HMRC: The war on furlough fraud and how they will fight it

In an effort to shield the economy from serious harm the UK government presented a cornucopia of financial support packages to individuals and businesses.

These have included the Self-employed Income Support Scheme (SEISS), Coronavirus Job Retention Scheme (furlough), Coronavirus Business Interruption Loan Scheme (CBILS), Coronavirus Large Business Interruption Loan Scheme (CLBILS) and Bounce Back Loan Scheme (BBLS). All of the above have given directors and individuals the opportunity to claim money from the public purse.

The latest figures for amounts claimed under the various schemes, as reported by the government are as follows:

Scheme                                    Date of statistic                         Value of Claims  (£billion)           

Furlough                                   12 December 2020                    46.4

SEISS Tranche 1                      19 July 2020                             7.8

SEISS Tranche 2                      15 November 2020                    5.9

SEISS Tranche 3                      13 December 2020                    4.8

CBILS                                       13 December 2020                    19.64

CLBLIS                                     13 December 2020                    4.97

BBLS                                        13 December 2020                    43.54

Total                                         13 December 2020                    133.05

The above figures have been compiled from the publicly available HM Treasury coronavirus statistics. They are the headline figures and more detailed statistics on number of loan facilities approved, number of claimants and number of employee schemes, amongst others, are available on the UK government website.

The National Audit Office issued a press release on 23 October 2020 containing estimates on the levels of error involved in the issuing of support payments. They stated that HMRCs fraud hotline had received well in excess of 10,000 referrals regarding coronavirus support payment fraud. They elaborated that the scale of fraud and error is likely to be considerable and that the current estimates of HMRC, that 5-10% of furlough payments and 1-2% of SEISS grants are based solely on assumptions and not evidence and that true visibility would likely be unavailable until the end of 2021.

HMRC Investigates

The Treasury has paid a substantial amount of money by way of grants and loans and HMRC will no doubt be gearing up for an impetuous assault on all those who did not return erroneous payments by the 20 October 2020 deadline.

Under the Finance Act 2020, Schedule 16 paragraph 8 sets out that any person who is the recipient of a coronavirus support payment where they were not entitled to it will become liable for that amount as income tax. Not being entitled to the payment can be either due to a change in circumstances or for not using the monies to reimburse the costs they were intended to cover within a reasonable period. The amount of income tax chargeable is the amount which the person was not entitled to or the amount as has not been repaid. In essence, this is a 100% clawback provision for the full amount received under the scheme and it applies to companies even where they are chargeable to corporation tax. In the case of partnership, paragraph 9 emphasises that an assessment made against one partner is jointly and severally enforceable against all partners.

Under paragraph 13 of the Finance Act, when such an assessment as above is made Schedule 41 of the Finance Act 2008 applies to a failure of a person to notify, under section 7 of the Taxes Management Act 1970, a liability to income tax under paragraph 8 of schedule 16 Finance Act 2020, that the person was not entitled to the amount of the coronavirus support payment in relation to which the tax is chargeable. The failure to notify HMRC is treated as deliberate and concealed and thus excludes paragraph 6 (b) and (c) in schedule 41 Finance Act 2008 meaning the penalty is 100% of the potential lost revenue.

As an example, if a person or company who was not entitled to a coronavirus support payment received £10,000 then upon assessment HMRC would impose an income tax liability of £10,000 - full clawback of the amount advanced. In addition, there would be a further penalty for deliberate failure to notify HMRC of the liability of 100%, meaning the total liability would be £20,000.

Liability for Insolvent Directors

It comes as no surprise that the Finance Act contains plenty of weapons for HMRC to deploy against directors of companies which have become insolvent (or insolvency is considered likely) and who have received coronavirus support payments to which they were not entitled.

Where a company has been served with a notice under the above delineated paragraph 8 of the Finance Act 2020 and subsequently enters into an insolvency process or there is a serious possibility that it will, paragraph 15 of the Finance Act 2020 provides that an individual will be jointly and severally liable for the company’s assessment where there is a serious risk that the income tax liability will not be paid.

Where a now insolvent company has received £10,000 in support payments and HMRC have penalised it in the same way as the above example (100% penalty on top) and the insolvent company is not in a position to repay that liability HMRC can serve notice on its directors or shadow directors. As a director this means you could be served with a £20,000 notice.

Your risk

If you are a company director or an individual who has received coronavirus support payments and you are concerned that you were not entitled to it, the self-assessment deadline of 20 October 2020 has passed. That, however, does not mean you should not take action and does not mean there is no possibility that you can rectify your error.

HMRC will no doubt be increasing its surveillance and investigations of payments it made where it is not entirely satisfied that they were legitimate. You must take immediate professional advice if you are concerned and our Insolvency Team can assist you.