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Investigations into furlough fraud and wider ramifications

HMRC has disclosed it is scrutinising twenty-seven thousand high risk cases. The next year will see a significant increase in tax investigations into furlough fraud. Wider investigations into those businesses and their principals are likely to ensue due to the lack of reliance on financial integrity. HMRC can identify irregularities in furlough claims in a number of ways.

By admin
14 Sep 2021
Manage Tax Risk

Normally the relationship with HMRC is that money goes in one direction. The furlough scheme offered the unusual opportunity for businesses to receive funds form the Government. Temptation has been too much for some and in September 2020, HMRC estimated that up to £3.5bn of furlough payments had been fraudulently claimed.

A furlough fraud would potentially include:

  • placing employees on full or partial furlough but requiring them to still work full time
  • ghost or fake employees
  • continuing to claim for employees that have left employment
  • claiming less hours worked by employees resulting in inflated claims
  • backdating an employment contract

The scheme comes to an end this month and the amount wrongly claimed could be significantly more than last year’s estimates. HMRC has disclosed it is scrutinising twenty-seven thousand high risk cases. The severity of the fraud will vary. Where furlough payments have been obtained fraudulently and HMRC pursue prosecution, it will have a significant impact on a business and its directors, both financially and reputationally.

Most will not face prosecution and instead the business will be able to settle with HMRC by repaying the over claim and facing penalties. In July 2020, HMRC gained powers to clawback payments and to charge penalties. Sanctions available to HMRC include income tax charges to cover the amount overclaimed, penalties of up to 100% of the amount the business overclaimed and publishing details of those organisations who deliberately overclaimed.

Those involved in the management of a company (directors, senior management, officers and potentially shareholders and shadow directors) can be held jointly and severally liable if a company is unable to repay monies obtained under the furlough scheme. Reimbursement may be sought from individuals if a company has little to no assets. Directors found responsible for a furlough fraud could also face claims for breach of their statutory duties and director disqualification proceedings. Businesses that are regulated for Anti-Money laundering purposes may also be adversely impacted for future fit and proper status applications.

Where HMRC identify furlough fraud, they will inevitably question the overall financial integrity of the business and principals involved. The result could be a full investigation into the business and its principal’s tax affairs.

With all taxpayers who know they have an irregularity, there is comfort in believing HMRC won’t find out. However, HMRC has many ways of identifying irregularities aside of a disgruntled employee tipping them off. For example, lets assume an employer made furlough claims although productivity didn’t reduce. With reduced resources you would expect the turnover of the business to reduce. This correlation is not industry specific although some industries have a greater correlation, for example productivity of the professional services sector is time driven.

HMRC will be able to identify what number of employees the business operated on pre furlough compared to the number purported to work in the business during the furlough scheme. The employment resources utilised in the business could be considered against sales and say energy consumption. Telephone, internet, and email usage would also be good measures to ascertain whether a person is working. Most IT systems record when someone is logged into a business system and can produce reports of activity, which may be reasonable information required in the event of a HMRC enquiry.

HMRC would have identified higher risk employers in 2020 and for some, they would have been the subject of covert operations. HMRC may have set up surveillance units or disguised their investigation. The cost of covert operations is high and is therefore generally only used where criminality is suspected or the loss to the Revenue is considered significant.

In March 2021, the Taxpayer Protection Taskforce was set up to investigate furlough scheme fraud. HMRC correspondence to taxpayers won’t necessarily stipulate the investigating team.  Inevitably, HMRC will make relevant informal requests for information. HMRC has wide information powers although does not tend to issue formal notices unless the taxpayer is not complying with an informal request. Where HMRC issue a formal notice at the outset of enquiries, it is an indication of the seriousness of their investigation. HMRC can:

  • request business records including emails to check the existence of an employee and whether they have been working during furlough.
  • Inspect business premises and in some circumstances even undertake searches.
  • Interview suspects under the Police and Criminal Evidence Act 1984.

In conclusion, the next year will see a significant increase in tax investigations into furlough fraud resulting in the possible wider investigations into those businesses and their principals. It may be difficult to determine the reason for HMRC’s enquiries at the outset and it is advisable to seek specialist commentary at the outset of any enquiries.

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