Tax Directors Sarah Stenton and Lisa Vanderheide look at the steps being taken by HM Revenue & Customs to recover incorrect furlough claims made during the Covid-19 pandemic, and discuss what a business needs to do if finds itself under investigation.

HM Revenue & Customs (HMRC) has had a challenging 15 months. Having never been a government department comfortable with paying out money, it was suddenly doing nothing but. Investigation work was largely shelved, and it was “all hands on deck” to facilitate the payment of the various Covid-19 support packages.

With HMRC now opening investigations again, this article examines its approach to incorrect furlough claims.

HMRC’s most recent update of June 3, 2021, indicates that 11.5 million jobs in the U.K. have been furloughed, with monetary claims totalling 64 billion pounds ($89.4 billion) across 1.3 million employers.

Although the computer system used by HMRC to facilitate the support payments was set up at short notice, it had a number of inbuilt checks to highlight potentially incorrect or dubious claims. And while HMRC operated a “pay now, check later” approach, it has a list of claimants of concern where challenges will be made. There are already reports of action being taken by HMRC in the most heinous instances.

There have also been more than 10,000 whistle-blower reports made to HMRC. Many of these are from employees forced to work while furloughed, and it is estimated around a third of furloughed employees have been asked to work in some form.

Some of these instances will have been thought innocuous by the employer, such as an employee spending an afternoon stocktaking or a shop or restaurant manager preparing budgets at home. But such actions result in incorrect claims in any case. Other instances will be so blatant as to make the furlough claim fraudulent. These include backdating claims or claiming for employees on long-term sick leave.

HMRC has estimated that at least 10% of furlough claims are wrong, and the possibility of clawing back around 6 billion pounds is a significant incentive to take action. HMRC’s Taxpayer Protection Taskforce of more than 1,250 investigators, which was announced in this year’s budget, will investigate the individuals and companies that claimed more than they were entitled to.


Mistakes Happen

While many fraudulent claims will undoubtedly be identified, the bulk of incorrect claims will have been caused by oversight or error. Employers have had to grapple with complex furlough rules: there have been several esoteric changes to these rules and more than 20 guidance documents published in the last 12 months.

As a result, the likelihood of businesses making errors in their applications is significant, particularly when close coordination and cooperation was required across various internal teams such as payroll, tax and HR departments. The bigger the company or group (many with disparate entities), the more complex it becomes. In many cases, existing checks and controls were potentially not fit for purpose when making furlough claims. In addition, many businesses were, at least initially, under severe time pressure to submit their furlough applications.

HMRC recognizes this, commenting on its website:

“We understand that mistakes can happen, particularly in the present circumstances. We’ve made it as easy as possible to pay back any amounts of Coronavirus Job Retention Scheme grants you’ve claimed that you were not entitled to. If you received too much because you made an error in a claim, you must pay this back to us.”

If an employer discovers that furlough payments have been over-claimed and not yet repaid, it must notify HMRC and repay the over-claimed amount. Employers must (broadly) notify HMRC within 90 days of making the incorrect claim. If furlough is still being claimed, employers can inform HMRC of an over-claimed amount as part of the next claim. Otherwise, employers will need to contact HMRC directly to disclose the error and facilitate repayment.

If incorrect claims are not notified to HMRC (and refunds issued) within the 90-day time limit, HMRC can impose penalties in relation to the incorrect claims, even where the mistakes are genuine errors, rather than deliberate or fraudulent. The penalties are “failure to notify” penalties, i.e. there will have been a failure to notify HMRC of the furlough claim error within the 90-day time limit. The penalty can be up to 100% of the over-claimed furlough payment, although it can be significantly mitigated.

One of the key mitigating factors is disclosure, meaning a potential penalty can be significantly reduced by making a voluntary disclosure to HMRC of any irregularities, even if the disclosure is after the 90-day time limit. A voluntary disclosure to HMRC allows the business to “get ahead of the curve” and identify any issues to HMRC rather than waiting for HMRC to open an inquiry. In our experience, it is easier to take control of an HMRC issue if you are making a disclosure rather than reacting to an inquiry.

HMRC operates a risk-based approach to businesses, with a business’s systems and controls being of particular interest. Where furlough issues are discovered by HMRC rather than the business, there are potentially wider ramifications for the ongoing relationship with HMRC. This may result in furlough claim inquiries being widened to a review of the business’s internal processes and controls and its mainstream taxes.

Inquiries called “cross tax enquiries” are an increasingly popular means for HMRC to check a business’s tax compliance. These potentially involve a broad range of HMRC specialists, including corporation tax, payroll taxes and value-added tax. Adding furlough into the mix is likely to add to the investigatory burden.


Planning Points—Be Proactive

Some furlough errors will simply come out of the woodwork, while other issues are likely to require some form of internal review or investigation. There are potentially three types of internal investigation a business can carry out:

  • Light investigation
    This is likely to be the preferred approach where a business does not consider it has breached the furlough rules but would like to confirm the position. A light investigation may include reviewing the business’s pandemic-related policies and procedures and how these were communicated to management and staff. For example, was it made clear to management that furloughed staff could not be called upon to perform ad hoc tasks, and how did the business monitor this?
    In addition, either via available internal resources or an external data analytics provider, the business may want to identify and compare any work-related activities of employees while furloughed and not furloughed. Structured data sources are likely to be useful for this exercise, such as log-in data, entrance card usage and stock control entries.
    If the light investigation does not identify any potential issues, the employer may use the report if HMRC makes inquiries.
  • Proactive investigation
    If the light Investigation identifies potential issues, a more proactive investigation may be merited. The breadth of this will depend on whether any breach is enterprise-wide or limited to certain subsidiaries, branches, reporting lines or geographical locations. Again, pandemic policies, communication and ongoing ownership of the policies will be key, together with the potential use of structured data sources to identify potential breaches of the schemes by focusing on employee activities.
  • Responsive investigation
    If there is an HMRC inquiry, a responsive investigation is likely to be required. The requirements communicated by HMRC will largely dictate the extent of the investigation, but the business can either:

    • respond only to questions put by HMRC and limit the scope of any investigation to those questions; or
    • conduct a full-scale review.

The latter approach may be preferable for several reasons. A full-scale review will ensure the business identifies all the issues. It will, therefore, be fully cognizant of the issues that have to be disclosed to HMRC and how such disclosure should be managed. Also, investigating and disclosing any issues demonstrates full cooperation and allows the business to take control of the inquiry rather than simply reacting to HMRC’s questions. Above all, disclosure is likely to help mitigate any penalties.

If the business wishes to conduct a full-scale review, the scope is likely to be similar to a proactive investigation.


It’s Not all Doom and Gloom

While there is the potential for the retrospective scrutiny of decisions taken by businesses during a period of extreme stress and economic uncertainty, everyone, including HMRC, appreciates that mistakes happen. Indeed, HMRC recently confirmed that businesses that took a “reasonable approach” to implementing the furlough guidance should not be overly concerned about HMRC scrutiny as long as the data the business has relied on is robust. Checking the level of robustness will be key.


This article first appeared in Bloomberg Tax. Click here to view the original.



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