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HMRC targets employers in furlough fraud crackdown

Posted on 28 May 2021

Although almost a year has passed since the implementation of the furlough scheme, HMRC is cracking down on fraudulent use of the Scheme during the COVID-19 pandemic.

We learnt from the 2021 Budget that the Government is investing over £100 million in a taxpayer protection taskforce for 1,265 HMRC staff to combat an estimated £3.5 billion of fraudulent claims. Given the potential to issue penalties of 100% of monies claimed for deliberate and concealed behaviour, HMRC has scope to reclaim up to £7 billion.

HMRC are now issuing "nudge" letters to employers and accountants, stating that furlough payments must be repaid. Businesses should be ready for such letters, which often indicate that HMRC has already been directed to a potential fraud, or has already obtained information regarding a potential fraud.

HMRC initially issued a wave of "nudge" letters in August 2020, writing up to 3,000 letters each week to advise businesses that they may need to repay amounts claimed under the scheme, which in turn resulted in a number of voluntary repayments being made within the October amnesty window (as discussed in an earlier Tax Aware article here). HMRC issued a second wave of "nudge" letters in February 2021.

Whether or not employers are in receipt of a "nudge" letter, it is essential to ensure that records are up-to-date and that any potential errors are quickly identified. Some of the activities that HMRC has frequently identified as fraudulent range from making furlough claims for employees who have left employment (i.e. ghost employees), asking employees to continue working whilst on furlough, or claiming furlough payments for purposes other than paying employee salaries. Whilst there may be circumstances in which employees have unintentionally breached the rules, it is still the responsibility of the employer to ensure the rules are being followed (to the extent possible) and processes are in place to manage the operation of the scheme. If "nudge" letters are ignored there is a real risk that businesses will face substantial penalties, as well as criminal sanctions and "naming and shaming" for deliberate tax defaulters. Businesses should notify HMRC of any issues they have identified, as well as the corrective steps taken to prevent erroneous claims being made.

It is therefore an opportune moment for employers to seek to mitigate potential penalties and reputational risks by reviewing the current (as well as historic) procedures in place in adopting the furlough scheme.

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