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The Growing Spectre of Furlough Fraud15th May 2020 Business Crime
When the Government offers a financial incentive or financial support of any kind, fraudsters are quick to search for ways in which to take advantage and prosecutors are quick to make allegations. The Coronavirus Job Retention Scheme (CJRS) or ‘Furlough Scheme’ is no exception.
What is it?
The word ‘furlough’ refers to a temporary leave of absence from work. It was introduced by the government on a temporary basis because of the Coronavirus situation so that employers can keep relevant employees on the payroll even though they aren’t working. The initial furlough scheme was open until the 30 May 2020, but was subsequently extended to 30 June 2020 and has only this week been extended until the end of October 2020. To be eligible, the employer in a business of more than one employee must have
- created and started a PAYE payroll scheme on or before 19 March 2020,
- have a UK bank account,
- and provided the employee was employed before 19 March 2020.
This may include companies that have since been placed into administration. It applies to full and part time employees, including zero hour contract workers (provided they are employees) and many agency employees. The general proviso is that whilst on furlough, the employee is unable to work for the employer (but also includes a wider definition that includes linked or associated organisations). The minimum period an employee must be on furlough for is three consecutive weeks. There are specific rules about people who, for example, have been on unpaid leave, maternity leave or if they were recently made redundant or laid off. The reimbursement from HMRC covers wages equal to the lower of 80% of the employee’s regular salary or £2,500 per month, plus the associated employer NI and pension (minimum automatic enrolment) contributions. Provisions in relation to related redundancy issues, sick leave, holiday entitlement etc. are not covered here. The JMW Blog contains useful updates on the various aspects of the CJRS.
What kind of fraud is furlough fraud?
The frauds fall into two main categories:-
- Asking a furloughed employee to return to work as a ‘volunteer’ without pay.
- Furloughing an employee (with or without the employee’s knowledge) and they continue to work as normal.
There will also be examples of:-
- Furloughing staff and not paying them what they are owed under the scheme.
- Employers making backdated claims that include periods in which the employee was working.
- Employers pretending to hire staff shortly prior to the qualifying period to take advantage of the payments.
- Not paying the full amount received from HMRC to the employee.
The current CJRS Guidance explains very clearly that HMRC will be checking claims and even if payments are made under the scheme, monies paid out may still need to be repaid if the claim is found to be fraudulent or is based on inaccurate information. HMRC has launched a portal for the reporting of furlough fraud. On 13th May, HMRC confirmed it has so far received 795 reports of potential fraud related to the CJRS.
The guidance is also clear that HMRC will retain the right to audit all aspects of any claim under the CJRS, which may mean that any fraud is only uncovered upon an inspection. Our expectation is that HMRC will be auditing claims for furlough payments for a number of years to come.
Is furlough fraud a criminal offence?
There is no specific offence of furlough fraud. It amounts to a fraud upon the Revenue or may be framed as a straightforward fraudulent misrepresentation. The likely offences and guideline penalties are:-
- Conspiracy to defraud; a common law offence - Maximum: 10 years’ custody. Sentencing range: Low level community order – 8 years’ custody.
- Fraud Act 2006 (section 1) statutory offence - Maximum: 10 years’ custody. Sentencing range: Low level community order – 8 years’ custody.
- Cheat the public revenue; a common law offence - Maximum: Life imprisonment. Sentencing range: 3 – 17 years’ custody.
Other cheats upon the Revenue can arise in relation to specific taxes, false accounting or straightforward theft. No matter how it is framed, COVID-19 related offending is likely to be regarded as very serious. We have already seen how the police are responding to COVID-19 public disorder and they have the support of the Crown Prosecution Service in their charging advice. Fines are increasing and the transition back to ‘normality’ is bound to be littered with enforcement action of variable quality and rampant inconsistency. When HMRC, the FCA, Police, NCA and other investigators start to reveal furlough fraud, they are likely to take a similar approach. The COVID-19 situation has revealed a hitherto largely hidden level of co-operation between all of the law enforcement agencies and prosecutors.
How will furlough fraud be detected?
We have already seen quite a few concerns reported by employees, particularly in the service industry. HMRC is actively encouraging staff to report suspicions and the Revenue will be developing protocols to assist in detecting potential frauds when they, for example, undertake PAYE reviews. The Government has launched ‘Fraud control in emergency management’, guidance aimed at fraud experts in government bodies and local authorities that are administering emergency programmes on behalf of the UK Government. It points to important principles and systems the agencies should implement and monitor in detecting fraud. It underlines the importance of fraud detection tools such as GOV.UK Verify, Spotlight, Appcheck by the National Fraud Initiative, or CIFAS. The detection and prosecution of fraud is often fragmented when it crosses between agencies. Each agency has its own priorities and projects. However, the COVID-19 response is likely to be different and defendants charged with offences arising from furlough fraud can expect a higher level of common purpose between the relevant investigators.
What about the self-employed?
At the end of March, the government announced similar support for the self-employed - The Self-Employment Income Support Scheme. It amounts to a taxable grant of 80% of the average monthly trading profits, paid out in a single instalment covering 3 months, and capped at £7,500 altogether. This is a temporary scheme, but it may be extended. HMRC explain HERE who is eligible to claim and how much can be claimed. The opportunities for fraud amongst the self-employed are a little different, in that they revolve largely around evidence that the business has been adversely affected by coronavirus. Nevertheless, the potential offences and consequences are just as serious.
How can JMW help?
Clients are contacting many of our departments about the operation and implications of the CJRS. For example:-
- Our Employment team has been extremely busy advising employers on how to approach furloughing employees and to ensure that the correct steps are taken in accordance with the rules and guidance. They are also providing advice on other aspects of staff retention and redundancy etc.
- Our Insolvency and Corporate Restructuring team is starting to receive instructions from employers who are really struggling to survive.
- The Commercial Real Estate and Finance Departments are advising companies in relation to how they should approach their fixed costs.
- The Regulatory Department advises companies and individuals regarding compliance with the Government’s developing policies on managing the return to work.
- Our Criminal Defence team is starting to receive enquiries from those who wish to report furlough fraud and those who may be accused of fraud.
The situation is without precedent and the fact that we are all labouring to some degree under the same difficulty perhaps explains why the different investigating agencies are pooling their experience across the board. It is worth noting that many Police, FCA, HMRC etc. officers are putting investigations together from laptops and conference calls on their respective kitchen tables! The Revenue in particular will be under pressure from the exchequer to claw back whatever they can to reduce what will be a massive burden on the taxpayer when all of this is over. There will be easy targets and there will be over-zealous prosecutions. Distinguishing between the two requires expert input and JMW is perfectly placed to assist.