJRS payment deliberately does not use it for the costs it was intended to reimburse. The penalty will only apply if the person fails to notify HMRC about the situation within 30 days, or 30 days after the Finance Bill receives Royal Assent if it arose before that (currently this looks like it might become a 90-day window).
– giving HMRC powers to make a company officer jointly and severally personally liable for the Income Tax charge raised in relation to any CJRS payment to which the company was not entitled or any CJRS payment which was never intended to be used to pay furloughed employee costs in certain circumstances. Those circumstances are where the officer is culpable for making a deliberate CJRS claim to which the company was not entitled.
This is embedded within the Finance Act 2020, Schedule 16.
This new legislation is of course supplementary to existing legislation for tax fraud such as:
- Conspiracy to defraud; a common law offence – Maximum: 10 years’ custody. Sentencing range: Low level community order – 8 years’ custody.
- Fraud Act 2006 (section 1) statutory offence – Maximum: 10 years’ custody. Sentencing range: Low level community order – 8 years’ custody.
- Cheating the public revenue; a common law offence – Maximum: Life imprisonment. Sentencing range: 3 – 17 years’ custody.
- Criminal Finances Act 2017 – liability for corporates for the offence of failing to prevent tax evasion.
There is a 90 day grace period to report potential wrong doing, so if you are business owner and are concerned about the situation, then you may want to take legal advice and may wish to self-report to HMRC before the 21st October 2020.
