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Mishcon Academy: Digital Sessions podcast - Tax Investigations: Furlough fraud

Posted on 06 July 2021

The Mishcon Academy Digital Sessions. Conversations on the legal topics affecting businesses and individuals today.

Emily Wright 
In this episode as the country begins lifting Covid restrictions, how can businesses prepare for the tax and fraud challenges that they might face in the post pandemic world?  Today we consider what issues should business be reviewing in relation to the amounts claimed the Covid-19 pandemic?  How can businesses ensure their compliance procedures remain relevant and effective in the post pandemic landscape?  And now what many restrictions have been lifted, what challenges might businesses face?

Hello and welcome to the Mishcon Academy Digital Sessions Podcast.  I’m Emily Wright, an Associate in the White Collar Crime and Investigation Team at Mishcon de Reya and I’m joined by my colleague, Waqar Shah, a Legal Director in the Tax Disputes and Investigations Team.

Waqar, in the last podcast in this tax and white collar crime mini-series, the discussion was about the latest developments in relation to furlough fraud.  Now that most of the restrictions in England have been lifted, what tax and fraud issues might businesses continue to see and how can they respond to this?

Waqar Shah
Thank you Emily.  I think it’s worth keeping in mind the context in which the furlough scheme was introduced and the reason why there is still to this day, a lot of press about this area, whether it’s in the Financial Times or in other sort of publications.  I think if you consider, from any perspective, on the first day the furlough scheme was introduced, if you ignore all of the politics from it altogether, the simple point was that the head of HMRC estimated 5-10% of it would be stolen or incorrectly claimed.   As of last month, the latest estimate suggests that £60 billion has been claimed under the furlough scheme. So by any estimation, you’re looking at at least £6 billion worth of money essentially not being in the states hands, and instead being in employers hands, whether that’s deliberately or through error.  So the reason why you will have already seen quite a lot of press attention about this and will continue to do so for so many months if not longer, is we’re in a situation where, from an economic perspective, the country is not doing particularly well financially, nor are many countries and one of the key ways in which they are looking to recover funds is through enforcing against those who have committed offences.  So just focussing in on that point, as it stands HMRC have been quite forthright in emphasising how much they’re going to look into this area.  The latest figures suggested that there had been already 13,000 investigations into abuses of Covid related support measures of which the furlough scheme or the Coronavirus job retention scheme is one of them.  That’s just the tip of the iceberg, bearing in mind that the furlough scheme itself is still on-going, the real crux of the issue will be seen in the coming months if not years.  When the scheme was introduced, HMRC made it clear that employers are to keep records for five years.  And one of the key reasons behind that is they know it’s going to take months, if not longer, to really uncover, who has perhaps fraudulently claimed this money and equally who has made claims which they shouldn’t have.  To give it some context, it’s easy to focus in on now, the money side of things, but the simple fact was, when the furlough scheme was introduced, you were looking at headlines and media coverage about the number of hospitalisations and death that was surrounding everyone. So you had a number of people having to make very, very quick decisions for businesses up and down the country as to deciding whether to furlough staff.  It wasn’t something that was normally done in this country. It was a new phrase, to ‘furlough’ somebody.  So, it’s obvious that errors were going to be made, but now with more of a return to office for many employees, it will be particularly interesting and important to see how many businesses take this opportunity to review what claims they have made in order to assess whether there has been any incorrect claims and therefore take steps to rectify that accordingly.

Emily Wright
Furlough fraud requires dishonesty of course, but as you’re saying, in many of these cases, the money will have been claimed by companies innocently and actually those companies will be very keen to resolve any issues and get back to business as usual, as quickly as possible and limit any financial penalties or reputational damage that they might suffer.

