The forthcoming Finance Bill 2020 proposes to give HMRC wide powers to make directors personally liable for a company’s tax liability. Under the new proposals, HMRC plans to penalise company directors who intentionally breach the rules of the furlough scheme – the so called “furlough fraud”.

What does this mean for company directors and what should you do to minimise your risk? We outline the issues below.

Identifying abuse of the furlough scheme

With the Coronavirus Job Retention Scheme (“CJRS”) in the process of being wound down towards the end of October, the government is now focussing their attention to identifying those companies who have made fraudulent grant claims for reimbursement of staff wages in this period.

Abuse of the system includes:

• forcing employees to continue to work on a part-time or ad hoc basis despite being declared as furloughed
• where employees not told that their employer was claiming reimbursement of their wages under the CJRS.
• companies claiming furlough for ‘ghost’ employees who may not actually work for the company at all.

With the Coronavirus Job Retention Scheme (“CJRS”) in the process of being wound down, the government is now focussing their attention to those companies who have made fraudulent grant claims for reimbursement of staff wages in this period.

Furlough fraud is manifestly an exploitation of employees, as well as a blatant abuse of a system set up to help companies through this period of unparalleled business turmoil. With billions of pounds paid out through this scheme, HMRC are now looking to seriously penalise those who have flouted the scheme for profit.

Joint and Several Liability of Directors – the new proposals

Legislation is currently being rushed through Parliament and is likely to become law in early July as part of the Finance Bill 2020.

The Bill proposes a new regime which will give HMRC the power to make directors and co-directors jointly liable and severally liable for the company’s tax liabilities if:

• the liability arises from tax avoidance arrangements or tax evasive conduct, repeated insolvency, penalty for facilitating avoidance or evasion; and

• where the company begins insolvency proceedings or is expected to begin insolvency proceedings so that some or all of the tax liability will be lost.

Of particular concern – and potentially worrying for some – is that these proposals include circumstances where a director did not know about a co-director’s fraudulent conduct – hence the “joint and several” liability. HMRC will seek to apply these provisions for penalties raised in relation to fraudulent furlough payments. It is understood that the penalties will apply in cases of deliberate fraud but could also catch directors who unintentionally breached the rules or who did not know that their fellow directors had made a claim under the scheme.

Of particular concern is that these proposals include circumstances where a director did not know about a co-director’s fraudulent conduct – hence the “joint and several” liability.

Penalties

Penalties for those found guilty are likely to include fines for companies, while directors of companies which have subsequently been liquidated could face personal liability for the falsely claimed furlough costs. Imprisonment for convicted fraudsters is also a possibility as exploitation of the CJRS amounts to defrauding the Treasury. The end result is directors potentially being personally liable even in circumstances where they did not personally benefit from the CJRS grants.

HMRC’s tougher approach

These new powers – indicating HMRC’s intention to take a strong approach to recovering any payments made as a result of fraud – looks to be just the start of a new wave of anti-fraud HMRC enforcement and enquiries arising out of COVID-19 crisis.

It remains to be seen exactly what form these measures will take, however directors are well advised to check whether any CJRS claims have been made on behalf of companies of which they are officers, ensure that any such claims were made in accordance with the rules and confirm that any payments received were then applied properly.

If you need help with the issues above, please call us on 0114 272 4984 or email info@shipleystax.com – we are ready to assist.