The Furlough Scheme – or officially the Coronavirus Job Retention Scheme (CJRS) – was a unique attempt by the Government to try and mitigate the impact of Covid-19 on the UK economy and the job market. And while most commentators would agree that it has been a valuable support to business, and will remain so until March 2021 at least, and that the majority of businesses have taken advantage of it to some degree, HM Revenue & Customs (HMRC) is now shifting its focus from simply ‘paying out Furlough grants’, to actually reviewing and examining the claims which have already been made.
As Jim Harra, HMRC’s Chief Executive, has previously estimated the error and fraud rate for Furlough payments as high as 10%, businesses should realistically expect some analysis of their claims and potentially more detailed investigation from the Revenue. Errors in this regard could represent up to £3.5bn in incorrect claims – a financial number which will clearly grow with the Scheme’s extension into 2021.
Indeed, the whole nature of the CJRS and the way it was introduced (at short notice) and has continually been ‘developed’ by the Government mean some genuine mistakes by companies are inevitable. This issue would be compounded by the core complexity of Furlough, which resulted in a number of changes to the HMRC guidelines when first introduced, and the fact that in many businesses, it would often require close coordination and cooperation on an ongoing basis across various internal teams – e.g. payroll, tax and HR departments. Plus, businesses were, at least initially, often under severe time pressure to get their grant application submitted and it is therefore quite probable (even inevitable) that many businesses would have made errors in their applications.
So, what is HMRC doing in this area?
HMRC is looking to take a number of steps to recover any amounts which have been claimed in error or by fraud. These include:
- HMRC whistleblower line
- Computer investigations and analysis
- Launching formal criminal investigations
- Enquiries as part of wider tax reviews (audits).
The whistleblower line – which is available for all types of tax fraud and not just Furlough fraud is an ‘easy way’ for HMRC to find out about incorrect and particularly fraudulent claims. For example, where employers have forced employees to continue working, while simultaneously claiming the Furlough grants. HMRC has been pro-active in promoting this line and is believed to have had around 9,000 CJRS-specific fraud submissions already.
In addition, the Revenue’s computer system – ‘Connect’ – will realistically be used to try and flag anomalies in claims and also to assess company claims against industry and sector practice and claims. Connect will also be used to ‘match up’ with corporate tax declarations to ensure the Furlough grants are correctly reported for those purposes too.
The legal angle
HMRC’s reviews and actions with regard to Furlough claims (and fraud) are backed-up by law. Specifically, the 2020 Finance Act, for example gives employers a ‘90-day window’ to repay incorrect claims on a ‘penalty free’ basis. On an ongoing basis, the 90-day window applies from the date that the CJRS payments were received, while for the earliest claims (i.e. those before the Finance Act 2020 was passed) had a deadline of 22 October (90 days after the passing of the legislation).
However, if incorrect claims are not notified to HMRC (and refunds issued) within the 90-day limit mentioned above, HMRC can consider imposing penalties on the incorrect claims, even where the mistakes are genuine errors rather than deliberate or fraudulent. In any cases which are fraudulent, HMRC has consistently shown a ‘zero tolerance’ policy and will pursue penalties and/or criminal sanctions.
Fraudulent claims could have the following characteristics:
- Claiming the grants while staff continued to work (this is perhaps a particular issue for the period until June 2020, when the CJRS grant was only available when staff were ‘fully furloughed’)
- Claims made on false payroll records
- Failure to use the Furlough Scheme grant money as required.
In contrast, innocent/non-fraudulent mistakes could include transposition errors, claims made on incorrect calculations (e.g. regards reference pay for workers with variable hours), or claims with regard to the partial furlough arrangements which have been available since July 2020, when businesses can have staff partly working and partly furloughed. Other problematic areas could involve salary sacrifice arrangements and the National Insurance or pension contributions which are due.
So, do you know whether you are at risk? Or if you are an advisor, whether your clients have any risks in this area?
While some companies may inevitably choose the ‘ostrich strategy’ – that is, only worry about the position if they are contacted by HMRC – such an approach is not generally recommended. Rather, it is better for companies to pro-actively review their systems and claims, to clarify whether they are comfortable that they can justify the claims which have been made and can, for example, in the case of additional Revenue enquiries, legitimately back-up the position.
By being pro-active in this area, companies which have made errors in their claims can ensure that they are in a position to ensure that HMRC is notified pro-actively and the penalty risk for the company is minimised. Moreover, a pro-active and clear review process in this area, can help ensure that the wider relationship that the company has with HMRC is as good as possible and hence help minimise the risk of wider corporate tax, VAT or employment tax enquiries being launched by the Revenue.
Examples of typical errors and risks for businesses
1. Reference Pay
The reference pay – the basis of any Furlough claim – is likely to be the most common area of dispute for any CJRS claims. While regular pay (salary/wages), is part of any reference pay for Furlough claims, discretionary pay isn’t. However, discretionary pay (e.g. commission, tips, overtime), shouldn’t be included in reference pay, though clearly there can be some dispute as to what is discretionary and what isn’t.
