The dangers of furlough abuse

Under the Government’s Coronavirus Job Retention Scheme (CJRS) and Self Employment Income Support Scheme, millions of UK workers have been supported financially, with what essentially amounts to unprecedented state support of the incomes of employed and self-employed individuals. 

The scope of this has been massive, which by February of 2021 had cost the government £53.8 billion, with over 1 million UK companies making claims. However, some companies have paid back their furlough claims, either in part or in full. 

However there has been furlough abuse by some, which this article will begin to examine. This article focuses primarily on abuses under the Coronavirus Job Retention Scheme; the Self Employment Income Support Scheme will also have been abused, but in a different way. 

Furlough explained

Under the furlough scheme, employers could claim compensation for up to 80% of their employee’s salary, up to a limit of £2,500. It was then up to the employer whether or not they topped the figure up to match 100% of the salary. 

Part of the furlough scheme rules are that employees who are furloughed must not work in a fashion which would normally expect remuneration. This means that while some training activities are allowed, all normal ‘work’ must pause. 

The furlough scheme, as well as being massive in scope, has also seen a potentially unprecedented level of fraud – estimates place around one third of claiming employers asking their employees to continue to work whilst claiming furlough, and HMRC has received around 3000 requests, primarily from employees, to investigate abuses. 

This at least in part stems from the fact that employers are in entirely new waters; the scheme is unprecedented, and with it the new challenges faced by accounting departments and firms, struggling to interpret the new legislation.

The seeking of fraudsters

The furlough scheme may be winding down – current plans are to run it through to at least September, but as it winds down and government resources become freed up, HMRC will start to investigate possible frauds. The main types of furlough abuse that may have occurred are:

1. placing employees on furlough and then requesting that they continue to work as normal; 
2. pressurising or encouraging employees to work on a ‘voluntary’ basis; 
3. claiming on behalf of an employee without their knowledge and recovering 80% of the employee’s salary, while the employee continues to work as normal; 
4. claiming on behalf of a ‘ghost’ employee – someone who has been dismissed before the CJRS’s start date of 19 March 2020, or a non-existent employee who commenced work following this date; 
5. employers misrepresenting the working hours of staff, so that they can maximise payments recoverable from the CJRS. 

HMRC has been granted increased powers to pursue cases of fraud, including cases where companies have since become insolvent. In these situations, directors may be pursued, with several or joint liability. 

The consequences are potentially severe, as furlough abuse often represents an exploitation of employees in addition to the furlough system, meaning multiple means of compensation may be sought. 

Legislation

The potential penalties for those charged and found guilty of abuse have been set out in the 2020 Finance Act. Potential penalties include fines for companies, personal liability for directors who have liquidated companies after contraventions have taken place, and in severe cases, imprisonment, as abuses of the CVJR scheme essentially amounts to defrauding the treasury itself.

Other cases which are expected to be pursued, are those where companies were either already insolvent or were becoming unviable, and were thus not protecting viable jobs by claiming. 

Given the unexpected twists and turns the year has taken financially, with lockdown after lockdown, insolvency has doubtless crept up on many businesses, and this will be given due consideration. Proactive measures however, such as early consultation with licensed insolvency practitioners, is always advisable. 

With prosecution, intention is key, and the cases which will be chased most aggressively are where a deliberate fraud has occurred. Some errors will have accidentally occurred, but if employers have either shown a willingness to remedy these mistakes through repayment, or can show that they have acted reasonably, they are unlikely to be prosecuted. Remedial action is key here. Mistakes could easily have been made in the rush to claim and avoid mass redundancy during the first lockdown, however now things have calmed down, companies should scour the books to look for any errors made. 

Diligence is certainly important here, and will pay dividends in terms of damage limitation. This is being illustrated in the number of companies repaying, in part or in full, initial claims made early in the pandemic. Better, it seems, to err on the side of caution.

Scale 

The sheer scale of potential abuses (currently estimated, in some form or another, at around a third of all claiming employers) is that HMRC will only have the resources to investigate the most serious of allegations. 

However, it is also expected that spot checks will become the norm, meaning that even comparatively small-scale abuses should be remedied.

Remedial action

It is certainly better to act sooner rather than later. After the financial hardships faced by many companies over the past year, the impact of fines and other penalties for intentional or unintentional abuses of the furlough scheme may cause many to become insolvent as they are unable to pay them. 

It is essential that expert advice is sought from a licenced insolvency practitioner, in order to charter these opaque and dangerous waters in the most expeditious and damage controlling manner possible. 

Now that you have read the guide please feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk