"Cheque, please" – Is the cost of fraudulent furlough scheme applications starting to emerge?

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White & Case LLPThe UK furlough scheme, rolled out in haste earlier this year, has been a lifesaver for many businesses and households that have used the scheme to stay afloat. The furlough scheme has so far cost the UK in excess of £35 billion and it is just one of several measures introduced to avoid an economic catastrophe. Inevitably, the bill for these measures will be something we will have to grapple with for some years. Perhaps due to the exceptional circumstances which gave rise to the furlough scheme, and the extent to which it has been used1, it is unsurprising that there will be a concerted effort to claw back wrongful claims. Her Majesty's Revenue and Customs ("HMRC") has signalled that it is committed to investigating an increasing number of reports of allegedly fraudulent claims. Employers may be advised to check now that, in the rush to take advantage of the scheme, they did not do anything that might expose them to allegations of fraud.

Since the World Health Organisation declared COVID-19 a pandemic, the world as we knew it has been turned upside-down. For the first time and on a global scale, countries have been forced to introduce measures to restrict or limit transmission of the virus, affecting businesses and employees across almost every industry.

In March 2020, the UK introduced its own measures in response to the pandemic, including the Coronavirus Job Retention Scheme, or the 'Furlough Scheme' as it has become known. The Furlough Scheme is a wage support measure that has enabled companies to furlough staff, rather than make them redundant.

Furloughed staff can receive a grant of up to 80% of their wages from the government, with an upper limit of £2,500 a month. Furloughed employees are not permitted to work for their employer while making use of the Furlough Scheme. They could however, if they wished, volunteer, attend training or take on new work elsewhere with a different employer.

By 31 October 2020, the Furlough Scheme will have ended. It has been a lifeline for many employees and businesses, and in all likelihood has at the least deferred very difficult decisions about the viability of businesses in the midst of a pandemic, and indeed a new world post-pandemic. However, the Furlough Scheme was rolled out very quickly, resulting in confusion for employers and employees alike. It has also contributed significantly to the strain on public finances; the government's statistics reveal that the total value of claims made nowexceeds £35 billion.2 Concerns are now being raised about the prospect of employers wrongly claiming for furlough relief.

Growing complaints of Furlough Scheme abuse

Since the inception of the Furlough Scheme, HMRC has signalled a robust approach to rooting out fraudulent claims, issuing a statement that said it "won't hesitate to take criminal action against the most serious cases."3

HMRC has gone to great efforts to try to prevent, at the application stage, fraudulent misuse of the Furlough Scheme. In spite of such efforts, it seems some employers have been able to exploit the system. The ways in which the Scheme may have been abused include:

  • making a claim for a furloughed employee, but insisting that the employee carry on working;
  • making a claim for 'phantom' employees, that is, dismissed employees or employees who have been 'newly recruited';
  • claiming for employees who are not in fact furloughed, either because the employee has been required to work or the employee is unaware that a claim in relation to his employment has been made; and
  • inflating a claim (e.g. misrepresenting the number of worked hours to maximise the size of the claim)

Arguably, the introduction of flexible furlough may have muddied the waters and/or made it more difficult to detect fraudulent or mistaken claims.

Interesting questions arise in the context of employers who have claimed under the Furlough Scheme but, strictly speaking, did not need to. For instance, what happens to those employers who were in financial difficulty before the pandemic hit, or who were sufficiently solvent before the pandemic and could have continued to keep employees on the payroll, but chose to 'take advantage' of the Furlough Scheme? We note that HMRC's Employer Guidance states employees can be furloughed if employers cannot "maintain [their] current workforce because [their] operations have been severely affected by coronavirus" [our emphasis] and that the business support website also says the Scheme is designed to offer support "for those that would otherwise have been laid off…to safeguard workers from being made redundant". Can we expect HMRC to take action against employers whose businesses they deem were not "severely affected" by the pandemic, or who furloughed staff when they were never at real risk of redundancy?

According to HMRC, which provides an online form for reporting Furlough Scheme abuse, as at 7 August 2020, there were almost 8,000 reports of potential 'furlough fraud'.4

In addition, a recent study by Oxford, Cambridge and Zurich Universities5 has found that the ban on working while furloughed was ignored, with 63% of furloughed employees (around six million) breaking the rules. The study also found that a fifth of furloughed employees were instructed to carry on working by their employer.

In July, HMRC announced its first arrest for suspected fraud in relation to the Furlough Scheme, involving a fraudulent claim for £495,000.6 In a press release, HMRC again made it clear it "will not hesitate to act on reports of abuse of the scheme. This is taxpayers' money and any claim that proves to be fraudulent limits our ability to support people and deprives public services of essential funding. As usual, we have built steps in to prevent mistakes and fraud happening in the first place, but anyone who is concerned that their employer might be abusing the scheme should report it to HMRC online…"

The arrest demonstrates that HMRC is following up on reports and underlines how seriously it is taking the issue. The Finance Act 2020, which came into force on 22 July 2020, gives HMRC substantial enforcementpowers in relation to the Furlough Scheme, and the power to claw back any payments made to businesses that were not entitled to receive them (along with certain penalties and fines in serious cases). HMRC also has investigation powers that means it may seek to bring a prosecution for a range of criminal offences arising out of 'furlough fraud'. The criminal offences HMRC may have in mind could include, for example, fraud by false representation, fraud by failing to disclose information, false accounting, conspiracy to defraud and failing to prevent tax evasion.

An amnesty period

However, criminal investigations and proceedings can be lengthy, expensive and time-consuming. Perhaps it is for this reason that the Finance Act 2020 offers an amnesty period of 90 days during which time an employer may notify HMRC of any mistaken or wrongful payments under the Furlough Scheme. In an earlier draft of the Finance Bill, the amnesty period was 30 days. The extension may signify a preference for HMRC to recoup any incorrectly paid sums 'the easy way'. Provision in the Act to avoid penalties by self-reporting of knowing or accidental misuse of the Scheme also suggests that HMRC may be willing to show some leniency, though companies should think very carefully and undertake a fact-finding and record-review exercise before taking this step, and seek further advice.

Checking the receipts

One thing is clear: once the buffer of the Furlough Scheme comes to an end, a large number of businesses will be facing an existential crisis. This potential massive increase in unemployment will not relieve the pressure on the public purse. There may be a large increase in the number of disgruntled employees and ex-employees looking to blow the whistle on what they consider to be fraudulent behaviour. The result is that many employers who may be attempting to patch a leaking bucket could find themselves under scrutiny.

Whilst they can take advantage of the 90-day amnesty period, employers would be wise to check that, in the rush to secure relief, they did not expose themselves to allegations of fraud.

1 More than a quarter of UK workers were furloughed as at 9 June 2020: BBC News, 'More than one in four workers now furloughed', 9 June 2020.
2 To fund the package of emergency measures introduced as a result of the pandemic, the UK government borrowed unprecedented sums. It is estimated that the government has spent over £35 billion on the Furlough Scheme alone, which is currently supporting almost 10 million people and 1.2 million employees. See HMRC coronavirus (COVID-19) statistics available here: https://www.gov.uk/government/collections/hmrc-coronavirus-covid-19-statistics#coronavirus-job-retention-scheme
FT Adviser, 'HMRC pledges leniency for furlough 'mistakes'', 8 June 2020.
The Times, 'Fraud fears lead to block on bids for furlough cash', 22 August 2020.
5 Adams-Prassl, A. and others, 'Furloughing', 17 August 2020.
HMRC press release, 'West Midlands man arrested on suspicion of £495,000 furlough fraud', 9 July 2020.
 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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