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CJRS fraud and penalty regime explained

According to Jim Harra, the CJRS has been a magnet for fraudsters. Rebecca Cave investigates HMRC's power to consider this fraud and how accountants can help clients avoid the fraud trap.

22nd Jun 2020
Tax Writer Taxwriter Ltd
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Jim Harra, chief executive of HMRC, made his comments about the attraction of the CJRS to fraudsters during an evidence session to the House of Commons Public Accounts Committee on 10 June.  

Employers who ask their employees to work while they are furloughed, and claim for the cost of those employees’ wages under the CJRS are likely to be committing fraud by false representation (Fraud Act 2006 section 2). Likewise, where the employer CJRS claims for employees who have not been furloughed, or does not pass on the CJRS grant to furloughed employees, could also be committing fraud under the same Act.    

How widespread is abuse?

A survey commissioned by Crossland Solicitors of 2000 employees across a range of business sectors, found that 34% of those employees had been asked by their employer to work while being furloughed. 

Determining whether employees are working for periods for which they are furloughed is difficult for HMRC, and will be even more so when the flexible furlough rules come into effect from 1 July. HMRC will largely have to rely on reports by employees or other parties through its online fraud reporting service. The telephone and postal contacts for reporting fraud to HMRC have been suspended due to the coronavirus.   

There is also anecdotal evidence that some employees have not been paid the amount of wages the employer has claimed for under the CJRS. In such cases, it is difficult for the employee to know whether a CJRS claim has been made on their behalf or not.

What the law says 

The rules of the CJRS scheme, as set out in para 6.1(a) of the HMRC Direction issued on 15 April 2020, say that a furloughed employee is an employee who “has been instructed by the employer to cease all work in relation to their employment.” 

The HMRC Direction goes on to clarify that “training activities directly relevant to an employee’s employment agreed between the employer and the employee must be disregarded for the purposes of para 6.1(a)”.  This means that employees can undertake directly relevant training to their job while furloughed, but they can’t work to generate income or even do administrative tasks for that employer.

A furloughed employee can take a job with a different unconnected employer (if their primary employment contract doesn’t prevent this), or volunteer for a different organisation. But an employee cannot work as a volunteer for their own employing organisation, even if it is a charity. 

Directors on furlough 

Directors are in a bind as they must continue to meet their statutory duties to file returns with HMRC and Companies House, and the HMRC Direction in para 6.5 specifically allows directors to provide information relating to the administration of their company while furloughed. However, a director must not create income for their own business or company. This would include carrying on the business of the company as a self-employed individual while claiming the CJRS grant for their director’s salary from that company.    

What power does HMRC have?

Draft legislation was published on 29 May to allow the taxation of the coronavirus business support grants. This draft law also gives HMRC powers to investigate abuse of those schemes, raise assessments to claw-back SEISS or CJRS grants claimed incorrectly or where the grant has not been paid to furloughed employees. 

Where the claimant is a company the company officers can be made jointly and severally liable for the tax charge that claws-back the incorrect claim.

What are the sanctions? 

HMRC has the power to apply penalties where a person has deliberately made an incorrect claim, or has failed to pay the grant claimed to its employees. However, the tax information note says these penalties will only be applied if the person fails to tell HMRC of the error by the later of; 30 days of making the claim, and 30 days of the law being passed. 

These provisions are expected to be included within the current Finance Bill which is expected to receive Royal Assent to become the Finance Act 2020 in late July. Thus any errors made in CJRS or SEISS claims before FA 2020 is passed will need to be notified to HMRC, and potentially corrected, within 30 days of Royal Assent.

Where the error is not notified to HMRC within this period, the penalty imposed will be between 30% and 100% of the tax charge that claws-back the grant, where a voluntary disclosure is made. Where HMRC prompts the disclosure, the penalty will be between 50% and 100% of the tax charge. 

In summary, an employer who breaks the CJRS rules will have to pay tax charges and penalties of up to 200% of the amount over-claimed. 

What must accountants do?