For example, if the employment contract specifically states that the paid overtime is required on a specific basis, this should be fine. However, in some cases, arrangements for regular, automatic overtime may – particularly in smaller companies – have developed overtime on an informal / ad-hoc basis without any clear, formal reference to these requirements existing in staff handbooks or employment contracts. In such cases, where there is no clear contractual/written back-up to indicate that the overtime, etc. is contractual, it is quite possible that HMRC could challenge any furlough claims which includes the ‘expected overtime’.
2. Clear records and paperwork
Has the company retained clear records in respect of the claim calculations which have been submitted? Also, is it clear that businesses that have furloughed people have all the correct paperwork vis-a-vis the furloughed employees? In this regard, employers cannot simply furlough employees on an ‘ad-hoc’ basis without formal written notification in advance.
3. People on zero-hour contracts
Companies which had people on zero-hour contracts (or contracts under which contracts varied over the course of the month/year), also needed to do additional calculations as part of the Furlough grant applications. Rather than simply looking at the fixed salary or wages for an employee, in such cases, the Furlough grant can be based on either:
- average wages since April 2019 (or later, if the employee started employment after that date), or
- the same pay-period in the previous year.
4. Annual Leave and bank holidays
Under furlough, annual leave taken by an employee (and also bank holiday days off), should be paid at the ‘full rate of pay’ rather than simply the reduced furlough amount. Has the business done this correctly?
In addition, if the business has allowed employees to ‘carry forward’ holiday into 2021, what records has the company kept in this regard? Are the new arrangements still in accordance with the eased rules that the Government has introduced in this regard? Can companies, for example, make sure that all holiday from 2020 is used by the end of 2022 in accordance with the new, Covid-related Government guidance?
5. Did the individual work during furlough?
Did any of the furloughed employees work while officially furloughed? While it is clearly important that businesses gave clear guidance to all managers and employees in this regard, it is also sensible to review – e.g. by interrogating computer records – to ensure that furloughed employees did actually follow the rules in this regard.
The rules for the initial furlough period up until June 2020 are clear: furlough was in simple terms for regular employees (rather than office holders) an ‘all or nothing’ scheme and employers cannot claim Furlough grants for employees who worked for the business during this initial period. There is no issue, if the individual employees found alternative employment with another separate employer or did volunteer work or formal training whilst furloughed.
6. Flexi-Furlough (July 2020 onwards)
The introduction of flexi-furlough in July 2020 has further complicated the rules – so while employees can be partly employed and partly furloughed in a month, how does the business track an employee’s working hours in such a situation? How does the company still ensure that no work is being done by the employee during the hours in each period during which they are officially furloughed?
In some cases, there won’t be a practical problem for the business – e.g. because the business has an established time-keeping system and logging system. However, for other businesses with less developed records, it may be an area which the Revenue could look to challenge.
7. NICs and Pensions Regulator Guidance
Perhaps the final key risk area for businesses is vis-a-vis the calculation of employer National Insurance and pension contributions within the Furlough grant applications. For example, if an employer has claimed the National Insurance contribution employer’s allowance within their actual payroll submission, has this been taken into account within the CJRS claim?
Or have employer pension contributions been included within the CJRS claim incorrectly? For example, because the employee – facing a reduction in salary / wages during the lockdown – has now opted out of the company’s pension scheme? Moreover, how have any pensions salary sacrifice arrangements worked during the furlough period? For example, has the business understood that one cannot ‘sacrifice’ CJRS earnings for pension purposes?
Your next steps?
While the original 90-day window for simply refunding the incorrect claims has passed (as mentioned above), companies should still be pro-actively reviewing their ‘in-time’ claims, if they wish to avoid unnecessary risks in this regard. For example, the risk of both criminal and civil penalties and the negative PR associated with HMRC publication of ‘defaulters’ in this area.
Moreover, whilst the automatic 90-day repayment window has passed for the earliest claims, by reviewing claims for this initial period and – if there are any errors – reporting them directly to HMRC on a pro-active basis, firms would be putting themselves in a better position from an overall disclosure perspective. Experience from regular employment tax audits and disclosures, shows that those businesses that are open and forward in their dealings with HMRC will suffer smaller (or even suspended) tax penalties.
Furlough has been a unique experience for most companies, which have been forced to struggle with a number of other areas at the same time including virtual working, staff and client changes and major cash-flow concerns. Moreover, it is inevitable that some businesses will have made some errors and mistakes in this regard given the pressures that they were under and the relative complexity of the claims.
However, while businesses are inevitably still concerned about the wider issues they face, such as cash-flow problems caused by the most recent national lockdown or the challenges that may arise from the new Brexit deal that came into effect on 1 January 2021, realistically those businesses that want to ensure they are complaint (and protect their overall position), need to handle both the wider, ongoing business issues they face and review their furlough arrangements. Otherwise, company officers could in some cases even face joint and several liability for those incorrect Furlough claims.