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HMRC may come knocking before the furlough amnesty period is over

Written by Andrew Wallis on Monday, 07 September 2020. Posted in Commercial law, Legal

The Coronavirus Job Retention Scheme has been a lifeline for many businesses and the uptake of the ‘furlough scheme’ has been extremely high.

HMRC may come knocking before the furlough amnesty period is over

The Coronavirus Job Retention Scheme has been a lifeline for many businesses and the uptake of the ‘furlough scheme’ has been extremely high. In May we surveyed 221 small businesses and found that over 60% of them had taken advantage of the Government’s furlough scheme and it is likely that this number would now be much higher.  

There is, however, increasing evidence that the scheme has been abused. It is now widely believed that up to a third of businesses have in some way stretched the rules surrounding furlough.  As such, the scale of furlough abuse could be significant. HMRC announced their first arrest in connection with abuse of the furlough scheme in July, where a Solihull-based man was suspected of fraud of just under £0.5m. Since this date, it is understood that approximately 8,000 reports of suspected fraud have been made to HMRC and investigations are underway.  

What could constitute furlough abuse

One of the key conditions of the furlough scheme until 1 July 2020, was that businesses were not allowed to request that staff work whilst on furlough.  Whilst it is clear that such a request is wrong, businesses may easily find that they have inadvertently breached the rules, as the rules are complex, have changed frequently and little guidance was available when the first claims were being submitted.

What happens when staff decide to work in some capacity without their employer’s knowledge, for example helping a customer or advising a colleague?  

The scheme allows employees on furlough to undertake voluntary work, but can an employee voluntarily work for their employee?  It is clear, that this is not allowed under the rules.

The scheme allows a furloughed employee to undertake other work, but are all employees aware then they cannot work for another linked or associated business?

The period of furlough can be extended, but are employers aware that this needs to be agreed with the employee in writing?

These are just a few examples of where confusion could easily arise and there are many complex areas such as:

  • The interaction of annual leave and furlough
  • Employment of a previously redundant worker and then placing them on furlough
  • Statutory leave such as sick leave, parental leave, compassionate leave etc.

HMRC powers and amnesty period

The Finance Act 2020 introduced legislation to provide HMRC with powers to check furlough claims and introduce an amnesty period to allow businesses to repay any money they have incorrectly claimed without threat of sanction or penalty.

Where furlough payments were not properly due, the legislation works to claw back the payments through income tax or corporation tax. Penalties may also be imposed up to 100% of the amount of the incorrect claim. In addition, HMRC shall have extended powers to investigate claims for up to four years (longer than the normal two-year period) or longer in the case of careless or deliberate behaviour. 

The legislation does, however, provide employers with the opportunity to correct incorrect claims without penalty or sanctions where they notify HMRC by the later of 20 October 2020 or 90 days after the date a claim ceases to be valid.

What action should businesses take?

Those businesses that do not take advantage of the amnesty and are later found to have made invalid claims may find themselves under serious investigation and facing substantial fines. Businesses should therefore triple check their claims and discuss the amnesty with their advisers if they have any concerns of potential infringements.

All businesses should ensure that they are prepared for a potential enquiry or investigation and consider preparing a “furlough documentation pack”. It is vitally important that businesses keep good and clear records of staff on furlough. Copies of communications to all staff, particularly those on furlough, reminding them of the rules is the bare minimum. 

Replying to investigations can take up valuable management time. We would advise employers to leverage the support and expertise of their advisers to help them navigate such a process. Businesses should also check whether such adviser support would be covered either through the Tax Investigation Services offered by their accountants and tax advisor or through their business insurance policies. Details of whether this is covered is advisable. If not already in place, businesses should consider getting such assistance. 

It is important to note that HMRC could come knocking before the amnesty period is over, so action should be taken now!

About the Author

Andrew Wallis

Andrew Wallis

Andrew Wallis is a Partner in the Corporate Tax team at Kreston Reeves.

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