Furlough fraud and the wrath of the HMRC

Jae Carwardine, Partner in the Russell-Cooke Solicitors, criminal and financial crime team. Jannine Gennaris, Associate in the Russell-Cooke Solicitors, employment law team.
Multiple Authors
5 min Read
Jae Carwardine, Jannine Gennaris

On 5 November 2020, the Chancellor announced that the Coronavirus Job Retention Scheme (the 'furlough scheme'), which had been due to end in its current form on 31 October 2020, would instead be extended to 31 March 2021. However, an important change to the scheme is that the Government will be publishing the names of employers who are still using it after 1 December 2020 alongside an indication of the value of the claims they are making. The Government no doubt calculates that this will deter many employers who have been relying on the scheme from continuing to do so. Another reason for making this information public is likely to be to deter employers from committing furlough fraud. 

What is furlough fraud?

Guidance set out in the Employees' CJRS guidance provides that furlough fraud includes situations where an employer:

  • claims on behalf of an employee and does not pay that employee what he/she is entitled to be paid under the scheme;
  • asks an employee to work whilst on furlough; or
  • makes a backdated claim that includes times when an employee was actually working.

It is estimated that furlough fraud and serious errors in payment calculations may together be worth a total of £3.5 billion. It is therefore unsurprising that the Government has taken this step, along with its continued efforts to encourage employees to report any abuse of the system, or otherwise fraudulent behaviour.

What are the implications of committing furlough fraud?

From the updated guidance it would appear that HMRC focus in the coming months will be on actively seeking out employers who have used the scheme fraudulently. Employers should therefore be aware of the following potential implications of misuse:

Powers to recoup through income tax assessments and charge penalties

Under the Finance Act 2020, which came into force on 22 July 2020, HMRC can, of its own motion, raise income tax assessments in order to claw back furlough payments from recipients who were not entitled to them, or where payments made under the furlough scheme were used for other costs and not to pay the wages of furloughed employees. In cases of deliberate non-compliance or misuse of a payment under the furlough scheme, HMRC can also impose penalties, with interest due on late payments.

Individual/personal liability

Under the Finance Act, a company officer will be jointly and severally liable where they have deliberately claimed under the furlough scheme in circumstances where they were not entitled to do so, and will be subject to furlough scheme penalties where the company becomes insolvent. Directors and partners should also be aware that, under the Criminal Finances Act 2017, they could face criminal charges. Such charges apply if they have intentionally facilitated furlough fraud, with directors at risk of disqualification from acting as a director of a company under the Disqualification Act 1986 for up to 15 years. In addition to this, where a penalty has been imposed due to a deliberate act or failure of a company officer, the Finance Act affords HMRC the right to pursue the relevant company officer for up to 100% of the company’s penalty on fraudulently claimed payments under the scheme. 

Corporate offences/charges

There are additional strict liability offences under the Criminal Finance Act 2017 which could be of relevance to furlough fraud. Companies should pay particular attention to these offences, as knowledge or active involvement by senior personnel within the company is not a requirement for an offence to be committed. The only way a company can avoid liability is to show it has taken "reasonable preventative measures."

Criminal liability/charges

HMRC will be responsible for conducting the investigation and may recommend that charges are pursued; ultimately the Crown Prosecution Service will conduct its own review and decide the nature of any criminal charges to be pursued. The first reported arrest was made in July this year, with HMRC retaining the right to search an individual's business premises and even their home address under warrant.

If convicted of fraud, the individual is at risk of a potentially substantial custodial sentence, depending on the nature of the case; further the Crown Prosecution Service may also pursue confiscation proceedings to claw back the funds said to be fraudulently distributed.

Audit and claw-back of amounts paid out under the scheme:

HMRC may retrospectively audit all aspects of the scheme.

What about employers who have mistakenly claimed under the furlough scheme to which they were not entitled?

Employers who have made claims under the furlough scheme mistakenly may wish to inform HMRC as soon as possible from the date they become aware of the error. The Government has produced the following guidance which sets out the steps an employer should take in this situation: Guidance: Pay Coronavirus Job Retention Scheme grants back. For further guidance on the penalties an employer may face if they do not inform HMRC of an overpayment once they become aware of it, please see Coronavirus Job Retention Scheme - receiving grants you were not entitled to. Employers must notify HMRC if they have over-claimed a CJRS grant and have not repaid it, within the notification period. Depending on the employer's circumstances, the notification period will end on the date which is the later of:

  • 90 days after an employer receives the CJRS grant they are not entitled to
  • 90 days after the date circumstances changed so that the employer was no longer entitled to keep the CJRS grant
  • or 20 October 2020.

For many employers, the notification period may already have passed. The implications of failing to notify HMRC of an overpayment within the required period are clear; HMRC can charge a penalty of up to 100% on the amount of the CJRS grant or overpayment that an employer was not entitled to receive or keep.

Getting it right

Although there appear to be few active investigations into furlough fraud at the moment, it is anticipated there will be many more in the next few years. As set out in the Employers' step by step guidance, HMRC considers that it is the responsibility of employers to check that the amount they are claiming under the scheme is correct.

It is therefore crucially important that employers are getting it right. If you are an employer and have any concerns about the above implications, or would like assistance in making sure you are following the correct process, please contact our employment team.

If you are concerned that your organisation may have claimed furlough payments to which it was not entitled, or have already been approached by HMRC about this, please contact our fraud and criminal litigation team.

Briefings Individuals & families Russell-Cooke crime employment furlough fraud HMRC Jae Carwardine Jannine Jenkins