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fallen angel | accountingweb | Ark Angel CJRS claim
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Calculation errors lead to downfall in furlough claim

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There is no doubt the Coronavirus Job Retention Scheme was extraordinarily complicated. Similarly, there was no doubt the Treasury would look at employer claims in the future, as the recent Ark Angel ruling demonstrates.

19th Sep 2023
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The Coronavirus Job Retention Scheme (CJRS) will be consigned to history as one of the most worthwhile yet administratively burdensome schemes that payroll, accounting and bookkeeping professionals have ever had to deal with. We had to cope with six different Treasury Directions signed by then-Chancellor of the Exchequer Rishi Sunak, introducing the scheme (1), extending it (2), tweaking it (3, 4 and 5) then its abolition (6). Arguably, the most important direction was the introduction which did four things:

  1. outlined the “integral” purpose of the scheme
  2. outlined the qualifying costs the scheme would cover (which professionals had to administer)
  3. outlined the qualifying employers and employees, but, importantly,
  4. gave HMRC the responsibility for the “payment and management of amounts to be paid”.

HMRC has made the payments, and now it is ensuring it fulfils the second part of its remit and manages the payments they have made. We are, of course, talking about compliance. In anything we do, compliance is essential, though complying with something so hurried and innovative as the CJRS was always going to be hard for professionals. Although it affects us in our everyday work, never more was the evidence more visible of the complication and confusion caused by the mix of:

  • employment law (furloughing employees) and 
  • the laws surrounding payment (RTI deadlines, payment calculations, reclaims and so on).

The August 2023 ruling Ark Angel Ltd vs HMRC in the first tier tribunal (FTT) is extraordinarily complicated to follow, let alone abbreviate and relay. Yet, the case brought by HMRC against the employer Ark Angel Ltd is centred around the following issues.

  1. Were the nature of the contractual furlough arrangements in line with the Treasury direction?
  2. Were the employees truly salaried workers of a limited liability partnership (referred to as fixed-rate workers)? 
  3. Was Ark Angel’s use of the CJRS contrary to the integral purpose?

Contractual arrangements

For an employer to make a claim under the CJRS (referred to as a “support payment” in the ruling), the employee’s contract of employment had to refer to a period of furloughed employment, during which time the employee was not to perform any work. While Ark Angel appears to have amended the contracts from April 2020, they were backdated to the start of the CJRS and made it clear that the furloughed employee should not perform work under their contract of employment.

The contractual issue was not contested, indeed, HMRC removed suggestions they were only “purported” contracts.

Fixed-rate workers

Interestingly, Ark Angel argued that point 7.6 (fixed-rate workers) in the Treasury direction was not grammatically correct. However 7.6 must be read in conjunction with other sections in the direction and the court ruled that the furloughed employees should have their support payments calculated as per 7.2 (using “the reference salary” – in other words 80% of £2,500).

In short, Ark Angel had calculated their payments incorrectly.

Use of the scheme

The integral purpose of the scheme is at point 2.1 of the direction. Point 2.5 says that a claim is not allowable if it “is abusive or is otherwise contrary” (to the purpose).

The court ruled that, although their calculations were incorrect, Ark Angel was not in foul of 2.5.

The moral of the story

Unlike the 15-page ruling itself, the answer is simple in that Ark Angel made mistakes with its calculations. They weren’t the first and they won’t be the last employer to be found to have made errors.

As a result of HMRC’s powers, they have instigated recordkeeping requirements for six years rather than the usual three. However, the Department for Business and Trade (DBT) is accountable for the recovery of any Covid-19 support payments that have been made in error or claimed fraudulently. A September 2023 publication by the House of Commons Committee of Public Accounts (Public Accounts Committee) says that, as of May 2023, only £20.9m of an estimated £1.1bn had been recovered as a result of overpayments – and the report relates to England only. Maybe the non-ministerial HMRC will need six years.

The compliance tips for professionals arising from this case are as follows.

  • Check furlough contracts of employment were in place.
  • Check your calculations.
  • Ensure you were acting in line with the purpose of the Scheme (2.1 of direction 1).
  • Keep records.

An interesting comment comes from the chair, Dame Meg Hillier MP: “Never again should a national emergency find policy being written as we go along.” As someone who tried to keep up with the changing CJRS guidance, I can only agree with that statement.

Replies (6)

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By Crouchy
20th Sep 2023 10:16

what was the level of overclaim?

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Replying to Crouchy:
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By Silvery Waves
20th Sep 2023 11:00

£59,664.54 for 2020/21 tax year and £16,000.00 for 2021/22.

Thanks (1)
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By tim_g
20th Sep 2023 10:24

Let’s all check our calculations!

Thanks (1)
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By petestar1969
20th Sep 2023 13:22

Hmm I wonder how many non-backdated contracts of employment made reference to furlough......?

Thanks (1)
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By hje
21st Sep 2023 08:12

Not really 'calculation errors' were they...more shameless and opportunistic fraud:

"27. In the period in the period in the tax year 2019/20 prior to 27 February 2020, no
employment contracts were in place, and the two Employees, who were registered on HMRC’s
RTI system, received ad hoc payments.

28. On 27 February 2020, formal employment contracts were signed. These new contracts
increased the Employees’ salaries to £3,200 per month for a fixed term of four months, from
27 February 2020 to 30 June 2020."

Thanks (1)
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By AndrewV12
21st Sep 2023 10:23

'The August 2023 ruling Ark Angel Ltd vs HMRC in the first tier tribunal (FTT) is extraordinarily complicated to follow, let alone abbreviate and relay. Yet, the case brought by HMRC against the employer Ark Angel Ltd is centred around the following issues.

Were the nature of the contractual furlough arrangements in line with the Treasury direction?
Were the employees truly salaried workers of a limited liability partnership (referred to as fixed-rate workers)?
Was Ark Angel’s use of the CJRS contrary to the integral purpose?'

Ark Angel, tip of the iceburg.

Thanks (1)