CoronavirusJul 13 2021

How HMRC is stepping up its furlough fraud investigations

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How HMRC is stepping up its furlough fraud investigations

The figures are in following HMRC’s update on June 3 2021: £64bn has been claimed by employers since the start of the pandemic, spread across 1.3m employees.

In September of last year, HMRC estimated that as much as £3.5bn had been fraudulently claimed, but with the scheme set to run to at least September this year the amount lost to fraud on the public purse could be much higher.

Undoubtedly, prosecution will be reserved for the most serious of cases. This much HMRC has made clear. In the vast majority of furlough scheme overpayments, HMRC prefers to resolve the matter through requiring repayment and, in cases where it is not an honest mistake, imposing financial penalties without resorting to criminal proceedings.

There are at least two reasons driving this approach.

The first is that investigating and prosecuting fraud of any kind through the criminal courts is costly and time-consuming, demanding technical expertise. The opportunity to recoup the amount derived from the fraud is then only available at the conclusion of the proceedings.

The non-criminal route where, in the case of furlough fraud, businesses of all sizes are heavily incentivised to self-report, and may engage in representations to HMRC on the appropriate penalty on top of the amount to be repaid, can be expected to yield a faster result.

Many legitimate companies and individuals standing behind them typically want to resolve matters with HMRC swiftly so that it does not stand in the way of the business’ survival, future opportunities or dent reputation.

The second is that although the term has made its way into common parlance, furlough fraud technically requires more than an over-claim. Dishonesty for the purpose of making a gain or causing a loss must underly the action and be able to be established.

However, identifying the line between criminality and oversight or error is no easy task, particularly when the rules applying to the furlough scheme have had several iterations and evolved over time. Dishonesty is judged according to an objective standard and the complexity of the rules and the haste with which they were introduced is to the advantage of the alleged fraudster.

High-risk cases

All this said, it should not be underestimated that HMRC is deploying vast resources to detecting furlough fraud. HMRC has disclosed that it is scrutinising some 27,000 "high-risk" cases, some of which had been prompted by tip-offs to HMRC’s whistleblower hotline.

These are cases where there are signs that the over-claim is not due to a mistake made in challenging times. In relation to these cases, HMRC are using investigative powers ranging from review of business and employee records through to covert surveillance.

The high-risk cases currently being reviewed by HMRC will span a range of activities. One example of furlough fraud is placing employees on full or partial furlough but requiring them to still work full time. The business doubly wins as the employee’s wages are largely paid for by the public purse and yet the business is continuing to benefit from the employee’s work to generate revenue.

Just as egregious, if not arguably more so, is a company conjuring up ghost or fake employees in order to pocket furlough payments. A common technique is to continue to claim for employees that have moved on either of their own accord or because they were asked to.

Remembering that the current furlough scheme also gives businesses flexibility to bring back their staff to work some of the time, lies may be told about the hours worked by employees in order to make inflated claims. A business may also hang on to furlough payments despite it being a condition of the scheme that the funds are put to employment costs. 

When it comes to such activities, the tipping point between HMRC reviewing a high-risk case and commencing a criminal investigation is likely to be discovery of evidence of blatant dishonesty. Faking contracts so that furlough payments can be claimed is an example.

The backdating of an employment contract is also likely to be obvious if there are no work communications or work output for a particular employee before a set date. Extensive work email communications between an employer and employee while on furlough will also be very difficult to justify when it is a clear condition of the furlough scheme that an employee is not to work during the hours or days for which they are furloughed.

As the year progresses it can be expected that criminal prosecutions, albeit a small number, will be announced in cases where there is good documentary evidence of dishonesty.

As for punishment of furlough fraud, fines may be imposed on any company criminally convicted of offences of fraud and also tax evasion that arise in cases involving public revenue. The corporate offence of failing to prevent tax evasion is also on the table. Instances of corporate criminal liability will be rare but are possible. Individuals directly implicated will also face terms of imprisonment if convicted.

Consequences of over-claiming 

Away from the criminal courts, the consequences are still severe. In July 2020, HMRC was given power to clawback payments made to businesses not entitled to them. Companies that have not repaid the amount to which they were not entitled will be charged double the amount.

There are also consequences for a business not reporting to HMRC swiftly as soon as they realise they have received more than what they were entitled. Businesses who have over-claimed are expected to make a disclosure and implement remedial action.

Failure to do so will attract hefty financial penalties that can be as much as 100 per cent on top of a repayment obligation. In such cases there is always scope to make representations on any penalty to be imposed.

A business, however, will inevitably be in a strong position if they are able to point to evidence that the claim, while incorrect, was made honestly and that on realising the inaccuracy it moved fast to remedy the position and bolster its anti-tax-evasion processes.

Separate from the question of penalty to be imposed by HMRC, those who have engaged in activity capable of amounting to furlough fraud should be aware of the prospect of director disqualification and tribunal complaints by employees.

Any dealings with HMRC about an over-claim also may adversely impact future applications for ‘fit and proper’ status – such approval is required to run or be involved in certain businesses that are regulated for anti-money-laundering purposes.

Additionally, any dealings with HMRC over the question of an over-claim will have a bearing on the question of financial integrity. A small number may be prosecuted for furlough fraud, but the implications of an allegation will extend beyond the criminal courts.

Anita Clifford is a barrister at Bright Line Law