In his 2021 budget announced in March, Mr Sunak promised tax reform in an attempt to raise £2.2 billion towards erasing the national deficit, alongside increased investment in compliance capabilities for HMRC to get tough on fraudulent furlough claims.
HMRC Gets Tough
The chancellor promised to sharpen up on fraud, tax avoidance and tax evasion, hoping to raise £2.2 billion over five years. We are now seeing more details emerge from talks about how the government plans to enact these measures. Members of the G7 signed a breakthrough tax reform deal in June, to establish a minimum global corporation tax, for the first time. Announced in July are seeing HMRC get tough on fraudulent furlough claims. Whilst there are also concerns about abuse of bounce back loans, of which 35-60% are estimated to not be repaid. Additionally HMRC has reported record high volumes of scams against taxpayers. Reports of suspicious activity to HMRC have risen by over 70% in a year, which is staggering. If you have received a suspicious communication, you can report it to HMRC here.
Fraudulent Furlough Claims
The Coronavirus Job Retention Scheme (CJRS), more commonly known as the furlough scheme is prone to abuse in a number of ways. Employers have been capable of overstating their furlough needs by inflating the number of staff on furlough and the number of claims. Another falsification is claiming the financial aid yet requiring your staff to work regardless. Additional to this is the type of organised crime whereby employers are coerced into making false claims, or false agreements with tax agents. As well as this, where the scheme extended to support businesses through the unfolding pandemic, there has been further opportunity for criminals to abuse the scheme and make fraudulent furlough claims and continue to adapt their methods to do so. In response HMRC has shown greater awareness of how workers are pushing the boundaries of the schemes, and has introduced tighter definitions of how businesses and individuals are ‘adversely affected by the pandemic. HMRC has also made a big investment in increasing compliance staff to deal with investigations, despite onboarding new staff taking time, we can expect to see the results of this over the coming months.
Ghost Employees
In some cases it’s possible for a company to attempt to conjure up ‘ghost’ or fake employees in order to receive fraudulent furlough payments. A more common technique is to continue to claim for employees that have moved on or been made redundant. Where the furlough scheme gives businesses flexibility to bring back employees to work some of the time, it’s possible for companies to be dishonest about the exact hours worked by employees, in order to make inflated claims. A business may also hang on to furlough payments despite that being a condition of the furlough scheme whereby the financial aid is put to employment costs only. Faking contracts so that furlough payments can be claimed is another example where dishonesty can be distinctly proven and could lead to legal proceedings. The backdating of an employment contract is also likely to be obvious if there are no work communications or work output for a particular employee before a set date. Heavy work email traffic between an employer and employee while on furlough is also an indicator of fraudulent furlough claims when it is a clear condition of the furlough scheme that an employee is not to work during the hours or days for which they are furloughed.
Appropriate Action
In most cases HMRC will be satisfied with a settled tax bill where there has been an overpayment, so it is always in businesses best interests to self-report as soon as possible if they find any mistakes and need to make a correction. Prosecution will be reserved for only the most serious cases. In the majority of furlough scheme overpayments, HMRC prefers to resolve the matter through repayment and, in cases where it is proven deliberate and not an honest mistake, financial penalties will be imposed without resorting to criminal proceedings. Prosecuting fraud of any kind through the criminal courts is costly and time-consuming and demands technical expertise. The opportunity to recoup the amount derived from the fraud is then only available at the conclusion of the proceedings. In the case of the non-criminal option for recovering overpaid financial support, businesses of every size are heavily incentivised to self-report. Many legitimate businesses and individuals typically want to resolve matters with HMRC fast so that it does not impact their financial survival, or future opportunities, norundermine their professional reputation. To be found guilty of furlough fraud technically requires more than simply an over-claim, which can be explained away in most cases by the challenging economic climate or simply a miscalculation. In order to prosecute, dishonesty for the purpose of making a gain or causing a loss, must be found underpinning the activity and be proven. Identifying the line between criminality and oversight or error is not easy however, particularly when the rules applying to the furlough scheme have seen several iterations and evolved over time. The complexity and the haste with which alterations to the scheme were prepared and announced to keep up with the shifting economic fall out of the pandemic, has been to the advantage of criminals submitting fraudulent furlough claims.
High Risk Cases
HMRC claims to be investigating 27,000 “high-risk” cases, some of which had been prompted by reports to HMRC via the online portal listed above. Cases are dubbed “high-risk” if there are definite indicators that the over-claim is not due to an error.
HMRC is investigating these high-risk cases with tools ranging from reviewing business and employee records, through to covert surveillance. HMRC has always been clear that they expect employers to keep records and that they will be carrying out compliance checks. More funding for compliance resources was announced in the 2021 Budget in March, but HMRC are yet to yield the results of that yet. However it is evident that in the past, for every pound spent on tax recovery nine in £10 is recovered. But this may not be so high for CJRS.
Bounce Back Loan Backlash
There is also significant concern for the abuse of bounce back loans, estimating that between 35% and 60% of bounce back loans may not be repaid. This is because there is a credit risk where people cannot pay back loans and with fraud control. Where the schemes were accelerated to ensure businesses were receiving critical support during the toughest months of trading, this could only be achieved by removing certain credit check points to speed things up. To sum up, lenders did not go into detail about the provenance of the claims and there was a higher risk of identity theft for making fraudulent claims. As the loans were underwritten by the government, rather than the lenders, qualifying criteria were not as robust as usual. The British Business Bank has been carrying out random sampling work to identify risk levels and this will produce two data streams: those paying back loans and those not, which will give a clearer picture of how to identify risk.
