Furlough fraud: what lies ahead?

Furlough fraud claims are on the rise.  Her Majesty’s Revenue & Customs (HMRC) together with whistleblowing organisations are reporting thousands of complaints against employers in relation to abuse of the Coronavirus Job Retention Scheme (CJRS).

In response, the Chancellor, Rishi Sunak, has announced that HMRC will be given new powers to enable it to not only reclaim funds, but also to bring criminal prosecutions, where CJRS has been abused. CJRS has so far paid out £20bn to UK companies.

Despite continued assurances from HMRC that they will not be “trying to catch people out” or punish genuine mistakes, this has fallen on deaf ears with much of the business community. Between placing the burden of proof firmly on the individual under investigation, the threat of criminal prosecution and the lack of any clear dispute resolution mechanism being put in place, these assurances have come as little comfort.

What is CJRS?

The Coronavirus Job Retention Scheme (CJRS) was created to safeguard jobs and aid employers who may otherwise not have been able to maintain their workforces throughout the pandemic. The scheme opened for applications on the 20th April 2020, allowing any employer with a UK PAYE scheme and UK bank account to apply for grants of 80% of furloughed employees salaries, up to a maximum of £2,500 a month.

For an employee to be eligible they needed to have been on a Real Time Information (RTI) report on or before 19th March 2020 and have ceased all work for their employer for a minimum period of three weeks at a time.

On 12^th May, the Chancellor announced that the CJRS had been extended to last until 31st October 2020 with changes which came into effect on the 1st July. A key change will be the granting of flexibility to those currently using the scheme by allowing employees to come back to work for any number of hours or shift pattern.

Employees will continue to receive 80% of their salaries, however from 1st August this will include contributions from their employer with the scheme continuing to pay for hours that are not worked. It is important to note that only those employees that organisations have successfully claimed for between 1^st March and 30^th June will be eligible for this next phase of the scheme. The only exception to this is for employees returning from parental leave.

What is furlough fraud?

The scheme and its extension have certainly been a blessing for millions of employers and employees. However, having been created and implemented so quickly, many of the intricacies and vulnerabilities of the scheme continue to surface. This has meant that despite some efforts to protect the scheme from abuse and fraud such as the RTI cut-off date, the claims from employees to HMRC and whistleblowing organisations have identified three main ways in which the scheme is being deliberately abused. These are:

1. Some employers asking employees to continue working or volunteering
2. Failing to inform employees of their furloughed status, meaning they only find out when they are paid
3. Claiming funds for employees that have been dismissed or “recruited”

Other ways in which the scheme is vulnerable to misuse include doubling up on public funding and the misapplication of grant funds. For example, organisations such as nurseries that receive funds toward the salaries of some of their employees must be careful to not claim the subsidised portion of the salaries again under the CJRS.

Guidance has been clear that the sole purpose of the money received through the scheme is to pay 80% of employee wages. The use of the funds to pay any other business costs such as redundancy pay, business rates or rent is not permitted.

HMRC will be checking claims thoroughly and has actively encouraged ‘whistleblowing’ for any breaches, launching an online portal for the reporting of furlough fraud. HMRC retain the right to audit any claim under CJRS and there is a strong likelihood that they will be auditing claims for furlough payments for many years to come.

Is furlough fraud a crime?

Furlough fraud is a criminal offence under the Fraud Act and other related statutes. The Finance Act 2020 stipulates that civil penalties can be added where the CJRS payment has not been utilised to pay wages, PAYE, pension contributions and NIC. HMRC can recover payments by imposing a 100% tax charge to anyone who has received a payment under CJRS or SEISS (self-employment income support scheme) and was not entitled to it or used the payment for other business means. With serious breaches, imprisonment may be imposed.

The self-declaration process

Whilst there is currently no facility in place to amend erroneous applications, when the scheme ends on the 31st October 2020 employers will have 30 days to self-declare any mistakes and pay the necessary sums without penalty. In the meantime, applicants are urged not to adjust future applications to compensate for errors in previous ones and they should seek professional advice regarding any self-declarations they may need to make.

Any undeclared errors discovered in the examination of this year’s and last year’s financial accounts will result in an investigation and any “ill-gotten” grants having to be repaid. A failure to pay could result in criminal prosecution.

Compliance with employment laws

As well as the possibility of finding you or your company in breach of the scheme rules, the risk of which is not helped by the fact that the new part-time furloughing rules have once again moved the goal posts, there are many other potential issues to consider. For example, despite the numerous operational limitations imposed on organisations during this difficult time, companies must seek to ensure compliance with employment laws. Issues can include anything from discrimination when deciding who to furlough to failures to comply with regulations on disciplinary proceedings.

The challenge ahead

The new phase of the CJRS will certainly bring new challenges for employers. For businesses, it is important to continue to keep records of your decision-making processes, correspondence, and documents. You should ensure that you have written confirmation of any changes to employment contracts and evidence relating to when employees were asked to cease work. Crucially, seek professional advice where necessary, whether regarding calculating claims, which employees to bring back to work part time or make redundant or deciding whether you may need to self-declare.

What to do if your business is accused of furlough fraud?

HMRC have several powers to help them investigate a case of furlough fraud. These include:

• Applying to the magistrates’ court for a warrant to search for specified materials relevant to their investigation.
• Applying to a Crown Court judge for a production order to hand over any requested documents within a set time frame
• Interviewing a person under caution if they are suspected to have committed an offence

After an investigation by HMRC, if it believes there is evidence of criminal conduct it will refer the file to the Crown Prosecution Service (CPS) who will then make the decision , using the Code for Crown Prosecutors, whether to bring charges. The CPS must be satisfied that it is in the public interest to bring a prosecution and that there is enough evidence to do so.

Charges that HMRC and CPS may bring include:

• False Accounting
• Fraud by false representation
• Fraud by failing to disclose information
• Fraud by abuse of position
• Conspiracy to defraud
• Cheating the public revenue

If you and your business are being investigated for furlough fraud, we appreciate that it can be a very stressful and upsetting situation. HMRC do make mistakes and innocent parties can sometimes find themselves being investigated for offences that they did not commit.

If you find yourself in this very unfortunate situation, we recommend you seek legal advice immediately. If you have been contacted by HMRC to inform you that you are being investigated, we advise you to:

• Insist that HMRC put their questions in writing to which your chosen lawyer will respond to
• Not attend any voluntary interviews in the absence of legal representation
• If arrested, ensure that your chosen lawyer attends any interview with you and provides you with legal advice beforehand

At Jeremy Gordon, we have many years of experience representing businesses facing investigations and prosecutions for fraud. We have in-depth knowledge of the furlough scheme and can support you every step of the way if you are under investigation.

Speak to our expert team today.