Waqar Shah
You’re absolutely right.  There’s a few ways to look at this. It’s always easy to just look at the financial impact that this might have on a company.  But, put simply, how likely are general members of the public to engage with or purchase services or goods from a business which has been labelled as a furlough fraudster?  It’s a genuine concern.  So, even if the amount at stake isn’t a huge number, that reputational hit is something that many will want to take very keen steps to avoid and, in particular, from anyone’s perspective, you don’t have to be the most brilliant economist to perhaps appreciate that things are going to get slightly worse before they get better particularly in terms of employment rates and similar issues.  What we have seen recently is naturally, there has been a slight rise in redundancies and hopefully that doesn’t continue but in all likelihood and depending on which industries that you’re looking at, that may continue and what we have seen is, where you might have disgruntled employees who were furloughed, they may make accusations via HMRC about the employers status when it came to enforcing and complying with the furlough rules.  Now, even if there’s not a shred of truth to that, do you really want a HMRC investigation into a business that has only just come back from lockdown and similar sort of arrangements?  The answer is obviously not, and the only real way to ensure that that doesn’t happen is to be on the front foot and to properly engage in a thorough review of your processes and systems and to see if there are any errors or mistakes that you think are perfectly innocent, review it, report it, engage with advisors accordingly and equally if we think something a bit worse has taken place, rather than bury your head in the sand, again engage with it and take it up with advisors such that a report can be made, so as to minimise, if nothing else, penalties and similar sort of outcomes that can be reached by HMRC.  And I think that, if there’s any perception that ‘oh because there are so many people and the amounts claimed under the scheme are so large, it’s not possible that HMRC could possible get me because I’m a smaller employer’.  I think it’s worth keeping in mind, just the sheer facts behind it, even in the latest budget; a specific £100 million was dedicated towards a Covid taskforce who are there to tackle furlough fraud.  Now that might sound a drop in the ocean, but that’s a lot of investigators and officers within HMRC whose day job is going to be over the next few years, to see who has made claims and were they made correctly and if coupled with that, they have for example, complaints or whistleblowing reports from current or former employees, that’s not going to look fantastic for many employers.  So it’s a really useful opportunity now to take the time and review. What HMRC have also been doing is taking the opportunity to make sure certain industries fall in line.  Now, they have been adopting the use of nudge letters, and what that is is, they will be sending letters or correspondence to employers in a certain industry for example to say, ‘we are looking at business in your area, you may have, not intentionally or otherwise committed some sort of breach of the furlough scheme’ and therefore inviting those employers to take some time to review whether that’s the case and report this accordingly.  The current estimates are that they’ve been sending out sort of 3,000 of these letters per week.  Now a view might be well I’ll wait until I’ve had a nudge letter.  I mean the simple fact is, this tactic is also used by HMRC in other taxes and when it comes to mitigating and removing penalties, you’re in a much better position if you’re the one to go to HMRC without any sort of prompt from them to say that there’s been an error and therefore rectify your tax and records accordingly, rather than waiting until they’re essentially at your door at which point, you then take some sort of steps to remedy it, because especially if you’re trying to demonstrate that you are a conscientious tax payer and good employer.  So, it’s a really useful time now particularly with more and more people returning to offices, particularly over the summer to take the time to engage with those senior members of a business that may have not been physically there over the last few months to engage and discuss are there any weaknesses in the claims that have been made to date and what would be the best next steps to remedy that.

Emily Wright 
And the furlough scheme is just one of the schemes that HMRC has been investigating miss-claims under.  There have also been a large number of investigations announced into the self-employment income support scheme and the ‘eat out to help out’ scheme from last August and we’ve seen enforcement already in relation to those.  But another scheme that we’re currently seeing quite a lot of interest from various enforcement agencies about is the bounce back loan scheme and this was another scheme similar to the furlough scheme where it was introduced right at the beginning of the pandemic in April 2020.  It’s now closed but over the period that it was in operation a huge £46 billion has been paid out and the scheme was put into place to assist small companies with the destruction that might come about in relation to their cash flow from the pandemic and to try and help them re-grow their businesses after the pandemic was over.  So this scheme has been overseen by the British Business Bank, loans are 100% Government backed so a lot of this money will be sought to be recovered.  As you were saying about the furlough scheme, because of the quick roll out of the scheme, the loans were approved quickly and it’s was only afterwards that full due diligence has been undertaken and also the eligibility tax was skipped because a lot of these companies didn’t know what the business viability would be under the pressures of the pandemic in April last year when they were first applying for these loans.  So by the end of last year almost 1.5 million loans had been approved and the government reported that it had blocked 27,000 fraudulent applications in the scheme which were worth £1.1 billion.   Those have been blocked but it’s also estimate that between £15 billion and £26 billion of the money paid out under that scheme could ultimately be lost through either fraud or credit risk.  It’s believed that this scheme is particularly vulnerable because it’s at risk from both attacks by fraudsters who may use tactics such as impersonating legitimate businesses and getting paid to those bank accounts and acting dishonestly with intention to defraud.  But, in addition to that there is also the risk that this money might not be repaid because businesses have taken out loans and then will not have survived the pandemic and although they had intentions to make use of the loans legitimately and have done so, they actually will find themselves also unable to repay the loans and it’s a risk that the enforcement agencies may look at this and try and consider any wrongdoing has taken place.  So the enforcement agencies have a lot on their plates and will have a lot to look at in the future. So where the businesses can do now to clearly demonstrate that loans were applied for legitimately, for example, retaining documents from this time, this could be of great help for businesses and individuals if they do find themselves being investigated.  PWC is currently going through applications granted under the bounce back loan scheme to help the British Business Bank identify potential frauds so we know that attention is already being paid to this risk.

Waqar Shah
That’s really interesting stuff and from what you’ve seen, in reality what is the position with regards to enforcement of the bounce back loans?

Emily Wright 
So we’ve seen that arrests and convictions have already taken place following investigations into abuses of this scheme.  So in October 2020, three people were arrested on suspicion of involvement in a £145,000 fraud involving the bounce back scheme.  Since then we’ve also seen two people who exploited the scheme using false identities to obtain almost £0.5 million be sentenced to time in prison of three and five years respectively and in addition to that a HR manager has been accused of claiming under the names of company employees to steal £240,000 of bounce back loans.  We have had reports that the City of London Police are opening an increasing number of investigations into fraud of the bounce back loan scheme and in March this year there were twenty eight investigations opened and that had risen in each month of this year.  It’s expected that the authorities will try and target larger, high value cases where there are clear links to organised crime.  Taking action against small businesses might be more difficult in proving that the loan was fraudulently taken out but it is as you were saying, a really good time for everybody to reassess what might have happened over the last year or so.