All accountants, whether they are a member of a professional body or not, have an obligation under the anti-money laundering regulations to make a suspicious activity report (SAR) if they know a client has committed fraud. The ICAEW advises members to refuse to submit CJRS claims for employees who have been working while furloughed.

As Reshma Johar reported, the FAQs relating to the professional conduct in relation to taxation (PCRT) have also been updated to guide advisers who are placed in a difficult position by the actions of their clients concerning the coronavirus business support schemes.    

Replies (15)

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By jvenegas16
22nd Jun 2020 10:34

Some points for reflection:

1. We all are aware of the abuse and it needs to be addressed without any doubt.
2. It seems that the legislation is being developed as we go along and it was not in place at the time, so the deterrence effect has been missed sadly and regrettably. Now it is applied retrospectively.
3. Committing fraud by false representation (Fraud Act 2006 section 2). Isn't that exactly what HMRC also does every time that pursue payment of taxes not due or already paid, whenever they "misallocate" a payment while charging interest on the "debt", and so on?
4. The potential abuse should have been anticipated and some measures could have been put in place. The scheme, in my view, was to retain staff that otherwise would have been made redundant as businesses had to close. However, every business with employees jumped into it as a way of getting easy money.

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Replying to jvenegas16:
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By gillybean04
23rd Jun 2020 12:06

jvenegas16 wrote:

Some points for reflection:

1. We all are aware of the abuse and it needs to be addressed without any doubt.
2. It seems that the legislation is being developed as we go along and it was not in place at the time, so the deterrence effect has been missed sadly and regrettably. Now it is applied retrospectively.
3. Committing fraud by false representation (Fraud Act 2006 section 2). Isn't that exactly what HMRC also does every time that pursue payment of taxes not due or already paid, whenever they "misallocate" a payment while charging interest on the "debt", and so on?
4. The potential abuse should have been anticipated and some measures could have been put in place. The scheme, in my view, was to retain staff that otherwise would have been made redundant as businesses had to close. However, every business with employees jumped into it as a way of getting easy money.

3. No - because the intent in that instance isn't to gain or expose another to a loss - which is what is required for fraud.
4. They did. Such as the cut off date to prevent people hiring friends/family/more labour. If they'd checked every single claim was genuine before paying out, those desperately & genuine in need would still be waiting.

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Replying to gillybean04:
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By jvenegas16
23rd Jun 2020 12:25

Are you sure about your comment to point 3? Because based on your answer, there is no difference between fraud and theft. If demanding payment that is not owed by knowing that it is not due is not false representation, then what is it? And what is the point of having a legislation that does not work for its purpose?

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By monksview
22nd Jun 2020 11:13

I do worry that HMRC will try to attack directors seeking a new contract. For some one man companies the business cannot re-start until a new contract is in place but will HMRC quantify the seeking of that new contract as working for the company.

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Replying to monksview:
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By jvenegas16
22nd Jun 2020 11:16

That would be considered working, so a tricky situation for some unfortunately.

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Replying to monksview:
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By unclejoe
22nd Jun 2020 12:36

How can any single director company put that director on furlough? As a director of a micro company with zero income for 3 months, I still have to check the bank account from time to time, just to make sure that we are not yet bust! It would be very easy for HMRC to prove that I had done some work for the company - just mandate the bank to provide the log-in details. We have received zero government help, apart from VAT deferment. Yet it is reported that some companies are using government aid to speculate on the stock market. I think the reality is that fraud will be rife, but also that many will innocently fall foul of the rules because they are misunderstood. Very unsatisfactory in so many ways.

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Replying to monksview:
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By petestar1969
22nd Jun 2020 12:45

Directors have a statutory duty to promote the company of which they are a director, so I would say that lining up new work is fine if the director is furloughed.

The new contract just has to stipulate that work won't start until some future, to be agreed, date.

