What is Furlough Fraud and Should Employers be Worried about it?

HMRC has started to take action against individuals and businesses over suspected 'furlough fraud' in relation to the Coronavirus Job Retention Scheme (CJRS). On Friday 10 July 2020, the first arrests were made, including the arrest of a man suspected of defrauding HMRC of £495,000. In addition to the arrests, authorities are seizing computers, other digital devices, and personal and business records.

HMRC has stated that, it "will not hesitate to act on reports of abuse of the scheme" and is encouraging employees to report their employers if they have any suspicions. By the end of May 2020, HMRC had received nearly 1,900 tip-off's and thousands more businesses could be at risk of investigation.

This news will naturally be concerning to many businesses. The Furlough Scheme is a complicated policy arising out of a pandemic - it is a situation no business has ever had to face. What about businesses who have no intention to defraud HMRC and simply made an honest mistake? A HMRC spokesperson has stated that, "we're not trying to catch people out - if it turns out to be a genuine mistake then we'll help put it right". However, HMRC has also stated that it owes a 'duty of care' to investigate fraud and clawback as much money as possible from wrongful claims.

This means that no business is completely safe from investigation and businesses and business owners could face criminal prosecution over any suspicions of fraud.

What is furlough?

The word 'furlough' means a temporary leave of absence from work. Until the COVID-19/Coronavirus pandemic, 'furlough' meant very little to employers and employees alike.

However, at the end of March the Government felt it necessary to lockdown the country to prevent the spread of the virus, forcing businesses to either close or swiftly adapt to remote working. For most businesses, lockdown has been mildly inconvenient at best and catastrophic at worst. Certain industries, such as hospitality and travel, have been particularly affected and millions of workers put at risk of redundancy.

The Coronavirus Job Retention Scheme (CJRS) (also known as the Furlough Scheme) was introduced to enable businesses to keep employees on the payroll and prevent mass redundancies. HMRC was given powers to implement the Scheme by the Treasury under the Coronavirus Act 2020.

Between the March and July 2020, the Government agreed to pay up to 80% of an employee's wages (up to a total of £2,500 per month). However, the employee was not allowed to do any work for the business. The Scheme closed to new entrants on 30 June 2020 and from July to October, furlough is more flexible. Furloughed workers may work reduced hours but their employer will have to:

• Pay the employee's salary for hours worked
• Pay their National Insurance and pensions contributions (from August)
• Contribute to their salary for hours not worked (from September)

The CJRS will officially end on 31 October 2020.

What is furlough fraud?

Furlough fraud occurs when an employer claims for a furloughed employee in breach of the rules on furlough - the Treasury Direction (latest version published on 26 June 2020). The key points of the Treasury Direction are:

• An employee is not allowed to do any work for the employer for the hours they are furloughed
• The employee must cease all work for at least three weeks before the employer can make a claim - from July 1, this changed to any period.
• An RTI ( Real time information) submission must have been made for the employee before 19 March
• The employer's reason for furloughing the employee must be related to Coronavirus
• An employee can undertake training while on furlough but this cannot provide any service to the employer or generate a profit for the employer
• The Scheme was closed to new entrants from 30 June (with narrow exceptions), meaning the cut-off date for placing an employee on furlough for the first time was 10 June 2020

Furlough fraud can therefore take many forms, including:

• Furloughing an employee who is still working without telling them
• Asking an employee to 'volunteer' to work for the business while the employer claims under the Furlough Scheme
• Asking an employer to take on administrative work for the business while on furlough
• Furloughing an employee but not paying them what they are owed under the Scheme
• Making a backdated claim to cover hours that the employee was actually working
• Backdating a claim for an employee placed on furlough for the first time after the cut-off date
• Claiming for employees who no longer work for the business
• Hiring fake employees for the purpose of claiming under the Furlough Scheme and backdating claims

Is furlough fraud a criminal offence?

Yes, there is no precise 'furlough fraud' crime but it can amount to other crimes under common law and statutes such as the Theft Acts, the Fraud Act and the Criminal Finances Act, including:

• Fraud by false representation
• Conspiracy to defraud
• Cheating the public revenue (tax evasion)
• False accounting
• Money laundering
• Facilitating tax evasion

Although a company itself can be held criminally liable for furlough fraud, this will not stop HMRC from also targeting directors, employees and other members of businesses allegedly involved in fraudulent activity wherever it deems necessary.

What are the penalties for furlough fraud?

The Furlough Scheme has cost the Government around £27 billion since it was introduced. In total, it is expected to cost around £42 billion. Given the enormous expense of the Scheme in addition to the costs of the many other temporary Coronavirus measures (such as the parallel support scheme for self-employed workers), it is unsurprising that the Government wanted to give HMRC some teeth to tackle fraudulent furlough claims.