Whistleblowing
HMRC has reported to have received 975,420 referrals of suspicious contact from the public over the last year. From this amount, 552,885 related to fraudulent tax rebates. This is a huge increase of 71.3% with 2019 recording 569,140 referrals. With criminals targeting the fraudulent furlough claims and other business support schemes, there has been an enormous increase of 1,350% in scamming. In February 2020, reports showed that there were 34,538 complaints of fraudulent activity, with a huge increase of 206% of 105,906 complaints in January 2021. Figures demonstrate that there has been an increase in fraudulent activity relating to Covid-19 financial scams involving emails, texts and phone increasing by 51% since March 2020. There were reports for over 19,820 suspicious web pages and 402 Covid related scams were taken down by web providers. There were 2,968 phone numbers reported for HMRC related telephone scams. HMRC says: ‘If someone calls, emails or texts claiming to be from HMRC, saying that you owe tax and face arrest, are due a tax refund, asking you to transfer money or for bank or other personal details, it might be a scam. Check gov.uk for our scams checklist and to find out how to report tax scams. Criminals are taking advantage of the package of measures announced by the government to support people and businesses affected by coronavirus. Scammers text, email or phone taxpayers offering spurious financial support or tax refunds, sometimes threatening them with arrest if they don’t immediately pay fictitious tax owed.’ Advice published by HMRC urges the public to ‘Stop, Challenge, Protect’. This advice is to urge you to pause before parting with information or money, reject, refuse or ignore requests as criminals will be more pushy and to report any suspicious activity that you may have come across. There are also checklists to help the public identify if what they are experiencing is fraud or genuine activity from the HMRC.
Offshore Crackdown
New international tax data and firmer penalty powers for HMRC has led to the discovery of a great number of accounts and investments being held secretly offshore. HMRC claims to have sent tens of thousands of warning letters to UK residents making money abroad. Talk to our team if you have received such a letter and want to know what action you can and should be taking. In most cases a simple phone call will clear up any misunderstandings. The crackdown on offshore tax avoidance has been increased since the outbreak of coronavirus. This is being enacted by HMRC’s expanded compliance department brought in to help tackle fraudulent furlough claims, in order to help fund the nation’s economic recovery and recover the government’s financial loss. Greater powers have been given to HMRC including demanding unpaid tax going back twelve years, which is twice what it was previously. They also have the capability to punish late payments and unpaid bills. Laws introduced in 2018 allow HMRC to charge a 200% penalty on tax owed on overseas income and gains, which has the capability to run up significant tax bills spanning years into the past, plus large penalties added. Tens of thousands of “nudge letters” were sent out to UK residents, with HMRC believing that one in ten UK taxpayers had an offshore financial interest. It is entirely possible that some individuals with rental properties abroad or investments in foreign accounts are oblivious that they owe money to the HMRC for these. This could be a holiday home that is rented out, inheritance earning interest in a foreign account, or investments held abroad. Contact Prestige Business Management to find out everything you need to know and how to streamline your tax efficiency, effectively.
Crime and Punishment
In most cases clients are fully compliant. There is a perception that HMRC is going to get tougher, but more accurately they are increasing their success rate at finding taxpayers who haven’t declared the correct amount of tax. Their technical facilities are more sophisticated and they are able to receive a tremendous amount of data and cross check this. More than 100 countries regularly and automatically share financial information with HMRC. This significant increase in global transparency is playing a major role in helping the government tackle tax evasion and avoidance which they say will help them level the playing field. In time we can expect more cases to arise where there is a good body of evidence indicating fraudulent furlough claims. As for punishment of fraudulent furlough claims, fines may be imposed on any company criminally convicted of offences of fraud and also tax evasion that arise in cases involving public revenue. The corporate offence of failing to prevent tax evasion is also on the table. Instances of corporate criminal liability will be rare but are still possible. Individuals directly implicated will also face terms of imprisonment if brought to conviction. Besides prosecution for fraudulent furlough claims the consequences can still be severe. In July 2020, HMRC was given the power to demand that companies which have not repaid their overpayment, to pay double the amount. There can also be consequences for a business not reporting an overpayment as soon as they have discovered it. Businesses who have over-claimed are encouraged to make a disclosure and implement remedial action as soon as possible. Failure to do so could attract penalties of up to 100% on top of a repayment obligation for fraudulent furlough claims. In the case of honest mistakes that have led to potentially fraudulent furlough claims being made, any business that can give evidence that the claim was made in good faith, while incorrect, was made honestly and that on realising the inaccuracy they have reacted quickly to correct the error error. This will boost their professional profile for anti-tax-evasion measures being taken. Further to financial penalties for fraudulent furlough claims there is the possibility of director disqualification and tribunal complaints by employees. Plus any activity with HMRC related to possible fraudulent furlough claims could impact future applications for ‘fit and proper’ status, whereby approval is required to run or be involved in certain businesses that are regulated for anti-money-laundering. Financial integrity can come into question and result in a red flag for the business. A small number could be prosecuted for fraudulent furlough claims, but the implications of an allegation will extend beyond the individuals.
At Prestige Business Management we can help your Business
At Prestige Business Management we are tax experts. We can streamline your business for maximum tax efficiency whilst keeping you and your business compliant so you never have to worry. Find out what we can do for you. Call us today on 0203 773 2927.
