Original content provided by BDO UK.
HMRC currently estimates that some £5.8 billion (8.7%) of Coronavirus Job Retention Scheme (CJRS) payments were subject to fraud or error. HMRC believe that the vast majority of this was “opportunistic” fraud, rather than large-scale or organised fraud, with the rest being attributable to error.
HMRC’s annual report and accounts covering the year ended 31 March 2021, reveal the extent to which its focus has been on administering the various business support schemes put in place by the Government in response to the pandemic. HMRC was called upon to implement a number of measures, at very short notice; most notably the Coronavirus Job Retention Scheme (‘CJRS’ or furlough), to prevent a wide-ranging meltdown of the UK economy. It is still difficult to grasp the extent of this response; during that first year, a total of £60.7 billion was paid out to support 11.5 million jobs.
It is clear that support on this scale, which needed to be delivered almost instantaneously, would inevitably lead to the claimants’ degree of fraud and error.
Furlough Fraud: prevention is better than cure
HMRC was committed to preventing fraud prior to making CJRS payments and built automated controls into its digital claim process. It estimates that it prevented more than 100,000 ineligible or mistaken claims by carrying out pre-payment checks. These checks involved HMRC in deploying its Big Data and analytical capability to sniff out fraud and error from an early stage, for example comparing a business’ current turnover to historic data (from VAT returns) to determine whether the ongoing level of activity could reasonably be achieved given the number of its furloughed staff. Unsurprisingly, given the widespread public appreciation of the magnitude of the financial strain to the country’s finances, HMRC also received a large quantity of intelligence where members of the public suspected furloughed staff of continuing to work, the most common type of fraud.
HMRC’s positive record in tackling fraud
In response to this significant level of potential loss to the public purse through businesses making fraudulent claims, HMRC has recently established a task force of 1,265 staff to investigate CJRS non-compliance and to make recoveries from claimants; it is targeting recoveries of up to £1 billion over the next two years. HMRC has a strong track record when it comes to achieving positive results in tackling fraud. In the 2010 Spending Review HMRC received additional investment to recruit 1,000 staff into the enforcement of tax fraud and was set a target to increase the additional revenue from its enforcement and compliance work by £7 billion a year by 2014-15, with a total yield target of £26 billion. HMRC achieved this target and reported a total yield of £26.6 billion in 2014-15. Furthermore, its fraud prosecutions (excluding organised crime) increased more than fivefold in the same period. We can therefore predict with a high degree of confidence that HMRC’s efforts to recover wrongly claimed furlough pay-outs will hit their target and have a substantial impact on a large number of businesses over the next few years.
It is clear from statements issued by HMRC that its main focus is to improve compliance, rather than to bring prosecutions. This stance is consistent with the way HMRC has historically dealt with recalcitrant taxpayers. Whilst it can - and sometimes does - pursue penalties and criminal sanctions for noncompliance, its main objective is to bring defaulting businesses back into compliance and to recover funds for the public purse.
Coronavirus Job Retention Scheme – is your business in the clear?
Do you have concerns about claims your business made during the period of operation of the CJRS? The actions you should consider depending on your circumstances are outlined below:
- Where HMRC has already identified possible overpayments of furlough monies to your business, it will follow one of two approaches. In the clearest cases it has already started to open formal tax enquiries. In less clear-cut situations it is employing a ‘nudge’ approach inviting employers to review their position. If you have been contacted by HMRC, it is generally the best policy for the taxpayer to be open and transparent, with a view to establishing your liability to HMRC and heading off potential aggressive enforcement action.
- Similarly, if the business is not yet in HMRC’s sights, the best course of action is to identify any overclaims, possibly with the assistance of specialist advisors. You should then promptly make an approach to HMRC, to seek to agree the quantification of any amounts overclaimed during the last 22 months and to settle any liabilities arising. HMRC is actively encouraging voluntary disclosure through the redesign of this year’s tax return forms, which contain specific questions regarding amounts claimed under the CJRS and amounts which should have been claimed. However, if you don’t know how much you have over-claimed, entering incorrect figures on the tax return may simply compound the problem.
- If you deal regularly with HMRC, you will already be aware that it offers more favourable treatment following voluntary disclosures of liabilities than if it has already initiated enquiries or enforcement action. Penalties for overclaims can range from 30%, where the disclosure is entirely voluntary and unprompted, right up to 100% where HMRC itself has identified the non-disclosure and will treat the failure to notify as “deliberate and concealed”.
In light of potential penalties and the level of exposure – both civil and criminal – for directors of affected businesses, you should seek appropriate professional help and take steps to resolve your position with HMRC, hopefully before its investigators come knocking!
What if your business cannot pay back the overclaimed monies?
Since the time of the financial crisis around 2010, HMRC has operated a specific scheme, Time to Pay, which is aimed at maximising its recoveries of tax by means of repayment schedules and other measures agreed with businesses. This pragmatic approach was introduced to assist businesses to regularise their payment position. It has obvious benefits for the business itself, HMRC and the economy generally. Large numbers of businesses have benefitted from using this scheme in the last ten years or so and it has become a well-accepted route to avoid enforcement and possible insolvency.
Although CJRS debt does not fall within the ambit of Time to Pay, businesses may effectively reap the benefits of that scheme by repaying the furlough debt and instead applying for Time to Pay on their other liabilities to HMRC. HMRC is likely to avoid taking steps to force otherwise sound businesses into insolvency, thereby increasing the loss of revenue to the government. Again, it is important for businesses to recognise and quantify their liability at as early a stage as possible and to engage constructively with HMRC to resolve the position.
CJRS debt and future corporate transactions
Failing to resolve your historic CJRS claims may stifle your ability to enter into corporate transactions such as refinancing or business sales indefinitely into the future. In particular, buyers of businesses with CJRS claims are now commonly seeking indemnities for any undisclosed liabilities. Directors should add an independent review of their CJRS position to their pre-transaction due diligence checklist. You want to be able to assure lenders of buyers that you have no undisclosed liabilities arising from CJRS claims.
How will this play out?
We anticipate that the fallout from misuse of the furlough scheme will be with us for several years to come; insolvency practitioners and other advisors will have a key role to play in identifying and resolving the outstanding claims by helping to save affected businesses using the full range of rescue procedures.
- We expect that the estimated £5.7 billion of CJRS overclaims will increase over the current fiscal year, as HMRC and businesses identify further overclaims, some of them occurring in the second year of the operation of the furlough scheme between March 2021 and September 2021, when the scheme finally ended.
- We anticipate that HMRC’s patience will quickly start to wear thin with businesses who do not engage transparently and constructively with them, to clear any liabilities. You will need to work with your accountants and lawyers, who are used to negotiating with HMRC, to identify any CJRS exposures and to reach successful settlements with HMRC of historic liabilities.
- With an overhang of liabilities running into several billion pounds – and 1,265 dedicated HMRC staff tasked with recovering it - there will inevitably be a number of business failures. In those cases, HMRC will wish to have insolvency practitioners appointed who it can trust to quantify and agree its claims – and those of other creditors - fairly and efficiently.
- If you are a director of a company with furlough scheme exposure and are contemplating financing or sale transactions, you will need to identify and address these exposures well in advance of starting to negotiate the transaction with counterparties.
If you would like to find out more about the implications of HMRC investigations or are having any concerns with regards to the effect of repayment on your business, please speak to a member of our team,