The whistle blower-protection charity, Protect, say that 20% of calls in relation to furlough fraud have come from those in the hospitality sector. We asked Michelle Sloane, partner at law firm RPC for some advice for employees and employers
The government believes up to £3.5bn in Coronavirus Job Retention Scheme (CJRS) payments may have been claimed fraudulently or paid out in error. Reports suggest more than 8,000 calls have been received to the fraud telephone hotline and HMRC is now looking into 27,000 ‘high risk’ cases where they believe a serious error has been made in the amount an employer has claimed.
If you are an employer that thinks you may have inadvertently broken the law or are an employee that thinks your employer has acted illegally, here’s some advice on what to do from Michelle Sloane, Partner at RPC.
How might the furlough scheme have been abused in hospitality and drinks industry?
Examples include placing employees on furlough and then requesting that they continue to work as normal; pressuring or encouraging employees to work on a 'voluntary' basis; claiming on behalf of an employee without their knowledge and recovering 80% of the employee's salary, while the employee continues to work as normal; claiming on behalf of a 'ghost' employee – someone who has been dismissed before the CJRS's start date of 19 March 2020, or a non-existent employee who 'commenced work' following this date.
Is furlough fraud rife in the hospitality and drink supply chain?
The full extent of fraud committed by employers in the hospitality and drink industry under the CJRS is unknown at this stage. However, given that over 100,000 sector employers made use of the scheme, accidental mistakes and fraud is anticipated to be widespread. The whistle blower-protection charity, Protect, have stated that furlough fraud is the single biggest issue that they have dealt with in their 27-year history. Further, that 20% of calls to the charity in relation to furlough fraud have come from those in the hospitality sector.
Various factors have left the CJRS vulnerable to abuse. The speed with which the scheme was announced and implemented resulted in inevitable confusion amongst both employers and employees and the rules are complex. It is acknowledged by HMRC that some employers would have inadvertently fallen foul of the rules. Further, the scheme is dependent on honesty by those seeking to utilise the scheme and there is ample opportunity for fraudsters to abuse the CJRS.
HMRC reported on 16 July 2020 that it is considering 4,462 cases of potential misuse of the CJRS, including cases where employers have asked employees to work while on furlough or withholding funds. On 8 July 2020, HMRC made its first CJRS related arrest of an individual based in the West Midlands as part of its investigation into a suspected £495,000 CJRS fraud. This arrest sent a clear message that HMRC is taking abuse of the CJRS seriously.
What extra powers will HMRC have to pursue those who have mistakenly or fraudulently claimed CJRS?
Draft legislation, which will provide HMRC with enhanced powers in relation to CJRS, is currently progressing through Parliament as part of the Finance Bill 2020, which is expected to be enacted later this month. To help deter further abuse of the CJRS, the proposed legislation will not only give HMRC the ability to pursue those who have broken the furlough scheme rules, but it will also enable HMRC to hold company officers jointly and severally liable for CJRS abuse, where a business has become insolvent.
Employers will be given a 90-day window in which to self-report if they have made a mistake
The legislation will give HMRC the power to claw back CJRS payments made to businesses who were not entitled to receive such payments, or which have not been used to pay employment costs. Employers will be given a 90-day window in which to self-report if they have made a mistake. They will then be allowed to repay the sums received without incurring any penalties. However, following this 90-day period of grace, if HMRC considers that an employer has failed to notify a mistake, the employer will be investigated by HMRC and required to prove that they are innocent of any wrongdoing.
Penalties for wrongdoing will start at 100% of the sums incorrectly claimed. If remedial action is taken swiftly this may be reduced but the penalty will not fall below 30%. Where HMRC has already commenced questioning then the minimum penalty will be 50%. HMRC has also warned that it will consider criminal charges in cases of deliberate misuse. There is also a real risk that HMRC will seek to bring prosecutions against corporates for the offence of failing to prevent tax evasion, under the Criminal Finances Act 2017.
How can employers avoid significant penalties?
Once the proposed legislation has been enacted, the timeframe in which to self-report to HMRC in order to avoid significant penalties, or a criminal investigation, is short.
Given this relatively short timeframe and the fact that HMRC is already investigating claims, businesses should, as a matter of priority, carefully review their internal records and internal systems in order to identify any discrepancies, before the proposed legislation is enacted.
Employers should ensure any paperwork is up to date and consider collating any documentation which details the business rationale for why certain roles or employees were furloughed. Employers should carefully review any claims they have made and ensure they have acted in line with the law and importantly can evidence this with a clear audit trail. At the end of the day, prevention is better than cure - now is the time to act!
If you are an employee who thinks their employer has acted fraudulently who can they talk to?
You can report it to HMRC by filling in this form linked here.