The UK Government Furlough Scheme: Time to Reconcile

Key Takeaways

• On 31 October 2020, the UK Government’s Coronavirus Job Retention Scheme will come to an end, to be replaced from 1 November 2020 by the new Job Support Scheme.
• It is estimated that between £1.75 billion and £3.5 billion may have been claimed fraudulently or in error by employers under the Coronavirus Job Retention Scheme. 
• The Government has provided a grace period for companies to come forward with details of mistakes or oversights in their claims under the scheme, before Her Majesty’s Revenue & Customs (“HMRC”) opens investigations. 

The Coronavirus Job Retention Scheme

On 26 March 2020, the UK Government announced the Coronavirus Job Retention Scheme (“the Furlough Scheme”). The Furlough Scheme was designed to protect the UK economy by assisting employers whose operations have been severely affected by COVID-19 to retain their employees rather than terminating their employment. Employers could claim back 80% of a furloughed employee's salary up to a maximum of £2,500 per month, plus the employer's national insurance contribution, from the UK Government.

Initially, the subsidy came with conditions for both employers and employees:

(a) the employee's reduced salary remained subject to income tax;

(b) an employee could not undertake any voluntary work or work for their employer during the time they were furloughed;

(c) wholly publically-funded organisations were excluded from the scheme. 

The Evolving Furlough Scheme 

Various changes have subsequently been made to the Furlough Scheme: closing to new entrants from 1 July 2020; and introducing “flexible furloughing” allowing employees to work part of the time and for Furlough Scheme payments to be made in respect of normal hours not worked. Changes to the Furlough Scheme have led to tapering down the level of support provided by the Government and instead requiring further employer contributions.

The New Scheme

The Government's Job Support Scheme (the "Support Scheme") begins on 1 November and will last for six months. The Support Scheme is available for all employers with a UK bank account and UK PAYE system, including those employers who have made no claim under the Furlough Scheme. The Support Scheme is available to those employees who work a minimum of one-third of their contractual hours. The employer will pay the employee for the hours worked, with the remaining pay up to 77% of normal income, equally divided between the employer and the government (subject to a reduced government contribution capped at £697.92 per month).

Additionally, employers will be able to claim the Job Retention Bonus, a one-off payment of £1,000 for every previously furloughed employee who remains employed at least until the end of January 2021.  However, where a Furlough Scheme claim is incorrectly made, fraudulently claimed, or inflated, HMRC will withhold payment of the Job Retention Bonus until an enquiry is completed.

HMRC Fraud Concerns

To date the Government has expended some £39.4 billion through the Furlough Scheme. HMRC estimate that between £1.75 billion and £3.5 billion could have been claimed fraudulently or by mistake. Due to the unprecedented nature of COVID-19 and its impact on the economy, the Government has indicated that they will be understanding of those who may have rushed out applications, overlooking the nuances of the developing Furlough Scheme. HMRC Permanent Secretary, Jim Harra, explained to MPs that HMRC "are not going to set out to try to find employers that have made legitimate mistakes in compiling their claims, because this is obviously something new that everybody had to get to grips with in a very difficult time". HMRC will, instead, step in to help rectify honest errors. However, HMRC have emphasised that in order to uphold the integrity of the Furlough Scheme, they are committed to pursuing organised criminal attacks, inflated claims and other non-compliance. Under the recent Finance Act 2020,   HMRC have been granted powers to recover any money that has been over-paid and have already made a number of arrests in relation to suspected criminal activity relating to the Furlough Scheme.  

A joint Oxford, Cambridge and Zurich study, estimated that of the 9.4 million workers furloughed during the April and May lockdown period, as many as 6 million may have been forced to work in breach of the Furlough Scheme. Fraudulent or mistaken claims may have arisen in a number of scenarios, including:

• claims for employees who no longer work for a company;
• duplicative payroll entries for the same employee;
• misstating an employee's salary;
• claims for employees recruited outside of the eligible timeframe;
• claims for employees who were not furloughed;
• furloughed employees continuing to work from home whilst furloughed;
• miscalculating the number of hours worked; or
• payments not actually being used to cover the cost of furloughed employees.

HMRC is operating a Fraud Hotline telephone service and has established an online form for reporting suspicions of potential fraud to HMRC. As of 7 August, HMRC had received 8,000 tips potentially identifying up to 30,000 firms that may have engaged in furlough fraud.  HMRC has also indicated their intention to use their inspection powers to investigate claims and clawback payments, paying particular attention to the Furlough Scheme claims that are inconsistent with the payroll data held by HMRC. 

At present, the Furlough Scheme will cost the Government an estimated £60 billion. A government spokesperson said it was committed to finding "fraud and recover[ing] money for the taxpayer". Head of the National Audit Office, Gareth Davies, recently stated that the Government are working on trying to clawback cash and notify the police of potential fraud, warning that "people who did commit fraud on these schemes can expect there’s a good chance that they will be detected and followed up". Mr. Davies also alerted attention that there has already been “significant” abuse of the Furlough Scheme and warned Ministers there will be “no excuse” if fraud within government schemes continues under a second COVID-19 lockdown. As Assistant Director of HMRC's Fraud Investigation Service, Terry Braithwaite, cautioned: "this is taxpayers’ money and HMRC will not hesitate to act on reports of abuse of the scheme.”

Next Steps - Disclosure

On 31 October 2020, the Furlough Scheme is due to end. The application system now allows applicants to inform HMRC if they have over-claimed, enabling HMRC to reduce the current claim to take account of a previous error. Businesses who have over-claimed monies must notify HMRC by the latest of either:

(a) 90 days after the date they received the grant to which they were not entitled;

(b) 90 days after the date they received the grant that they were no longer entitled to because of a change in circumstances; or

(c) 20 October 2020.

UK firms have already voluntarily returned £215 million to the Government in Furlough Scheme payments they did not ultimately need or took in error. More than 80,400 employers have returned grants they have received under the Furlough Scheme according to HMRC figures. 

It is essential for employers to keep clear and contemporaneous records of their decisions to furlough employees and records of employee furlough arrangements. If HMRC were to raise an assessment against a company in order to clawback a Furlough Scheme claim, it would be for the company to establish that the claim was valid. Furthermore, any company which is later the subject of a merger or other major investment, will likely be called upon to demonstrate that their engagement with the Furlough Scheme was administrated correctly.

Employers who do not voluntarily report errors and repay over-paid amounts, risk penalty charges. At worst, companies may find themselves under suspicion for deliberately making fraudulent claims, for example where claims have been made for employees who have not in fact been furloughed, or where Furlough Scheme funds were not used to cover furlough costs. An absence of records could prejudice a company under investigation, whereas timely review could demonstrate a lack of dishonest intent with respect to an inaccurate claim. Employers should also consider the potential reputational damage from reports that a company benefited from public support to which it was not entitled, even where this arose from error rather than dishonesty.

Companies who have claimed under the Furlough Scheme should review their processes and records and conduct an audit review to ensure that no claims have been made in error, and identify any potential fraudulent claims. Any potential breaches of the scheme conditions should be discussed with legal advisers prior to the expiry of the grace period.