HMRC investigates furlough fraud cases

According to HMRC statistics, as at midnight on 16 August 2020, 1.2 million employers had taken advantage of the furlough scheme, furloughing or flexibly furloughing 9.6 million jobs. The value of claims made by employers to HMRC under the scheme is over £35.4 billion.

As the furlough scheme was rapidly set up to meet a pressing and unprecedented need, HMRC have acknowledged that the scheme is open to abuse.  Jim Harra, HMRC’s chief executive, told the Treasury select committee on 8 April 2020:

The Chancellor announced the Coronavirus Job Retention Scheme (“the furlough scheme”) as one of a number of measures to help businesses weather the effects of the COVID-19 pandemic and lockdown. A similar scheme, the Self-Employment Income Support Scheme (“SEISS), operated for those who are self-employed. For more information on the furlough scheme itself, please see our article What does “furlough” mean for employers?

HMRC, are now looking in to 27,000 “high risk” potential furlough fraud cases. It is clear that HMRC are actively investigating claims made and that, in appropriate cases, prosecutions will follow. By August 2020, HMRC had received almost 8,000 reports of furlough fraud on their Fraud Hotline and in early July the police arrested a man as part of an investigation into suspected furlough fraud valued at £500,000. More recently, in September, a company director and an accountant were arrested over suspected furlough fraud. It is estimated that up to £3.5billion has been paid out as a result of fraud or error.

Type of behaviour which may be investigated:

• Placing employees on furlough and then requesting that the employee continues to work or that they work on a voluntary basis;
• Where an employer claims on an employee’s behalf, without the employee’s knowledge, and the employee continues to work as normal;
• Employees working in other jobs, for the same employer, when they were furloughed from their main employment;
• Employers making claims for furloughed staff that did not exist;
• Employers misrepresenting working of hours of staff in order to maximise payments under the furlough scheme;
• Employers furloughing staff and claiming a grant, yet only passing a proportion on to employees;
• Employers making back dated claims, which include periods when the employee was not working;
• Employers using the payments to fund redundancy pay.

Furlough fraud offences

Individuals

The Fraud Act 2006 covers a number of offences that may be relevant to furlough fraud, such as fraud by false representation, fraud by failing to disclose information and fraud by abuse of position. For there to be an offence, the prosecution would need to prove that any false representation to HMRC was made dishonestly and with the intention of making a gain (or causing a loss to another).  The gain need not to have been realised – so even if HMRC were to uncover the fraud before a payment were made – a conviction could still be possible. Any conviction carries a risk of a substantial prison sentence.

Furlough fraud may also be prosecuted by way of other criminal offences such as conspiracy to defraud, false statements made by a company director and false accounting.

Corporate bodies

The Criminal Finances Act 2017 created a criminal offence for the failure of a company to prevent its employees in the facilitation of tax evasion.  This is a strict liability offence, meaning that the prosecution do not have to show that there was any intent on the company’s part.  However, the company may have a defence if it can prove that it had put in place reasonable prevention procedures (such as training and policy documents) or that it was not reasonable in the circumstances to have those procedures in place (for example in smaller businesses).

Where a corporate body can be capable of committing a criminal offence, those members of senior management and third parties who provide advice to businesses, must be wary of inadvertently assisting in wrongdoing.  It is imperative that businesses actively review existing policy documents and implement, as a matter of importance, policies and procedures in respect of applications to the furlough scheme.

The Criminal Finance Act 2020, which was rushed through Parliament to tackle those who have abused the furlough scheme, received royal assent on 22 July 2020. This new piece of legislation gives HMRC an arsenal of civil remedies, which includes the right to charge 100% tax on wrongly claimed furlough payments and, importantly for company officers, the ability to make a company officer pay a portion of the company’s penalty where there has been a deliberate act or failure attributable to that individual. Importantly, the Act also places an obligation on businesses to notify HMRC of any wrongly claimed payments.

How we can help

We are able to guide you through the review process and assess whether claims have been made in accordance with the requirements. As a firm, we have extensive experience of both tax and criminal/regulatory investigations by HMRC. We are able to represent you at all stages of review, investigation and prosecution. Additionally, our employment and tax teams add to our wider experience in this area.

Conclusion

The clear message is to review any claims that have been submitted, now. The scale of the potential fraud is immense and HMRC have already signalled a clear intention to take action. This is further amplified by arrests already made in connection with furlough fraud, which appear to be only the tip of the iceberg. If you are in any way concerned about how claims for furlough payments and furlough fraud may affect you, whether you are a business or an employee, then please do not hesitate to get in touch with us.

This article has been co-written by Mark Jones and Henry Watkinson.