Insights

The government’s furlough scheme, known as the CJRS (Coronavirus Job Retention Scheme), was launched very quickly and those using it have been allowed to make an ethical judgement about whether they should be claiming or not. By 24 May 2020, the CJRS had been used by 1m employers claiming grants for 8.4m employees on furlough, and according to Jim Harra, chief executive of HMRC, the scheme has become very attractive to fraudsters.

Before the CJRS furlough scheme portal opened for claims, HMRC launched a new fraud hotline and an online whistle-blower service. This was to replace their previous telephone and postal fraud reporting contact lines. Since the CJRS launch, HMRC has received around 1,900 reports of potential fraud related to the scheme from people who have notified them of cases where the rules have been breached.

A large proportion of these tip-offs are linked to employers who have asked their employees to work whilst they are furloughed and are claiming for the cost of their wages under the CJRS. This is a case of fraud by false representation (according to the Fraud Act 2006 section 2).

It is also apparently the case that some employers are making CJRS claims for employees who have not been furloughed or are claiming the grant but not passing it on to furloughed employees.  Some employers have also been reported for making backdated claims to cover periods during which employees were actually working.  These are examples of furlough scheme fraud under the same Act.

There have been other more outrageous examples reported, such as employers submitting claims for family members or partners who were not previously employed by them, but who they have hastily provided a salary to, and employers who have furloughed employees and replaced them with family members.

Most examples of furlough scheme fraud are less obvious than these, and many relate to employers asking their furloughed staff to do odd bits of work. This is apparently widespread, as one survey by a firm of solicitors identified. It found that 34% of employees working across a wide range of industry sectors had been asked by their employer to so some work whilst they were furloughed.

What are the CJRS rules with regard to working?

According to the rules of the CJRS scheme, as set out in para 6.1(a) of the HMRC Direction issued on 15 April 2020, a furloughed employee is an employee who “has been instructed by their employer to cease all work in relation to employment.”  The HMRC Direction goes on to clarify that “training activities directly relevant to an employee’s employment agreed between the employer and the employee must be disregarded for the purposes of para 6.1(a)”.  This means that employees can undertake training which is directly relevant to their job whilst furloughed, but they can’t work to generate income or even do administrative tasks for the employer who has furloughed them.

A furloughed employee can take a job with a different unconnected employer (if their primary employment contract doesn’t prevent this), or volunteer for a different organisation, but an employee cannot work as a volunteer for their own employing organisation, even if it is a charity.

Directors on furlough

Company directors are in a more difficult position because they must continue to meet their statutory duties to file returns with HMRC and Companies House. The HMRC Direction in para 6.5 specifically allows directors to provide information relating to the administration of their company whilst furloughed. However, a director must not create income for their own business or company. This precludes carrying on the business of the company whilst also claiming the CJRS grant for their director’s salary from that company.

HMRC’s power to enforce CJRS fraud penalties

Draft legislation was published on 29 May to provide for the taxation of the coronavirus business support grants (this includes the RJRS and also the Self Employed Income Support Scheme -SEISS). HMRC also has the power to investigate abuse of those schemes, raise assessments to claw-back SEISS or CJRS grants claimed incorrectly, or where the grant has not been paid to furloughed employees. Where the claimant is a company, all company officers can potentially be liable for the tax charge that claws back the incorrect claim.

HMRC will very likely apply penalties where a person has deliberately made an incorrect claim or has failed to pay the grant claimed to its employees. However, there is a time window to rectify any issues. The official tax information note states that penalties will only be applied if the person fails to tell HMRC of the error by the later of; 30 days of making the claim, and 30 days of the law being passed.

It is expected that these rules will be written into the Finance Act 2020 in late July. This means that any earlier errors made in CJRS or SEISS claims must be declared to HMRC and corrected within 30 days of Royal Assent to avoid any penalties.

What furlough scheme fraud penalties are payable?

Where an error is not declared to HMRC in the correct timeframe, but a voluntary disclosure is made, the penalty imposed will be between 30% and 100% of the tax charge that claws back the grant. If HMRC prompts the disclosure, the penalty will be between 50% and 100% of the tax charge. An employer who breaks the CJRS rules will need to pay tax charges and penalties of up to 200% of the amount over-claimed.

All employers should take care to ensure that any furloughed employees do not carry out any work that makes money or provides services for the organisation or any associated organisation(s). It might be wise to take steps to prevent this happening by removing access to work emails, texts or phone calls and include an out of office message to explain that work will not be carried out by that individual until further notice.

HMRC has made it clear that it will be auditing employers and will claw back payments made where the application is found to be fraudulent or based on dishonest, inaccurate information.

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