COVID-19: Your workforce – furloughing - act to mitigate the risk of exposure to tax evasion offences as scheme could be open to abuse

Jim Harra, Chief Executive at HMRC, has informed a Treasury Committee meeting that he expects the government's multi-billion pound employee furlough scheme to be targeted by criminals seeking to exploit the £60 billion pledged in Chancellor Rishi Sunak's unprecedented Coronavirus protection package.

The essence of the furlough scheme allows businesses to apply for a grant of up to the lower of 80% of the employee's usual wages, or £2,500 per calendar month, for an initial three month period, beginning on 1 March 2020, where there is no work for the employee to undertake due to the closures required by social distancing measures. For further information on the operation and conditions of the furlough scheme, please see our previous blog post here.

An essential condition of the furlough scheme is that employees do not undertake any work "providing services or generating revenue" for or on behalf of the organisation. Training and volunteering are permitted, although where the line between volunteering and providing services is drawn, remains to be seen.

Mr Harra reassured the Committee that there are four protections in the design of the furlough scheme to assist with managing the risk of abuse:

1. the furlough scheme only relates to employees who were on the payroll at 28 February 2020;
2. the employer, to use the online service through which applications are made, has to use authentication credentials;
3. a whistleblowing hotline has been established where abuse of the furlough scheme can be reported; and
4. HMRC have the ability to retrospectively audit the claims made, described as 'downstream checking'.

Mr Harra stated "We are aware that some employees have already been reporting that some employers have asked them to work during the furlough period" and noted that HMRC are already conducting operations "looking for evidence of someone working during a period when they shouldn't be".

Mr Harra comments that where abuse of the furlough scheme is detected, payments will be disallowed, recovery of any over payment sought and, depending on the nature of the behaviour, criminal action may be taken against employers, indicate that HMRC are likely to take a zero-tolerance approach to any attempts to abuse the furlough scheme.

In addition to the risk of deliberate actions undertaken by businesses such as a sudden swelling of the number of persons recorded as 'employed' and inflated wages, the risk of an unjustified 'whistle-blower' complaint from disgruntled now-redundant employees, and the risk of credential theft from unscrupulous third parties via phishing or data theft, there is a real risk that HMRC will seek to bring prosecutions for the offence of failing to prevent tax evasion, under the Criminal Finances Act 2017. Although on the statute books since 2017, HMRC are yet to initiate a prosecution for the corporate criminal offence of failing to prevent tax evasion under the Criminal Finances Act 2017.

Regular readers will recall that this is a strict liability offence, meaning that if criminal tax evasion (whether or not there is a successful prosecution) and facilitation by a person or entity associated (i.e performing services for or on behalf of) the business are proven, the defendant business' guilt for failing to prevent will follow.  For further information see our note here.  

Businesses should also take this opportunity to review carefully their policies, procedures and controls around employee wages to ensure that they have 'reasonable preventative procedures' in place to address risk of tax evasion.

Given HMRC's public statement about the risk of abuse to the furlough system, it is likely that businesses will now be expected to act to mitigate the risk of tax evasion. A good starting point would be a clear 'tone from the top' message adopting a zero-tolerance approach to any attempts to manipulate the furlough system by anyone connected with the business. This should be followed by a clear consideration of this risk in accordance with the six guiding principles of risk management:

• Risk assessment - The nature and extent of the exposure to risk of criminal tax evasion of those who act in the capacity of person performing services for or on behalf of the company, particularly with remote working potentially decreasing ongoing oversight. 
• Proportionality of risk-based prevention procedures - Given the nature, scale and complexity of activities and the level of identified risk, what is appropriate given the level of control and supervision that can be exercised over associated persons in these unprecedented times?
  
• Top level commitment - The 'tone from the top' and fostering of a culture of intolerance of tax evasion. 
• Due diligence - Taking an appropriate and risk-based approach to what is possible within the confines of social distancing and how the obvious additional risks can be addressed.
• Communication (including training) - Communication, embedding and understanding of the policies and procedures proportionate to the identified risk.
• Monitoring and review - Documented monitoring and review, including modifications necessary to address the specific concerns of remote working, and improvements where necessary.

HMRC and the Courts may look to make an example of anyone found to have abused the furlough scheme and deprive the public purse at a time of national emergency. In the present climate, the reputational risk to businesses from any such prosecution is likely to be significant, not to mention the potential for an unlimited fine should the business be convicted.