Further to the recent Government announcement that the Coronavirus Job Retention Scheme (CJRS) will be extended until April 2021, many employers decided to re-furlough significant numbers of employees. When the scheme launched, the initial focus of HMRC and the Government was to deliver financial support but with the scheme having been re-opened and the percentage increased back up to 80% pay, attention is now shifting onto the detail of claims made with HMRC and reviewing claims to ensure they are accurate.
In September 2020, HMRC announced they would be enquiring into what they considered high value and/or high risk claims and initially wrote to 27,000 claimants. HMRC estimated that the error or fraud rate in the furlough scheme could have been between five and ten percent which at the time meant between £1.75 and £3.5bn. As the scheme has been further extended beyond the initial expected end date of 31 October, the potential amount lost due to error or fraud has increased and further claimants have since been contacted.
Given the short timeframe of introduction and the complex nature of the CJRS claim calculations, it is unsurprising that errors and over / underpayments have occurred. This has included changing contribution percentages as well as the difficulties of weekly vs monthly pay periods and where pay periods overlap different months. Attention has now shifted to reviewing previously submitted claims to ensure these were correct, identify any potential errors, and take the correct remedial actions, as well as making good these amounts with HMRC.
How can errors occur?
The main area likely to result in errors is the reference pay used to calculate the CJRS claim. While regular salary forms part of the reference pay, discretionary pay such as tips or commission do not. Whether pay was discretionary or not could be a matter of interpretation leading to some employers taking a position which may not be what HMRC concurs with. Furthermore, for those on zero hours contracts, the calculation of reference pay was even more complex as it required a comparison with equivalent pay before furlough or the average pay since April 2019.
The number of hours worked for the purpose of calculating the claim also presented an issue and whether the employee worked during the furlough period added further complexity. In the first stage of the CJRS, furloughed employees were not able to work although there were some exemptions, for example in relation to training and directors performing statutory duties. A potential error could have resulted around misinterpretation of the guidance so that furloughed employees worked in addition to training or employers did not properly track which employees returned to work.
While the introduction of flexi-furlough in the second stage of the CJRS addressed to some extent the issue of the employee being able to work during a furlough period, alongside the introduction of flexi-furlough also came changes to the level of wage claim the employer could make, decreasing from the initial 80% (capped at £2,500 per month) to 60% (capped at £1,875) by October as well as the covering of employer NIC and pension contributions ceasing in August. Under the third stage of the CJRS in place since 1 November the wage claim cap has returned to 80%/£2,500 but still without the employer NIC/pension contributions. Errors may therefore have arisen in terms of claiming the incorrect level in force at the time, the incorrect rate of employer’s NIC or mistakenly claiming employer’s pension contributions when in fact the employee had opted out.
What if my claim is incorrect?
Due to the timeframe of implementation and the complexity involved, it is inevitable that mistakes can and will occur. HMRC has already begun trying to tackle incorrect and potentially fraudulent CJRS claims. Given the potential amounts involved, a significant and increasing amount of HMRC resource is focusing on this area of reviewing and correcting claims made. Even companies with large HR departments are expected to have made errors, due in no small part to the often complex calculations and definitions of what constitutes ‘wages’.
What steps to take next?
It is important to look back at previous CJRS claims submitted, particularly periods covering when scheme changes came into force and the formulae used to calculate the relevant reference pay and what amounts factored into this calculation. At BDO we have been helping clients to review their CJRS claims and it is important to take pro-active steps to review your own calculations, so that if an error is identified, any amounts can be made good with HMRC on a voluntary basis, to avoid any potential penalty or interest issues. The new CJRS legislation also includes powers to publicise defaulters online and to pursue company office holders where businesses become insolvent, with joint and several liability.
If you would like to discuss any of the points raised above, please reach out to your BDO contact, who can put you in touch with our Employment Tax team to discuss how we can help.