Anyone suspected of furlough fraud could face both criminal and civil action:

Criminal penalties

The penalties for criminal furlough fraud can range wildly depending on the seriousness of the offence. For example, the following are the maximum punishments a person could receive for various different fraud offences tried in the Crown Court:

• Fraud by false representation - up to 10 years' imprisonment, a fine or both
• Conspiracy to defraud - up to 10 years' imprisonment, a fine, or both
• Money laundering - up to 14 years' imprisonment, a fine, or both
• False accounting - up to 7 years' imprisonment, a fine, or both

Civil penalties

The Finance Act 2020 gives HMRC the power to impose a 100% tax charge to recover payments that were not legitimately used to pay employee wages on a PAYE scheme, National Insurance contributions or pension contributions. Employers could also be charged extra financial penalties if they:

• Receive payments under the Furlough Scheme to which they are not entitled; and
• Knew that they were not entitled to the payments.

The Act will give employers a 90 day grace period from the date the Act receives Royal Assent to confess and repay the money without incurring additional penalties. The Act is expected to receive Royal Assent sometime in July 2020.

Individuals who are facing criminal action in respect of fraudulent furlough claims (such as fraudulent misrepresentation and money laundering) may also find themselves facing civil action to freeze their bank accounts and seize their property.

What is the difference between furlough fraud and a mistake?

HMRC has stated that it is "not trying to catch [businesses] out". Its powers to investigate and prosecute furlough fraud should, in theory, be reserved for the most serious cases. The recent arrests, for example, relate to a suspected multi-million pound tax fraud and money laundering scheme as well as a high-value furlough fraud of nearly £500,000. However, it remains to be seen how diligently HMRC will investigate businesses.

Employers should be aware that HMRC may impose income tax liability on businesses that have made innocent or careless mistakes as well as in cases of fraud. However, so long as there was no knowing intention by a business to claim and keep money to which it is not entitled, any tax charge should not exceed 100% of the furlough payment and no additional penalties should be invoked.

From 1 July employees can be asked to work some hours, but their employers must not claim a grant for said hours - otherwise they will be found guilty of furlough fraud.

Can directors be held personally liable for furlough fraud?

Yes, directors of limited liability companies can be held personally liable in cases of fraud or other criminal offences.

Typically, the criminal liability of individual directors will arise out of the criminal liability of the company. For example, where a company is held liable for fraud by false representation under section 2 of the Fraud Act 2006, a director who consented to the fraud taking place could also be prosecuted under section 12 of the Act ('liability of company officers for offences by company').

This is not always the case. For example, if the criminal offences were the actions of an isolated individual, such as a director gone rogue. Another situation in which a director might personally be held liable is if they use a limited liability company structure to facilitate or conceal their own wrongdoing.

What should you do if you are being investigated for furlough fraud?

It is understandable to be concerned about the possibility of furlough fraud. The rules are complicated, mistakes are easy to make and the Government appears keen to make examples of companies and individuals that try to exploit the scheme.

Even though HMRC has stated that it does not intend to pursue genuine mistakes, even an investigation could harm your business's reputation. Therefore, if you are facing investigation and prosecution for furlough fraud or you are worried about investigation or prosecution, contact our specialist business crime and fraud solicitors today.

We have a dedicated team who specialise in white collar crime, business crime and fraud. Our highly skilled team includes our firm's co-founder, Alan Burcombe, a highly experienced solicitor with expertise handling complex and multi-million pound frauds. It also includes Ravinder Khumra whose main area of practice is business crime. Ravinder has specific expertise in tax fraud allegations and associated cash seizure and confiscation proceedings.

As a firm, we are independently recognised for our Criminal Litigation skills by the Law Society and we are highly ranked for our crime work by prestigious client guide, the Legal 500.

We can offer you and your business practical advice and assist you at every stage of the criminal justice system, including:

• During criminal investigations
• At the police station - our team includes qualified police station representatives who can represent you upon arrest or invitation for voluntary interview under caution
• At court - our team includes qualified court advocates and barristers. We also have close links with several high-profile barristers' chambers

Contact our business crime and fraud lawyers for advice about furlough fraud

If you are being investigated for furlough fraud or you need advice about a potential police or HMRC investigation or prosecution, get in touch with our expert criminal defence lawyers for advice and legal representation.

Contact us today in West Drayton on 01895 449288,  in St Albans on 01727 840900 or send us an email.

If you or someone you know has been arrested and needs urgent advice, call us on our emergency number - 07592034170.