October 5th, 2020 / Insight posted in Articles

HMRC ferrets out furlough fraudsters

HMRC suspects 27,000 businesses of making wrongful claims for the government’s furlough scheme. Having mustered a special taskforce, HMRC intends to not only recover the payments but also charge the maximum penalty. In the most serious cases, HMRC reserves the right to start a criminal investigation with a view to prosecution.

Businesses that made incorrect claims more than 90 days ago have until 20 October 2020 to tell HMRC and avoid paying a penalty that could see their liability double. Making a voluntary disclosure normally minimises the risk of HMRC starting a criminal investigation. Our tax dispute resolution team is starting to see a steady trickle of requests for help with making voluntary disclosures to HMRC.

Correcting incorrect furlough claims

The furlough scheme, also known as the Coronavirus job retention scheme, was launched in March this year, since when an estimated £3.5 billion has been claimed incorrectly from the government’s coffers.

Over 8,000 reports have been made to HMRC of suspected furlough fraud so HMRC already has a considerable amount of information to review. Its national team of investigators specialising in criminal investigations is already taking steps to identify suitable cases.

Dealing with HMRC in the correct way

HMRC recognises that some businesses may have made genuine mistakes. Business owners may have hurriedly made claims when the lockdown first came into force thinking that they would sort out any mistakes later on. Businesses affected by this have until 20 October 2020 to tell HMRC that they have incorrectly claimed furlough payments. The prospect of a high-profile prosecution is likely to encourage businesses to resolve any non-compliant activity.

Cost of incorrect furlough repayments and penalties

The legislation to enforce the repayment of incorrectly claimed furlough payments is contained in the Finance Act 2020, which came into force on 22 July 2020.

After 20 October, HMRC will use its formal enforcement powers to issue an estimate for the sum owed and also charge a penalty of up to 100%. For example, a business that over-claimed a furlough grant in the sum of £5,000 would also have to a potential penalty of £5,000. There are further powers available to HMRC to enforce the tax charge and penalty.

In partnerships, partners will be jointly and severally liable for incorrect furlough payments and penalties concerning claims made by their business.

Insolvency

HMRC has new powers to make directors and members of LLPs jointly and severally liable to the Coronavirus support payments incorrectly claimed, as well as the penalties due. The powers are triggered where the directors or members start insolvency proceedings or HMRC considers that there is a serious possibility that they intend to do so. The purpose of the new legislation is to pierce the corporate veil where HMRC considers business owners to be evading the debt owed to HMRC.

What businesses should do

Navigating correctly through the complex legislation is key, as is taking proactive steps before it is too late. Businesses should first ascertain whether they incorrectly claimed any payments. The next step is to identify how to disclose this correctly to HMRC with a view to then correcting the position in the most effective way.

Making a voluntary disclosure to HMRC removes the risk of a criminal investigation, except in the most egregious cases. Furthermore, a voluntary disclosure minimises the exposure to penalties, as well as the professional costs of resolving the matter.

Getting expert help

HMRC is under pressure to recover funds and start criminal investigations where needed. The message to take away is that anyone thinking they might be affected by the new legislation should get the right professional advice without delay to keep the damage to a minimum.

Moore Kingston Smith’s specialist tax dispute resolution team has been dealing with HMRC for over 20 years. If you have any questions about furlough payments, please do not hesitate to contact us.