HMRC prepares to take action for abuse of the furlough scheme

Updated: 3rd March 2021

The Coronavirus Job Retention Scheme (CJRS) was the standout measure among the raft of initiatives introduced by the government in the wake of the Covid-19 pandemic. Over 1.1 million companies across the UK took advantage of the ability to furlough some, or all, of their employees as the country was put into lockdown this spring. Latest figures show over 9 million people have been put on furlough at some point since the scheme was introduced in March.

Estimated to have already cost the government over £40bn, this amount is likely to rise considerably by the time the programme stops at the end of September 2021.

Identifying employer abuse of the furlough scheme

With the CJRS in the process of being wound down before coming to an end for good at the end of September 2021 the government are now turning their attention to identifying those companies who have falsely made claims for reimbursement of staff wages during this time.

Abuse of the system includes forcing employees to continuing working on a part-time or ad hoc basis for the company despite being declared as furloughed, while other reported cases include those where employees were not even told that their employer was claiming reimbursement of their wages under the CJRS. There are also fears that some companies may be claiming furlough for ‘ghost’ employees who may not actually work for the company at all.

Furlough fraud represents an exploitation of employees, as well as a system set up to help companies through this period of unparalleled business interruption. With billions of pounds being paid out through this scheme, HMRC are now gearing up to penalise those who have abused the system.

What does the new legislation say?

Legislation became law in July as part of the Finance Bill 2020. Penalties for those found guilty are likely to include fines for companies, while directors of companies which have subsequently been liquidated could face personal liability for the falsely claimed furlough costs. Imprisonment for convicted fraudsters is also a possibility as exploitation of the CJRS amounts to defrauding the Treasury.

The key term within the legislation is ‘deliberately’, with contraventions including ‘deliberately making an incorrect claim’ and ‘deliberately not using the money to reimburse wage costs for furloughed employees.’ This should provide reassurance for companies that have abided by the rules. However, as many claims were submitted in a rush shortly after lockdown measures were announced, companies are advised to double-check that the claims they have submitted are correct and to rectify any errors they may contain.

Employers were given 30 days from when the legislation comes into force to come clean to HMRC about mistakenly claiming – whether accidentally or deliberately – in exchange for the opportunity to right their wrongs by repaying the money falsely claimed, without being subject to additional penalties.

The scale of furlough fraud

It is estimated that up to 34% of employees have been asked by their bosses to work while being furloughed, and HMRC has already received in excess of 3,000 claims – mainly from employees – of abuse of the furlough scheme.

This is likely to be just the tip of the iceberg; however, in many cases, employees will be unaware they have been falsely declared as being furloughed, while others will fear the repercussions of whistleblowing in this way.

Random spot checks are also likely, therefore, to be employed to check for instances of non-compliance from unscrupulous companies who have not already been flagged up by way of the reporting system.

Furlough fraud and financial distress

For companies across the country, the past few months have been extremely challenging, with many now fighting for survival as a result of the enforced interruption to business. Penalties for abuse of the furlough scheme could compound the financial problems already being faced, taking these companies one step closer to insolvency.

When insolvency threatens, time is very much of the essence in order to protect creditors and stem further losses and advice should be sought as soon as possible.

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