Out-Law / Your Daily Need-To-Know

Criminal investigation risk for UK employers furloughing staff

Out-Law Analysis | 19 May 2020 | 12:23 pm | 3 min. read

UK employers who are furloughing staff as a result of the coronavirus pandemic could face a criminal investigation from HM Revenue and Customs (HMRC) if they are dishonestly claiming under the coronavirus job retention scheme whilst simultaneously requiring employees to work.

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, and could face criminal action. 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.

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Pursuing the employer for the corporate offence of failing to prevent the facilitation of tax evasion would send a particularly strong deterrent message.

There are a number of potential criminal options open to HMRC to address breaches of the scheme, but one, which would send a particularly strong deterrent message, would be to pursue the employer for the corporate offence of failing to prevent the facilitation of tax evasion.

HMRC could treat systematic claiming under the scheme, whilst employees are being required to work, as a 'Cheat on the Revenue'. A cheat is any form of dishonest conduct which results in money being diverted from the public revenue. HMRC could then explore whether there has been a dishonest facilitation of such evasion, say a specific manager requiring their furloughed teams to perform some work in breach of the rules.

If HMRC was able to establish facilitation, the corporate criminal offence (CCO) of failing to prevent the facilitation of tax evasion comes into scope and it would be for the business to demonstrate that it had reasonable measures in place to mitigate this very new, and very specific, risk.

It is important to note that for the CCO to apply, senior management need not be aware that a fraud is being committed. If the business does not have reasonable prevention procedures in place, it is at risk if someone lower down the chain asks employees under their control to work in breach of the scheme conditions.

Using the CCO would also provide a mechanism that could incentivise other workers to come forward and report further breaches - thus allowing HMRC to better police the broader scheme from a strategic perspective.

HMRC's guidance in respect of the CCO provides them with flexibility in how they engage with workers who may themselves be in breach. It says: “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 occasioned by 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 £14billion pounds each month.

It's 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.