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By Ian McTernan CTA
22nd Jun 2020 11:26

For many companies this is literally the difference between surviving and closing down with the loss of all those jobs and the knock on effects through the economy that will have.
The administration of the scheme means it is not easy for the employer to adjust for the first periods of claim where an employee might have been asked to do one or two days of work during the month (the flexible scheme hasn't started yet). Especially given that most don't run their own payrolls.
I feel sorry for employers who are having to go through this and then have the added worry of HMRC trying to impose penalties and fines and charges where a disgruntled (ex) employee makes a false claim- as it could be very difficult to disprove such a claim.
There will be people who will have taken advantage and made deliberately false claims and they should be caught and fined etc. But my worry is HMRC will be their usual sympathetic selves and try and tar everyone with the same brush...
The fines and penalties might be enough to push the employer into administration- which would be quite ironic for the reporting employee if they were just making mischief but a disaster for the other employees.
I'm sure this saga will run and run.

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By Mike Nicholas
22nd Jun 2020 11:44

Surely, pursuing claims of fraud is going to be really difficult, and raise difficulties for HMRC, employers and employees. We know the CJRS 'rules' were 'incomplete' at the beginning and have since been subject to continual 'clarification'. It's reasonable to say genuine errors will have occurred in calculating furloughed pay and in claiming the grant. And there will be some employees who inform HMRC of fraud when in fact there was a misunderstanding (whether on their part or of their employer) or they are disgruntled with their employer.
Yes, HMRC must pursue employers that have deliberately made fraudulent claims. We'll hear of some HMRC 'successes' but surely the reality is that HMRC does not have the resources to pursue every claim of fraud or even check the accuracy of furloughed pay.

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By Paul Crowley
22nd Jun 2020 11:59

Thanks, significantly for confirming that "providing services" means what I thought it meant.
Raised the matter in one of my posts:

"20th Jun 2020
Edit
What does provide services mean. Written by HMRC man, I think means self employed as in "contract for services or contract of service?" Mainly because it uses the plural.

Bring forward the usual abuse if you disagree

Reply to
Employee working during furlough"

But not picked up by any other responder yet.
Why could not the stipulation be in plain English. eg Must not be self employed providing services......

A distinct trip wire deliberately or negligently set for man on the Clapham

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By johnjenkins
22nd Jun 2020 14:25

34%? I doubt that very much. UC wouldn't have so many applicants if that were the case. So what about the SE claiming whilst working??????????????????????????????
What about the increase in scammers??????????????????????????? There will always be winners and losers in a temporary scheme set up to help those that might be on the dole for a long time.

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By martinhayward
22nd Jun 2020 15:45

This is the worse crises this country has had since the second world war and anyone seeking to make money illegally out of this human crises is effectively doing the same as black market operators did in that war. The sanctions should not be the same as HMRC usual ones but far more draconian as they were then. Prison.

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By cfield
22nd Jun 2020 18:17

There are more than a few grey areas in both the CJRS and SEISS schemes. Sole traders are confused by the 14/7 date for "adversely affected". Obviously this is associated with the 13/7 deadline for the first grant, but it is unclear what period you must base it on. Is it from their business's year end to 14/7, compared to the same period last year, or is it from 1st March or 1st June? Or does it just mean making less money at that particular date due to loss of work? Suppose you make more money than last year but not as much as you would have (or might have) due to the virus?

I have a few contractors affected by IR35 who either lost work or had to go on the client's payroll. The CJRS rules allow them to work for other unconnected employers, even though it's the same "job". Their PAYE schemes are still open, even though they may be planning to close the company, and they paid themselves a salary by 19/3, so by rights they can claim.

Or can they? Does it matter if their company's fee income would have ceased anyway thanks to the IR35 reforms? They could argue that they would have found other contracts outside IR35 following the one year extension, but couldn't due to the lockdown, so their company has only ceased trading temporarily. Will it count against them if they wait until November to close down?

If HMRC get too enthusiastic with these penalties, and on past form they probably will, the appeals system will totally break down. I can see there being loads of hard luck cases on these forums over the next few months.

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By matthew pennifold
27th Jun 2020 11:48

Directors cannot generate income for their company in order to be able to claim a grant which is classed as income for their company.

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Replying to matthew pennifold:
By cfield
27th Jun 2020 12:35

But they're not, are they.

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