What is Furlough Fraud?

Posted onJune 23, 2020

The government’s furlough schemes for businesses and the self-employed have offered essential support during the UK’s COVID-19 lockdown, supporting approximately 7.5 million workers.

However, HMRC recently revealed that it has received nearly 800 reports of suspected fraud in relation to the two schemes and that it would “take action to ensure compliance with the relevant rules, regulations and legislation that govern the UK taxation systems”.

A business or self-employed person would be considered to have committed a criminal offence of fraud if it were found that they obtained payment under either the Coronavirus Job Retention Scheme or the Self-Employment Income Support Scheme by making false representations to HMRC.

Potential examples of furlough fraud include:

Claiming under either scheme for someone who is still carrying out revenue-generating work
An employer claiming under the scheme and failing to pass this on to a furloughed employee
Claiming for someone who is not entitled to support under the scheme

What are the rules for claiming under the UK government’s furlough schemes?

Under the Coronavirus Job Retention Scheme employers can claim where:

An employee has been furloughed and is not performing any services that make money for their employer
Employees must be furloughed on a full-time basis up until 30 June 2020
Employees who have been previously furloughed can be brought back flexibly from 1 July 2020 with employers claiming for the time an employee is not working

Under the Self-Employment Income Support Scheme, you can claim if:

You are a self-employed individual or part of a partnership
You have been trading since the 2018-2019 tax year, having also traded in the 2019-2020 tax year and with the intention to continue trade in the 2020-2021 tax year
You are unable to work or have lost business due to the COVID-19 lockdown
Your trading profits are less than £50,000

Businesses claiming under the furlough schemes are required to retain records for at least six years covering the claim period for each employee, the amount claimed, how this amount was calculated and the claim reference number.

What are the penalties for furlough fraud?

Should a business or self-employed person be convicted of making a fraudulent claim under the Coronavirus Job Retention Scheme or the Self-Employment Income Support Scheme, the potential penalties include:

A substantial term of imprisonment
An unlimited fine
Director disqualification
The requirement to repay any payments to which the claimant was not entitled

Additionally, HMRC recently published draft changes to the Finance Bill 2020 that, if passed by Parliament, will give it powers to hold directors personally liable for tax charges if they deliberately flouted the rules of the Coronavirus Job Retention Scheme.

Who can be prosecuted for furlough fraud?

Where furlough fraud is suspected, the directors of a company, members of a partnership or a self-employed person can all potentially be prosecuted.

However, HMRC has said it will only prosecute in “the most egregious cases, where amounts are deliberately over-claimed with the officer’s knowledge, and where the company is insolvent or in serious risk of insolvency and there is a serious possibility it will not pay the tax liability.”.

In cases where a genuine mistake has been made, businesses will be allowed to repay the wrongly claimed amount.

What can you do if you have made a mistake with the furlough scheme?

Speaking to the FTAdviser, a HMRC spokesperson confirmed that they “intended to help rectify any cases where a "genuine mistake" had been made.”.

This suggests that, where the mistake was a genuine one, you should be able to simply negotiate repayment of the wrongly claimed funds with HMRC. However, it is advisable to seek specialist legal advice before contacting HMRC to ensure you are not at risk of prosecution.

What happens if HMRC thinks a business has wrongly claimed under the furlough scheme?

Should HMRC believe that you or your business have claimed funds to which you were not entitled under either furlough scheme, they will likely investigate to see if there are grounds for prosecution.

There are two types of investigation HMRC might carry out:

An aspect enquiry – looking at a specific part of your accounts (in this case, those related to funds claimed under the furlough scheme)
A full enquiry – looking at all of your financial records, including business accounts and personal financial records of directors/partners/business owners

In cases of furlough fraud, HMRC will likely start with an aspect enquiry and only proceed to a full enquiry if the investigating officers find evidence of serious, systemic wrongdoing in your accounts.

What to do if you are investigated or prosecuted for furlough fraud

During a HMRC investigation, you are legally required to provide all information requested by the investigating officers. Should you find yourself in this situation, it is sensible to have the support of specialist fraud defence lawyers with experience navigating HMRC enquiries. This can help to ensure that you comply with your legal obligations while protecting yourself and your business, as well as minimising the likelihood of HMRC moving to a full enquiry.

If you believe there are no grounds for HMRC to investigate your business, you can challenge the decision to investigate if you can show that the reasoning behind HMRC’s decision to investigate was flawed. If you wish to go down this route, you will need strong evidence to support your case, so, again, specialist legal advice is essential.

At ABR Solicitors, our fraud defence team can handle your defence against allegations of furlough fraud, ensuring you comply with any investigation carried out by HMRC and that you can build an effective defence from the outset. We can also advise on whether you may be able to challenge the decision to investigate and guide you through the process for doing so where appropriate.

Any mistakes you make in the early stage of an investigation can be very hard to recover from, so please do not delay securing expert representation if you find yourself facing a furlough fraud investigation.

For immediate expert advice and representation for a furlough fraud investigation or prosecution, please contact your local ABR Solicitors office in Leeds, Liverpool, London or Nottingham.