HMRC investigates clawback money from fraudulent claims

The reported arrest of a man on suspicion of defrauding the government’s furlough scheme out of nearly half a million pounds could just be the tip of the iceberg, said leading tax and advisory firm Blick Rothenberg.

Fiona Fernie, a tax dispute and resolution partner at the firm said: ‘HMRC has started investigations into companies and individuals that it believes have fraudulently made claims under the Coronavirus Job Retention Scheme (CJRS), which has paid out more than 27bn.

‘The Government now intends to clawback as much money as possible from those whose claims were wrong.  Nobody who has received these grants should be complacent, the proposals for clawback are not confined to instances where the claim was fraudulent – it applies to cases where there has been a lack of proper care as well.  Now is the time to ensure that claims under the CJRS are accurate.’

She added: ‘The Government is proposing that the grants are taxable so that where the recipient should not have been entitled to the grant in the first place or has used the funds inappropriately, the full amount of the grant is subject to income tax at a rate of 100%. This will effectively clawback the entire amount of the grant. The regime is retrospective applying to all grants made under the scheme. Legislation has been drafted with a view to it being enacted as part of Finance Act 2020 which is expected to become law later this month.

‘Given the number of changes there have been to the scheme since it was first introduced, there are likely to be a significant number of cases where people have inadvertently made incorrect claims and the repercussions could be long-lasting. Imposing the clawback by way of treating the grant as taxable allows HMRC to impose its normal investigation, assessment, and penalty regime to wrongly made claims.

‘This means that HMRC will be able to assess the tax due (and thereby impose the claw back) within four years after the grant was made in the case of an innocent error, six years if the error was careless, and 20 years if the claim was fraudulent. In cases of fraud HMRC may prosecute and in certain circumstances companies and individuals may be treated as deliberate defaulters and be publicly named on HMRC’s website. In some cases, HMRC may involve the police.’

She noted that: ‘It is likely to be a major problem for some who are investigated and receive assessments. Once the assessment is issued, the burden of proof will be on the taxpayer to show that it is wrong. A combination of the lack of clarity in certain aspects of the detailed rules of the scheme, and the length of time which may elapse before an HMRC investigation is complete, may make it very difficult to prove entitlement to the grant. It is therefore vital that the accuracy of claims is considered now.

‘HMRC has received over 3,800 reports of fraudulent claims under CJRS and this case shows they are already taking action in the most obvious cases of misuse. HMRC will always investigate complaints and tip-off which suggest that the system has been abused. It is only right and proper that those who have made false claims should be caught and penalised.

‘However, not all such complaints have substance and HMRC will be wary of the possibility that the complaints are themselves untrue and represent a backlash from employees who have lost their jobs. HMRC will also be sensitive to the possibility that some of the incorrect claims are merely mistakes rather than carelessness or deliberate abuse.’

She continued: ‘Nonetheless businesses will be required to notify HMRC if they know (or discover) that they have received a grant to which they were not entitled. Penalties will apply for failure to notify. Companies should therefore carry out a review now and make corrections to any claims they discover to be incorrect prior to the deadline for the first obligation to self-declare in order to avoid penalties.

‘The timescale is relatively short – that deadline is 90 days after Royal Assent of the Finance Act and Royal Assent is normally around mid to late July. The proposed deadline in the first draft of the legislation was 30 days after Royal Assent, so the current proposal is more generous but the deadline may still be problematic, since the claims calculation is complicated and prior to 5th June 2020 it was not possible to correct errors in claims for one furlough pay period by adjusting a claim in a subsequent period. This also represents an additional burden on businesses which will still be struggling to rebuild in the wake of lockdown.’

She added: ‘It is also a good time for companies to ensure that they have detailed evidence which demonstrates why they considered they were entitled to receive the grants, and how the funds were deployed. Although, there remain major areas of uncertainty for establishing eligibility, such records will at least help establish that any error in a claim was innocent.’

The types of records which will be useful include:

  • Financial forecasts which support the reasons for making the claim.
  • Evidence that employees furloughed and in respect of whom claims were made, would have continued in employment if the pandemic had not happened.
  • Evidence that the appropriate amounts have been paid to furloughed workers.
  • Communications with employees notifying them they were being furloughed and the responses from employees providing their agreement.
  • Written instructions to furloughed employees confirming the need for them to stop working during the period when they are furloughed.
  • Evidence that non-furloughed employees have been made aware that they cannot involve furloughed employees in work.
  • Details of the procedures used in managing the changes in the implementation of the scheme from August.
  • Details of the procedures for bringing back employees from furlough.

Fiona concluded that: ‘Spending the time now to ensure that records are fully maintained should mitigate the impact of an investigation in the future.’


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