The Coronavirus Job Retention Scheme has supported 1.1 million employers and 9.4 million furloughed jobs. This government scheme has been introduced on a temporary basis so that employers can keep their employees on payroll, even though they are not working. Though, the scheme has not come without collateral damage, and the taxman has had over 6,000 reports over the scheme being misused.
An example of this, reported by The Times, is the 57-year-old business man who was the first arrested for fraudulently taking advantage of the Furlough scheme: after claiming £495,000 of public money, HM Revenue and Customs froze the funds in the business man’s bank account. HMRC raided 11 locations across the Midlands as part of the investigation. Furlough fraud is real, and it ultimately comes at the expense of the tax payer.
Though there is not a specific offence of ‘furlough fraud’ it does amount to fraud upon the Revenue and it is fraudulent misrepresentation. The likely offences and penalties are:
- Conspiracy to defraud; a common law offence – Maximum: 10 years’ custody. Sentencing range: Low level community order – 8 years’ custody.
- Fraud Act 2006 (section 1) statutory offence – Maximum: 10 years’ custody. Sentencing range: Low level community order – 8 years’ custody.
- Cheat the public revenue; a common law offence – Maximum: Life imprisonment. Sentencing range: 3 – 17 years’ custody.
Those who are on furlough leave are not permitted to work. This is emphasised by the Treasury Direction under Sections 71 and 76 of the Coronavirus Act 2020 issued on 22 May 2020, which provides that the training activities a furloughed employee can undertake while on furlough must not provide a service to the employer; nor can they contribute to the business activities or generate income or profit for the employer. Despite this, some employers are exploiting the scheme by forcing their workers to come in, or not informing people they are on furlough until individuals received a reduced pay check. But how can Government and HMRC crackdown on this type of systematic abuse?
In addition to penalties that may arise from Fraud Act 2006 (as described above), Parliament quickly acted to push forward The Finance Bill 2019-21 and it received Royal Assent on the 22nd July 2020, becoming the Finance Act 2020. The Act gives the HMRC a wide range of powers in order to investigate allegations of furlough fraud. The Act also has a broad range of civil penalties resulting from situations where payments have been made to businesses under this scheme which have not been used to pay employees, as well as the HMRC having powers to recover monies sent of which the recipient was not entitled. In the more serious of circumstances additional penalties and fines may be given.
Despite these powers given to the HMRC, leniency is offered to those employers which have made a genuine mistake in claiming furlough cash. There is a 90-day amnesty within which a business or individual may make a report to HMRC if they believe a genuine mistake has been made, and these mistakes should be set out clearly and persuasively to avoid being given harsh penalties, fines, criminal investigation or prosecution. An example follows:
Peter owns a restaurant that sells takeaway food and beverages and employs ten staff to manage the orders, cook the food, package the food and deliver them to customers.
The staff were furloughed under the CJRS during lockdown, but Peter requested that they still come in to continue work on a voluntary basis so that the company may continue to operate. Peter tells his staff that this work is essential for the company to be able to reopen post-lockdown, and so the staff do this as they fear for their employment security.
Peter sees no harm in claiming furlough and asking his staff to come in because they were volunteering unpaid. Unfortunately, he has broken the law and will be liable to the 100% tax charge under the Finance Act 2020 on the amount it received under the CJRS.
He should however report the position to HMRC within 90 days in order to be certain that a separate penalty will not be levied by HMRC. Because Peter did not realise that the staff were not permitted to volunteer, his company cannot be prosecuted under the Fraud Act.
Peter has been offered leniency, and in situations such as the above where an honest mistake has been made this seems fair. Though putting leniency aside, the harsher penalties are not at all surprising and they have much merit. A consequential effect of businesses claiming monies for their employees which are not entitled to it has a far-reaching impact. The HMRC has stated that fraudulent claims limit the ability to support individuals and deprive the NHS of essential funding. With the NHS under immense pressure with an inpour of COVID-19 patients, which have required the need of ‘nightingale’ hospitals to be quickly constructed, harsh measures are an agreeable necessity protect funds for the essential public services’.