New HMRC Clawback Powers and Penalty Measures for COVID-19 Support Payments

Morgan Lewis

A new act in the United Kingdom provides power to HMRC to claw back coronavirus (COVID-19) support payments and issue penalties for deliberate and inadvertent misuse of such schemes.

The UK Finance Act 2020 (which received Royal Assent on 22 July 2020) provides HM Revenue & Customs (HMRC) with powers to claw back COVID-19 support payments (including payments paid under the Coronavirus Job Retention Scheme (CJRS)) to which recipients of such payments were not properly entitled. The clawback mechanism will apply not just in cases of deliberate or fraudulent conduct, but also where genuine errors have been made. Additionally, recipients may be subject to penalties for errors, as well as civil and criminal proceedings in the most serious cases, and directors and officers of insolvent companies may in certain circumstances be personally liable for such amounts.

KEY POINTS TO NOTE

With respect to the CJRS, HMRC has recently published guidance outlining the steps employers should take if they have made errors in their CJRS claims, as well as highlighting the penalties employers may face if they fail to report and rectify errors. The key points for employers to note are as follows:

  • CJRS payments are revenue receipts chargeable to income tax or corporation tax in the hands of the employer (as applicable).
  • If an employer discovers that it has claimed too much under the CJRS, or that it has ceased to be entitled to a payment under the CJRS, it should notify HMRC. For errors discovered quickly, employers will have up to 72 hours to delete claims made through HMRC online services. Otherwise, corrections can be made by adjustment to subsequent claims or by notifying and repaying HMRC through an online portal.
  • If an employer has claimed a payment under the CJRS to which it is not entitled (including where there is a change of circumstance after the payment has been made or the employer does not use the payment to meet the wages of furloughed employees and associated costs), then to the extent it has not repaid these amounts to HMRC, an income tax charge equal to up to 100% of the amount of the CJRS payment may be imposed. This will allow HMRC to recover these amounts from employers. The amount of income tax will depend on the extent to which the employer is or was not entitled to the payment, and operates regardless of fault. The income tax charge will also apply to companies.
  • HMRC’s normal enquiry and assessment powers will apply in respect of this income tax charge. As a consequence of this,
    • HMRC will be entitled to assess employers to income tax to recover amounts to which employers were not entitled, and employers are under an obligation to notify HMRC if they identify errors in their CJRS claims;
    • if HMRC raises an income tax assessment, the amount assessed will be payable to HMRC within 30 days following the assessment, following which interest will be payable and penalties may also be charged; and
    • if HMRC fails to raise an assessment, employers should include details of any CJRS overpayments in their corporation tax or income tax returns (as applicable).
  • Employers that discover a CJRS error which means they are liable to the income tax charge should notify HMRC of this by the latest of the following:
    • 90 days after the date they received the grant they were not entitled to.
    • 90 days after the date they received the grant that they were no longer entitled to keep because their circumstances changed.
    • 20 October 2020.
  • HMRC has stated that where genuine errors are discovered outside of these periods, penalties should not be charged as long as errors are disclosed, and any income tax liability is settled, within 12 months following the end of the relevant accounting period for companies, or 31 January 2022 for individuals.
  • The amount of any penalties charged by HMRC will depend on the conduct of the employer and the circumstances giving rise to the error. In the most serious cases where the recipient knew it was not entitled to the payment, or knew it became repayable after a change of circumstance, but failed to notify this to HMRC, penalties of up to 100% may be due. Additionally, in cases of deliberate conduct, HMRC may publish details of the employer on its “details of deliberate tax defaulters” list.
  • Where a company becomes insolvent, the former directors and other managers or officers may be made jointly and severally liable for any income tax due to HMRC under these provisions. This should only be the case where it can be shown that the relevant individual knew that the company was not entitled to the CJRS payment at the time it was made.
  • Employers may also contact HMRC to increase CJRS claims if they discover that they have not claimed enough under the scheme, although employers are no longer able to add employees to an existing claim for periods up to 30 June 2020.

WHAT MAY CONSTITUTE MISUSE OF THE CJRS

The table below summarises what is likely to constitute lawful use and potential misuse of the CJRS. This table reflects our current understanding of the CJRS. Further guidance is likely to be issued in due course, which may provide additional clarification on the specific requirements for businesses.

LAWFUL USE

POTENTIAL MISUSE

Asking employees to carry out genuine training, or volunteering for a third party (so long as it does not provide services to or generate revenue for your business or an associated business), while those employees are on furlough.

Allowing employees to work for another employer (provided that employer is not associated with your business) while those employees are on furlough.

Inadvertently asking furloughed employees to carry out tasks that may amount to work, even on a voluntary basis (unless the relevant furlough arrangement relates to the period after 1 July 2020, in which case the employee may be asked to work on a part-time basis).

Claiming under the scheme for a furloughed employee who is serving a statutory notice period.

Using the CJRS payment for redundancy pay.

Re-furloughing employees who are currently back at work provided they were previously furloughed for a consecutive three-week period at any time between 1 March 2020 and 30 June 2020.

Incorrectly calculating how much can be claimed under the scheme.

Not continuing to top up furloughed employees’ salaries to 100% of their usual salary until 1 October 2020 (provided that a new or extended furlough arrangement is put in place).

Claiming for employees employed after 19 March 2020.

Asking employee representatives to carry out their roles as employee representatives in the context of an individual or collective consultation while on furlough.

From 1 August 2020, not making national insurance and pension contributions.

From 1 September 2020, not contributing 10% of employee wages (up to £312.50) plus employer national insurance and pension contributions.

From 1 October, not contributing 20% of employee wages (up to £625) plus employer national insurance and pension contributions.

WHY ACTION IS NEEDED

HMRC has stated that it will conduct audits into the use of the CJRS, which is not surprising given the huge financial burden of the scheme for the UK government. It has been reported that HMRC has already made its first arrest in connection with an alleged £495,000 CJRS fraud, although this appears to have been part of a larger fraud and money laundering investigation. We do not expect the majority of cases involving misuses of the CJRS to be dealt with via dawn raids, arrests, and criminal prosecution. However, this does demonstrate HMRC’s resolve to act on reports of abuse of COVID-19 support schemes, and to that end HMRC has set up a dedicated reporting service for suspected abuse of such schemes (including CJRS).

Further, although prosecutors have been told to downgrade less serious cases in order to manage the COVID-19 pandemic, COVID-19-related offences remain an “immediate priority” under the Crown Prosecution Services’ Interim Charging Protocol. There is also the possibility that fraudulent CJRS claims might lead to the first prosecutions for the failure to prevent tax evasion offence under the Criminal Finances Act 2017 (CFA). Employers should be aware of the reputational damage of misusing public funds, and certain companies are making proactive decisions to pay back grants or not accept the job retention bonus. The benefits of self-reporting are therefore not solely financial.

Consequently, we recommend that businesses conduct internal audit exercises to ascertain whether any inadvertent errors were made as a matter of priority, and within the 90-day amnesty period at a minimum. This will help mitigate the risk of any penalties being issued. Morgan Lewis can help by working with employers to conduct a legally privileged review. We also recommend employers review their CFA procedures to avoid failure to prevent tax evasion offences. Employers should also note that uncorrected CJRS errors may have an impact on their HMRC business risk review (BRR) categorisation.


Trainee solicitor William Mallin contributed to this article.

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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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