First Furlough Fraud arrests. Have HMRC got it wrong?

13th July 2020 Business Crime

Following on from the production of some blogs on furlough fraud HERE and HERE, it was only a matter of time before HM Revenue and Customs (HMRC) found their first newsworthy customer. A man in the West Midlands has been arrested in connection with alleged offences arising in the government's furlough scheme. HMRC detained the 57 year old on Wednesday in connection with an alleged loss to the Revenue in the region of £495,000.00. Eight others have been arrested as part of the investigation and raids involving more than 100 officers across 11 locations. As is often the case, computers and papers have been seized. Bank accounts have been frozen and assets have been restrained. The government will gradually reduce the support available through the scheme from next month and it is due to end in October. It is clear that HMRC plan to take action in advance of that date to secure funds they think may have been obtained as a result of fraud.

They were never going to start with a small case. They need headlines to shock potential or actual offenders into realising that HMRC have teeth when it comes to monitoring the application of public funds in schemes of this type. Tax payers don’t often think kindly of HMRC, but this is one example of how HMRC act to protect our hard earned money. That said, HMRC do not have the best record when it comes to intervening in this way. An analysis of how HMRC acted in these particular raids would almost certainly uncover misapplication of powers and authority. They might be serious flaws or they might not be actionable, but rarely will HMRC execute an operation of this scale without contravening the relevant laws, regulations or protocols in some way. The question is this – is the transgression material? Have they caused the required degree of harm or prejudice justifying judicial review or formal complaints? Raids, arrests, freezing orders and restraint orders against businesses can have devastating commercial consequences and succeeding in demonstrating the wrongful application of the relevant powers will not necessarily put the business back in its original position. Officers therefore need to take great care in (i) choosing the correct target (ii) using the correct powers in the correct way and (iii) properly co-ordinating a large operation; to avoid causing more harm than they set out to prevent. I say this with some force, having been instructed in similar cases (some much larger than this example) where HMRC search warrants were unlawful and seizure of large volumes of material was found to be illegal. These were cases in which the officers might not have intended to act in this way, but adherence to proper procedures is crucial in being able to rely upon the evidence in subsequent proceedings.

The headlines suggest ‘no smoke without fire’. The evidence might turn out to be very persuasive. Surely the arrest of so many people and the freezing of bank accounts etc. must mean that serious offences have been committed? Not necessarily. As any defence solicitor experienced in matters of this type will tell you, quite a few large scale HMRC operations come to nothing after years of investigation. Suspects can be subject to police bail for years before matters are suddenly discontinued without anything more than a short explanation. They might morph into civil investigations or they might give rise to parallel proceedings; limited in scope. Of course, the current investigation might result in early guilty pleas or a complex trial, but taking a fair and robust approach involves assessing HMRC’s compliance from the very beginning. Only in this way can the tax payer be confident that their hard earned cash is being properly recovered by an agency acting in full compliance with its statutory obligations. To do otherwise is to risk causing further harm to an already weakened commercial base.

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Evan Wright is a Partner located in Manchester in our Business Crime & Regulation department

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