In the world of financial crime, furlough fraud is all the rage in 2020. To get to grips with its legal implications, we caught up with the heads of Hodge Jones & Allen’s financial crime and regulatory team.
Where once seemingly unthinkable, this year has seen the UK government subsidise and support the nation’s workforce through various fiscal measures. We recently caught up with Ruth Harris and Kiran Mehta – joint heads of Hodge Jones & Allen’s Financial Crime and Regulatory team – to understand some of the intricacies around the Coronavirus Job Retention Scheme and the fraudulent activity emerging in its wake.
Chambers Student: Why was the Coronavirus Job Retention Scheme – or ‘Furlough Scheme’ – introduced?
Ruth Harris and Kiran Mehta: The Coronavirus Job Retention Scheme was introduced by the government in March 2020 in response to economic concerns arising from the unprecedented coronavirus pandemic. The scheme provided grants to employers to retain and continue to pay staff who would otherwise be at risk of redundancy. It was designed to support businesses suffering detrimental financial circumstances as a result of coronavirus. Staff could be retained so that they would be available for work when circumstances improved. In effect, through the scheme the government subsidises the staffing costs that many businesses would otherwise have been unable to afford due to reduced turnover.
CS: What provisions did the scheme outline?
RH and KM: The scheme applies to “furloughed employees” of a business.These are employees that could no longer be employed as before because their employer had limited or no work as a result of the pandemic.
For the period March 2020 and July 2020, employers were able to claim 80 per cent of an employee’s gross pay up to a limit of £2,500 per month, in addition to National Insurance Contributions and minimum employer auto-enrolment pension contributions.
From 1st July 2020, as lockdown eased, the scheme became a little more flexible. Furloughed employees could work reduced hours or limited shifts. Their employer could claim a grant so that the government would cover the difference in pay between hours worked in these circumstances, and hours worked pre-coronavirus.
From the 1st August 2020 the scheme adapted further to expect more from the employer on a rising scale of contribution. Each month, the level of grant from the government would reduce and the employer’s contributions would increase. From August, the government paid 80% of furloughed staff wages (up to the £2,500 cap) but the employer had to pay National Insurance and pension contributions. From September, the government agreed to pay 70% whilst the employer was expected to top up to 80% of the monthly income. From October the cap will reduce again to 60%. The scheme is to end on 31st October 2020. There is considerable debate about whether the scheme should continue in some form – possibly offering assistance only to certain sectors. But at this stage employers must plan for the scheme to end entirely.
CS: How would you define “furlough fraud”?
RH and KM: Furlough fraud would necessarily involve a degree of dishonesty. It would involve an employer claiming a grant they were not entitled to from The Coronavirus Job Retention Scheme. To be fraudulent the behaviour would have to be knowing and dishonest. The scheme was complex and imposed at short notice. Errors and mistakes will understandably have been made on application forms at a time of intense pressure as the coronavirus pandemic took hold. Likewise, there is the potential to misinterpret or misunderstand the provisions. If it is human error made by an employer seeking to apply the provisions properly, then in our view that this is not dishonest and it is not fraud.
When assessing dishonesty, the Courts will use the following alternative two stage test in the context of furlough fraud:
- what was the applicant’s actual state of knowledge or belief as to the facts at the time of making the application; and
- was the applicant’s conduct dishonest by the standards of ordinary decent people
CS: What constitutes “serious furlough fraud”?
RH and KM: In our view, the difference between furlough fraud and serious furlough fraud will centre round culpability and harm. The more sophisticated the planning and conduct of the fraud, the more serious it will be. Equally, the higher the value of the fraud, and therefore the loss to the taxpayer, the more seriously the offence will be judged to be.
CS: In what ways has the scheme been misused?
RH and KM: The furlough scheme comes with a number of conditions and requirements. The employee must be informed they are to be furloughed and they must agree to it. An employee cannot do any work which makes money for their employer or associated company, nor can they provide any services.
It is within this latter category that we expect to see most allegations of fraud. An employer might dishonestly make a claim to the coronavirus job retention scheme for an employee who continues to offer their services or work for the employer. So, the employer would have benefitted from the government paying a large part of their employees’ salary, but would additionally have benefitted from their employee continuing to work.
