Criminal investigation risk for UK employers furloughing staff

Formal top level declarations of zero tolerance, the introduction of necessary controls, and due diligence to ensure that the risk of furlough breaches are effectively mitigated should be urgent considerations for all firms claiming under the scheme.

Under the current criteria for the coronavirus job retention scheme, employers may claim 80% of the normal pay of employees designated as 'furloughed employees' for at least three weeks, up to a cap of £2,500. They can also claim the national insurance contributions on that 80%.

One of the main conditions is that employees cannot be asked to undertake "remunerative work" whilst furloughed.

HMRC has said that companies caught abusing the scheme will be asked to repay money – HMRC is consulting on emergency legislation to make provision for penalties to be applied – and could face criminal action under the existing law. HMRC is also asking furloughed staff to report if they are undertaking work for their employers in contravention of the scheme's current eligibility criteria.

Any form of dishonest conduct which seeks to divert money from the HMRC contravenes the common law offence of 'cheating the revenue' and individuals who make false representations, or who fail to disclose relevant information, also risk investigation under the Fraud Act.

With over eight million staff currently furloughed it is easy to imagine that some managers may seek to additionally support their staff by making some form of 'off book' top up to furlough payments. In such an instance pursuing the employer for the corporate criminal offence (CCO) of failing to prevent the facilitation of tax evasion is a further option, and one which would send a particularly strong deterrent message of HMRC's intent to clamp down on misuse of the scheme.

If HMRC was to launch such an investigation it would be for the business to demonstrate that it had reasonable prevention measures in place to mitigate this very new, and very specific, Covid-19 induced risk.

It is important to note that for the CCO to apply, senior management need not be aware that a fraud is being committed, nor is the business required to derive any profit from the conduct. If a business does not have reasonable prevention procedures in place and someone lower down the management chain facilitates employees under their control to evade tax due, then that is sufficient for establishing the offence.

HMRC's guidance in respect of the CCO provides it with flexibility in how it engages with workers who may themselves be in breach of their personal tax obligations: "A conviction at the taxpayer level is not a pre-requisite for bringing a prosecution against a relevant body under the legislation. For example, a taxpayer may voluntarily come forward and make a full and honest disclosure to HMRC of their actions and it may not be in the interests of justice to criminally prosecute that individual.”

Given the statement of intent made by HMRC in respect of their reaction to fraudulent claims, the eye watering sums of money involved every month, and very public profile of this scheme, firms would be well advised to ensure that their current financial risk assessments address the possibility of rogue managers seeking to incentivise their staff to work whilst in receipt of the grant, whatever the underlying motive.

Even 'gold standard' controls from a pre-Covid era will be of little comfort unless they have been updated to take into account the additional risks stemming from the biggest economic crisis in modern history.

HMRC is the UK's tax administration, and the most prolific economic crime investigation agency in the country, sending more financial crime files to the Crown Prosecution Service each year than any other law enforcement agency. It is also charged with delivering and policing the coronavirus job retention scheme – a scheme in respect of which its chief executive, Jim Harra, acknowledged when giving evidence last month to the House of Commons Treasury select committee that "time was the enemy of perfection".

HMRC will be very uncomfortable therefore that it is required to superintend not only an imperfect scheme, but one that's reportedly costing the UK £14 billion pounds each month.

It is unsurprising therefore that HMRC has publically stated that companies caught abusing the scheme will be asked to repay money, and could face criminal action.

HMRC's criminal functions generally engage after the consideration of three criteria: the severity of the behaviour requires it, a strong deterrent outcome is required, or its civil powers will not work.

It is easy to foresee that HMRC will consider that systematic abuses of the furlough scheme will tick several of those criminal indicators.