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.
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.