The Rise and Fall of the Furlough Scheme - article by Jemma Sherwood-Roberts, Regulatory Partner at Constantine Law
Claims for furlough payments should be proactively reviewed to ensure accuracy and alignment with the spirit of the scheme.
The UK is starting to emerge from the COVID-19 pandemic which has held us in limbo for the last two years. The pandemic required the Government to act quickly and resulted in urgent measures being put in place to support the country’s economy and its citizens. These measures included the introduction of various financial schemes by Her Majesty’s Revenue & Customs (HMRC), for example the Coronavirus Job Retention Scheme (CJRS). The CJRS, also known as the furlough scheme, was designed to avoid millions of staff redundancies from businesses that were unable to afford to keep employing them during the pandemic. The CJRS was, no doubt, a remarkable lifesaver for many; Harriet Clark, a researcher at the House of Commons Library, has stated that it supported an estimated 11.7 million jobs. However, the cost to the taxpayer is estimated to have been a massive £70 billion.
The end of the scheme – on 30 September 2021 – has seen focus shift to how it may have been exploited and steps that can be taken to address this. The speed at which the scheme was introduced and the method used to process the payments meant that there was significant opportunity for fraud, now believed to have cost the taxpayer around £5.8 billion. It has been widely reported that the Treasury has agreed to wipe out £4.3 billion of these potentially fraudulent claims and to focus on recovering £1 billion from businesses (in addition to around £536 million already recovered); this decision has come under fierce criticism. Businesses now need to concentrate on ensuring that they are not investigated in respect of the £1 billion HMRC is looking to track down.
It is useful to consider what offences of fraud are likely to be considered by the investigatory taskforce set up by HMRC and steps to take to avoid coming under the spotlight. The most obvious fraud offences are contained in the Fraud Act 2006 (‘the Act’) although it is noted that there are common law offences, such as conspiracy to defraud, which may also be used by HMRC. The most likely offence to be investigated and charged is fraud by false representation (under section 2 of the Act). This is when: information has been dishonestly provided for the purposes of a claim; is found to be untrue or misleading and the claimants knew it to be so; and the claimants made this representation in order to make a gain for themselves or another, or to cause loss to another, such as HMRC.
A further offence is fraud by failing to disclose information (under section 3). This is when material information has been dishonestly omitted to make a gain or cause a loss to another. Those in positions of seniority within a business could also see themselves investigated for fraud by abuse of position if they dishonestly used that position to make a false claim (pursuant to section 4 of the Act). Section 12 of the Act provides the opportunity for HMRC to challenge whether the body corporate can be found guilty of these offences if they are found to have been committed with the consent or connivance of a director, manager, secretary or other similar officer of the body corporate.
Check your claim
Businesses need to make sure that they are comfortable with the claims they have made – not simply in terms of the money claimed but also in relation to the information provided. It will be particularly important for directors (both executive and non-executive) and business owners – who may not have been directly involved in making the applications – to be satisfied that all necessary information was provided to HMRC and that it was accurate and not misleading.
Not all businesses that claimed furlough incorrectly did so dishonestly. At the time when claims were being made, it was difficult to know how things would pan out. However, if a business finds they made a mistake with their furlough claims, they should seek advice as soon as possible and not bury their heads in the sand.
Another slightly more difficult aspect of the CJRS regime relates to the purpose for which a claim was made. The creation and extension of the scheme at its various stages was set out in Treasury Directions. At each stage, these highlighted the purpose of the scheme, that being, to reimburse employers in respect of paying the salaries of employees furloughed owing to circumstances arising from COVID-19. No claim should have been made if abusive or contrary to this purpose. This is a much more difficult area for HMRC to investigate. Examples of an abusive or contrary claim could include furlough being claimed where the employee was actually being required to work or where the employer did not want to employ the staff member but also did not want to incur the cost of their redundancy.
The question of the purpose of a claim could also potentially affect businesses that claimed for financial relief but were in fact able to pay the salaries themselves – see, for example, recent press questioning why supermarket supplier Greencore claimed £30 million in furlough despite paying its Chief Financial Officer a bonus of £286,000. Many companies, that have perhaps done financially better than expected, have decided to reimburse HMRC in respect of the financial assistance provided. This is not necessarily an admission that they should not have made the claim, but takes away the reputational risk of an investigation or public perception that the furlough claim was wrongly made.
Considerations for regulated firms
It is particularly important for regulated firms to consider what steps they may need to take to avoid an investigation by HMRC. A regulated firm which availed itself of the CJRS – or any other similar government pandemic financial scheme – once subject to an investigation – possibly for error and definitely for fraud – will need to think carefully about its duty to be open with its regulators and consider its notification obligations.
Where significant errors or fraud are found, a regulated firm should be aware that their regulator may investigate with a view not only to sanctioning the firm but also to investigating the senior managers to establish if any of their conduct, integrity, fitness or propriety is impaired.
Businesses need to consider whether there is a chance that they have wrongly claimed in terms of the information provided – or not provided – and whether their claim was made in the spirit of the scheme. Officers should re-evaluate both initial and subsequent claims and consider whether they were accurate and correct, as the factual basis may well have developed over the course of the pandemic.
Where individuals are satisfied that their businesses’ claim for furlough was legitimate, they should document that decision, noting in particular how the claim was linked to the purpose of the scheme.
If, in hindsight, it is felt that the claim was inaccurate, incomplete or otherwise not in the spirit of the scheme, rather than brazen it out, the better option may be for businesses to self-report and return funds to HMRC. Failure to do so could heighten the risk of the taskforce commencing a criminal investigation into the company.
Not all businesses that claimed furlough incorrectly did so dishonestly.
A similar article appeared in Governance and Compliance Magazine - March 2022