Furlough fraud penalties confirmed by HMRC

According to reports, the number of fraudulent claims has continued to increase in recent weeks as exploitation of the Coronavirus Job Retention Scheme (the furlough scheme) becomes a new Government threat. HMRC has announced the penalties that can be imposed on the employers who commit furlough fraud. Opeyemi Ogundeji, researcher and employment law writer at Croner-i, explores this in more detail below.

The furlough scheme was put in place to support employers who were not able to operate as normal due to the pandemic. Since its inception, thousands of employers have furloughed all, or part, of their workforce and claimed wage costs.

Based on information from the Experimental Official Statistics publication produced with HMRC's furlough claims data, the scheme has supported 9.4 million employees thus far, with assistance totaling £26.5 billion. However, some employers have likely overclaimed and may face sanctions if it is not reported and rectified.

What does furlough fraud look like?

The Government has explained that the following actions constitute an overclaimed furlough grant, and thus could lead to furlough fraud:

  • any amount the employer was not entitled to receive

  • any amount the employer is no longer entitled to receive after a change in circumstances, eg an employee whose monthly wages are being claimed for under the scheme is no longer employed by the employer but claims are still being made for said employee.

The Government has introduced legislation to aid in the recovery of overpaid monies. HMRC's concern is to address non-compliance with the scheme but are not obliged to look into “innocent errors” in their approach to tackling this issue. However, employers will not be charged a penalty if they did not know of the overpayment at the time it was received, or at the time that their circumstances changed, and if it is repaid within the following time period:

  • companies will have until 12 months from when their accounting period ends to rectify errors

  • sole traders or partners will have until 31 January 2022.

Furlough fraud penalties

While errors can be rectified, failure to report this can incur such penalties as:

  • income tax charge — full overclaimed amounts may be recovered if HMRC make a tax assessment for the amount overclaimed, of which payment of the assessed amount will be due 30 days after the assessment (otherwise interest will be charged on the tax from day 31)

  • company officers can be made personally liable to pay the tax charged on overclaimed grants in the case of insolvency — if officers of the employer knew of the overclaimed grant, or tax incurred on the grant, but this cannot be recovered from the company

  • 100% penalty for failing to notify HMRC, within the below notification period, that the employer is chargeable for income tax on an overclaimed furlough grant

  • details of employers that deliberately overclaim may be published

  • partners will be jointly and severely liable for any overclaimed grants repayable.

If employers repay monies overclaimed, this will prevent any potential tax liability relating to the overpayment of the grant. Notification of any overclaimed furlough grant payments need to be made within any of the following notification periods:

  • 90 days after receiving the overclaimed payment

  • 90 days after the day circumstances changed

  • 20 October 2020.

Correcting errors to avoid furlough fraud

On 1 July, HMRC updated its guidance on the furlough scheme to enable employers who have overclaimed through the scheme to either:

  • correct this error in their next claim, or

  • make a payment directly to HMRC if the employer will not be making any future claims; employers will, however, first need to contact HMRC to receive a payment reference number before paying via bank transfer, online or telephone banking.

The Government has emphasised that any overclaimed grant payments must be repaid and, as mentioned, one option is to repay it to HMRC in the next furlough claim. Employers should notify HMRC of the amount that has been overclaimed as an additional step to making a new furlough claim. Any new grant payments made to the employer will then reflect any deductions made due to previous overclaimed payments. Employers should keep records of this for six years.

Furlough fraud arrests

HMRC has confirmed that it has made the first arrests for furlough fraud, with one individual suspected of defrauding £495,000 from the Government. A 57-year-old man from the West Midlands is said to have been arrested, alongside eight other men linked to the investigation. Company assets, such as electronic equipment, have also been seized, while bank accounts relating to the business has been frozen. HMRC is investigating allegations of multi-million-pound tax fraud and money laundering, alongside abuse of the furlough scheme.

This action from HMRC does seem to deliberately send a clear message to employers that furlough fraud will be investigated and, if proven, could result in criminal prosecution. This warning applies not only to those who have willingly abused the scheme but may have made a mistake somewhere in their calculations. If such a mistake is discovered, and the employer fails to come forward, they may face the same public sanction that has been seen by the arrest outlined here.

It is important to remember that the rules surrounding use of the scheme changed on 1 July to accommodate flexible furlough, and employers must be up to date with this (to avoid overpayments) as employees, as well as external bodies, can report suspected furlough fraud to the relevant authorities.

What if employers have underclaimed?

Employers that have miscalculated how much they needed to claim under the scheme, and are due to benefit more from it, can contact HMRC to amend the claim. Employers should note that HMRC have powers to perform additional checks if amendments on underclaimed grant payments are requested.