Alternatively, the employer may have set up a company, disguising the fact that the company is associated with them. The employee may continue working for the employer through this company.
We also anticipate that it is possible that claims might be received for false employees or in circumstances where a claim seeks to fraudulently inflate the hours work by an employee before the coronavirus so as to increase the value of any claim.
There are number of possible ways that the scheme may therefore be misused, leading to allegations of furlough fraud.
CS: Will employers who have acted fraudulently face criminal sanctions?
RH and KM: We think it highly likely that an employer suspected of acting fraudulently is at serious risk of criminal investigation and prosecution. If convicted of an offence under the Fraud Act, depending on the circumstances an individual may potentially face a maximum custodial sentence of up to 10 years. The actual sentence would depend on numerous variables, such as the value of the fraudulent claim.
CS: Could you please outline the main provisions in the Finance Act 2020?
RH and KM: The Finance Act 2020 has provided HMRC with new powers to deal with abuses of the scheme. The key features are:
- 90 day amnesty for those who wrongly received payments. They must come forward within 90 days from the end of July and make repayments, and in those circumstances penalties can be avoided.
- HMRC empowered to claw back payments to businesses that they were not entitled to and to impose financial penalties on wrongly (not just fraudulently) claimed furlough payments.
- Penalties to apply to the company, or even to a company officer personally (depending on the circumstances, where the wrong claim might be attributable to the actions of that company officer)
CS: What powers do HMRC have to investigate allegations of furlough fraud?
RH and KM: HMRC have wide powers to start an investigation into any suspected allegation of furlough fraud. The nature of any allegation would depend on the suspected nature of the fraud. As we discussed above, furlough fraud could come in a number of different guises. Using the example of submitting a claim to the furlough scheme for an employee who continued working, HMRC could request business records such as emails, phone messages, customer invoices and so forth. In the example of submitting a claim for an employee who does not exist, HMRC could request employment records, ID records, company records to demonstrate the employee is genuine etc. In addition to requesting documents, HMRC may be granted powers to carry out unannounced searches. In more serious cases, HMRC may also seek to use their existing criminal investigation powers, for example by interviewing a suspect under caution using their powers under the Police and Criminal Evidence Act 1984.
The important point to remember is that HMRC, who are the investigating government authority, will have unfettered and ready access to any claims made to the scheme. This is in addition to important relevant information about businesses and employees – such as tax payments, NIC contributions, corporation tax etc.
CS: What role do solicitors have in mitigating the fallout for employers for potentially fraudulent and/or mistaken claims?
RH and KM: Instructing a solicitor in these circumstances will be very important. It is vital to establish whether any claim is merely mistaken or actually dishonest. If an honest mistake, it is important to bring this to HMRC’s attention in the right way as quickly as possible. This will be the best way to mitigate any future action such as the imposition of harsh penalties, or, even worse, criminal action. If a criminal investigation follows, then a solicitor can help you to navigate this stressful time, advising you as to your rights, and helping you to navigate an often intrusive and stressful criminal investigation. Likewise, of crucial importance is the availability of the amnesty window until towards the end of October. If it is possible to avail yourself of this, then the right solicitor can provide fast urgent advice to ensure any protection this might offer.
CS: How long do you expect this area of work to continue for? Will it be wrapped up quickly or do you anticipate claims/cases be processed and prosecuted for years to come?
RH and KM: It is very hard to say. The majority of UK businesses have used the scheme at some point and the total value of claims, we understand, has run into £30 billion plus. Likewise, reports to HMRC about possible furlough fraud have run into the thousands. It will, therefore, take HMRC some time to sift through reports and establish which claims ought to be investigated. It is telling that against the backdrop of thousands of whistleblowing reports, millions of furloughed employees and billions of pounds of claims made, we think there have thus far been only three arrests. There is a lot for HMRC to investigate and this will be resource and time intensive.
CS: Is there anything else you would add for our readers specifically?
RH and KM: The biggest take home we think, is that the amnesty window for reporting wrong payments currently closes on 20th October. Concerned employers should make the most of it by contacting a lawyer, and obtaining advice as to whether the scheme has been utilised wrongly, their risk of investigation and prosecution, and avail themselves of the amnesty if appropriate.