Are you claiming reimbursements under the Coronavirus Job Retention Scheme? If so, be mindful of what you ask of your employees on furlough leave as it could unexpectedly cost you under new rules.
The most recent figures compiled by HMRC show that 9.3 million jobs in the UK have been furloughed. The scheme rules stipulate that employees cannot provide services or activities which generate revenue for their employer while they are on furlough leave.
Unfortunately, however, there have been reports of large corporates and SMEs in a range of sectors knowingly claiming scheme funds whilst simultaneously instructing staff to work as normal, on reduced duties or on a voluntary basis in order to circumvent the purpose of the scheme.
The Chief Executive of HMRC, Jim Harra, recently remarked that the scheme is a “magnet for fraudsters” and that tip-offs would be taken “very seriously”. Circumventing the scheme is potentially fraudulent and could result in HR professionals being implicated personally.
It may also breach the implied contractual term of mutual trust and confidence, thereby opening the door to breach of contract claims. If employees alert their employers, HMRC (via their hotline or online platform) or another government agency of their employer’s potential abuse of the scheme and are subsequently dismissed or suffer any detriment as a result, they could bring whistleblowing claims which could, in addition to financial liabilities, result in substantial reputational damage.
However, breaking the rules might not always be deliberate. Flexible furlough, which allows employers to rotate staff on a part-time working and part-time furlough basis, was introduced with effect from 1 July 2020. Working out how to calculate wages and how much can be claimed under the scheme is complex and could result in some employers inadvertently falling foul of the scheme.
If the risk of facing employment tribunal claims is not enough of a deterrent to prevent misuse of scheme funds, either knowingly or in error, then perhaps the clawback provisions included in the draft Finance Bill 2020 will be.
Finance Bill 2020
At the time of writing, the draft Finance Bill is being urgently pushed through Parliament and we expect this to receive Royal Assent this month.
Employers should be aware of the following key provisions:
- payments to businesses under the scheme will be treated as income receipts and therefore within the scope of income tax or corporation tax in the same way as any other taxable receipt;
- the government proposes an initial penalty-free grace period in which to notify HMRC that scheme funds were claimed in error. This will be the period ending on the later of (i) 90 days from Royal Assent or (ii) 90 days from when income tax becomes chargeable under the clawback provisions (this has been extended from the original draft of the Bill which only offered a 30-day grace period). The date tax becomes chargeable is normally the date on which the reimbursement payment claimed in error was received. However if an employer was initially entitled to a reimbursement payment but subsequently loses that entitlement it will be the date on which they ceased to be entitled;
- recovery of funds will be punitive in nature: for every pound that a business was not entitled to receive under the scheme and for every pound that was not paid to furloughed employees within a reasonable period of time, HMRC will impose an additional tax liability of 100% less any amount already repaid to HMRC, which is the default penalty charge;
- if businesses act swiftly and voluntarily disclose payments made in error, the penalty may be reduced to no less than 30%. However, if HMRC has to prompt a disclosure of funds paid in error, the penalty charge will not be reduced below 50%;
- where a company becomes insolvent, the former officers can be held jointly and severally liable for any amount subject to the clawback provisions; and
- a zero tolerance attitude towards the worst offenders of the scheme is likely to be adopted, with criminal charges being considered.
What should you do now?
It may sound obvious, but having an understanding of what you can and cannot ask of your furloughed employees is vital. A good system for calculating furlough pay and the wages of employees returning to work on a part-work/part-furlough basis is also crucial so you do not mistakenly break the rules.
It will be critical to carry out an audit exercise in advance of the grace period deadline to ensure the scheme rules were complied with. The time to start that audit is now. Conducting a review and gathering evidence is both time-consuming and complex, so in many cases it will be advisable to seek professional advice. Dentons has a team of specialist tax and employment lawyers on hand if you would like assistance with this process.
Information contained in our COVID-19 articles and publications is correct at the time of print. This is, however, a constantly evolving situation across the globe and specific advice and guidance should be sought as required.