Furlough, Act Now to Avoid the Knock

As we leave behind the curious summer of 2020, both HMRC and the SFO are readying themselves for the new term. First order of business: combatting corporate misuse of furlough and Covid-19 bail-out funds. According to official statistics released on 18 September, furloughing of staff in the wholesale and retail sector peaked on 24 April at 1.85 million employees - by 31 July, initial figures show 789,000 retail jobs furloughed– a decrease of more than a half since the peak for the sector. Some furloughed employees in the wholesale and retail sector have been returning to work as lockdown restrictions eased, others have, sadly, faced redundancy. As the furlough scheme winds down to a close next month, some employers may be faced with HMRC insisting that their furlough claims amounted to a misuse of – or even fraud against - the scheme.

HMRC has already begun to investigate and make arrests in relation to furlough fraud – this is concerning, given the number of businesses that might unwittingly be in breach of government requirements. From late March and throughout April 2020, in particular, employers were making judgment calls on the scheme rules and availability of a grant, applying ambiguous guidance and often in time critical situations.  This will have led to good faith judgement calls being made in challenging circumstances.  As the guidance and Treasury Directions have evolved and been repeatedly clarified and superseded, some of the earlier positions originally adopted, and decisions made, may, despite the genuine interpretation of the rules, be found to be wrong, when judged against later guidance and understanding.  Equally, there have been some examples of clear abuse  - for example,  claiming on behalf of an employee without their knowledge and recovering 80% of the employee's salary from the furlough scheme, while the employee continues in role, none the wiser. HMRC has warned that in cases of deliberate misuse of the scheme, it will consider criminal charges and it is likely that it will be seeking a 'trophy' scalp in the coming months by way of example to others.

We are entering a new era, where decisions made by businesses at a critical time will come under the cold light of retrospective scrutiny. HMRC is moving from provider of state funds to a more inquisitorial role.  We can expect to see it, and other relevant authorities, increasingly flex the new regulatory muscle given to them.  New powers conferred on the various authorities under legislation introduced this July include:

• significant new powers for HMRC to investigate potential furlough fraud;
• the imposition of stringent individual accountability on company officers for the entity's furlough liability if a company has become insolvent; and
• significant civil penalties to be imposed by HMRC in relation to furlough fraud (in addition to criminal penalties).

There is a saving grace for those businesses with concerns, though it is a time limited one. The new legislation has also introduced an opportunity for employers to self-report to HMRC if a mistake has been made.  A short timeframe of 90 days (which runs until 20 October 2020) has been afforded to businesses to come forward to notify HMRC. They will then be able to repay the furlough sums back without incurring any penalties.

Outside of the grace period, penalties for wrongdoing (in addition to repayment of the grant itself) will start at 100% of the sums incorrectly claimed. Where remedial action is taken swiftly this may be reduced but the penalty will not fall below 30%. In cases where HMRC has already commenced questioning then the minimum penalty will be 50%. There is also a real risk that HMRC will seek to bring prosecutions against corporates for the offence of failing to prevent tax evasion, under the Criminal Finances Act 2017. And there will be reputational damage to consider.  It is therefore critical that all businesses, many of whom may have implemented claims in haste when the scheme was first introduced, take the time now to carefully review any claims they have made under the furlough scheme to ensure they have acted in compliance with all the rules and can evidence this with a clear audit trail, should HMRC come knocking. Time spent doing so now could pay dividends in the weeks, months and even years to come.

Our specialist tax, investigations and employment lawyers in our retail team are at the forefront of work in this area. We have been quoted in theTelegraph (here) and have released a Podcast on this topic as part of our Taxing Matters series (here). 

Our teams have supported companies in the review of their furlough arrangements, identifying (and making good) areas of potential challenge by HMRC.  We are therefore able to discuss the likely impact of the new laws as well as practical ways to keep up to date and mitigate risk.