The key issues for businesses completing their furlough claims

Jeremy Johnson is a Director in our Tax Investigations Divison, inTAX. In this brief article he outlines the key issues businesses need to be mindful of in relation to past furlough claims.

The furlough (Coronavirus Job Retention Scheme) and self-employed support schemes have now ended, and the Office for Budget Responsibility (OBR) estimates they will have cost around £66bn. Jim Harra, HMRC’s Chief Executive, had previously estimated that furlough related fraud and error may account for 5% to 10% of payments. On that basis, there is between £3.3bn and £6.6bn that the Treasury will be very keen for HMRC to recover.

HMRC’s recent assessment of the ‘Tax Gap’ – the amount of tax unpaid through error, fraud and avoidance – was £35bn in total. Will HMRC therefore be throwing between 10% to 20% of its compliance resource looking at furlough and self-employment support scheme issues? Publicly, HMRC has stated that it has formed a team of around 1,200 people to look at COVID support payment issues.

Some criminal investigations have already hit the press, the first as early as July 2020. HMRC is, quite understandably, throwing some considerable resource at this.

From a civil perspective, Finance Act 2020, Schedule 16, sets out the mechanisms by which HMRC can recover payments made as well as penalise businesses, companies and potentially directors. 

We believe that the bigger issues will come from furlough, rather that the SEISS scheme, since employers could, and did, claim in relation to many employees at once. The potential for larger scale errors or fraud is far higher with that scheme.

In relation to furlough, here are the key issues businesses should be aware. 

What if I discover that I have made a mistake on a furlough claim?

If you become aware of an error, you need to repay HMRC the amount of any overclaim. HMRC has stated that if companies do so within one year of the end of the accounting period of the error, and sole traders do so before the end of January 2022, it won’t charge any penalty in relation to that disclosure and repayment. If there is any doubt as to the accuracy of any claim, it’s likely to be much cheaper to check and correct now rather than have HMRC find out later.

What can HMRC do if it finds a mistake on my furlough claim?

Putting to one side criminal enquiries and sanctions if HMRC suspects serious fraud, HMRC can assess any overpayment as if it was tax. HMRC can also charge a penalty of up to 100% of the overclaim if it believes that the claimant employer knew that they were not entitled to some or all of any claim at the time it became taxable. If HMRC can show knowledge of the error, the error is automatically classified as ‘deliberate and concealed’, the highest category of penalty.

I think I have a problem, what happens if my company can’t pay the money back?

Firstly, you need to speak to an insolvency expert. However, any debts may not be left behind in the company. If HMRC demonstrates, in an insolvency situation, that the officer(s) knew that there was an overclaim at the point it became taxable, then HMRC can make the officer(s) jointly and severally liable. This is in addition to any action that an insolvency practitioner might consider against the directors. The debt may not simply get left behind the corporate veil.

It is very important, therefore, to keep good records of what was claimed and why. HMRC is likely to make challenges in relation to knowledge of errors. If it can prove knowledge, it can charge penalties and move liabilities from a corporate to the officers of the company if necessary.

It will also be very important, if HMRC opens an enquiry and asks questions, to make sure that responses are not sent carelessly, and explanations are worded carefully and fully. A poorly worded comment that inadvertently provides HMRC with ammunition it could use to argue knowledge of the error could have significant financial consequences at worst or cause a long and painful argument at best.

Summary

• HMRC estimates that £3.3bn to £6.6bn of COVID support payments have been misclaimed through error and fraud.
• A team of around 1,200 has been brought together at HMRC to look at this.
• Mistakes uncovered should be disclosed and overclaims repaid.  If action is taken quickly there may be no penalties.
• Penalties can be up to 100% of the overclaim if there was knowledge of the issue.
• Officers of insolvent companies may become personally liable for any overclaim if they had knowledge of the error.