Waqar Shah
And particularly so for businesses which may have any sort of query as to whether there had been anything untoward going on internally.  As you mentioned the HR manager who was claiming large amounts and from the sounds of it, even if generally they might be going for the larger amounts when it comes to the issues that have been defrauded it doesn’t sound like they’re loathe to go for the low hanging fruit as well, because some of those prosecutions or investigations were for hundreds of thousands rather than millions of pounds, which is interesting.

Emily Wright
I remember where we were talking about at the beginning of the pandemic, when we were advising various businesses to reassess their compliance procedures and policies in line with the new normal, which was working from home, some people going on furlough and jobs being done by different people to who would normally be responsible for certain compliance tasks.  So, at those times, we were advising people to reassess the policies they had in place, to make sure that proper training was in place for anybody who was doing a slightly different role or for anybody who was new to the business, who’d been brought in during the times when remote working was in place and also to make sure that the communications were very clear.  It’s difficult to create a culture of compliance when people are working from home and it’s been suggested that there are more risks.  So we would say now, again it a good chance to have a look and reassess what policies and procedures are in place.  Whether the return to working from the office or whether the homeworking set up has worked well and will be continued by the company.  Whatever the new state of play is, it’s a good time to reassess whether the compliance policies remain reasonable given the significant changes that business has faced over the last year or so.  And I’m thinking in particular about the corporate criminal offences which were introduced in 2017 and those created two offenses relating to tax which were the failure to prevent the facilitation of UK tax evasion offenses and the failure to prevent the facilitation of foreign tax evasion offenses.  And I think when we talk about coming back to the office and the lifting of restrictions that is happening, we anticipate that there will be a different working environment and a different business landscape to return to but we need to think about this not only in terms of Covid but also in terms of the other changes that have taken place, such as Brexit.

Waqar Shah
Yeah, absolutely and I think the discussion we were having previously also touched upon the fact that where there are safeguards supposedly in place for businesses and where there are written procedures in place in how to deal with, whether it’s the facilitation of tax evasion or similar issues like that, what businesses cannot do is treat it as they might do with a fire safety checklist i.e. something that might be written down and then is put in a top draw and then forgotten.  It really does have to be something that is consistently engaged with and monitored to see how developments or changes in the businesses are factored in and if the last sixteen or eighteen months isn’t considered a change in the business then I don’t know what is.  So naturally, there is going to have to be changes to those procedures for business to be able to show to whichever part of the state it is that they are taking reasonable measure to make sure that these things aren’t happening on their premises or anything in relation to their business full stop.

Emily Wright
And another big change that will have occurred or is potentially in the process of occurring is the fact that there are a large number of insolvencies expected.  It’s actually already been reported that in the first quarter of this year 40,000 firms have been struck off and that’s an increase of just under 5,000 firms being struck off in the same period in 2020.  So it’s a huge increase and this has led to concern about whether some companies could have stopped trading to avoid paying Government loans from the bounce back loan scheme and that is a concern for Government.  So there has been new proposals for enhancing the powers of the Insolvency Service so that it can investigate and disqualify any directors, who were directors of dissolved companies to check whether this has all been done properly, which in many cases, it will have been.  And this new Bill that is being considered is hopefully going to help HMRC recover any misclaimed Covid support funds and it will give the insolvency service the ability to investigate directors and also to investigate those who may have done this in order to avoid repayment of outstanding debt.  But there is a question around whether there’ll be the resources available to these services to fully be able to carry out these checks and the burden on businesses who may be facing insolvency to respond to these is really large so, our advice, being able to get on top of this before it really becomes an issue is the ideal position.

Waqar Shah
That’s absolutely right.  It may sound as though this is a challenging time for business because it is.  The simple fact is it’s not been a particularly pleasant time for anyone over the last year and half or so and as we sort of step into this new age essentially of working, there is going to be a lot of additional hurdles whether that is in relation to the stuff historically and the things that we’ve talked about the various support schemes but also, even on a day-to-day basis, there’s various compliance matters that are still troubling businesses and in any normal time would be the absolute top of the list of priorities.  So depending on what type of business it might be, IR35 compliance i.e. whether somebody is employed or self-employed for tax purposes would normally be incredibly important thing and we had seen quite a few enquiries and cases about this are pre-Covid and now this area is picking up again.  This is an incredibly technical area and one that would require input from, not just a legal time, but a legal team, the tax function, the HR function, a real collaborative approach from a business.  You’ve got to balance all of that with all of these other areas as well, and it is going to be a challenge, but it is a particularly useful opportunity to make sure these things aren’t slipping though the net and are properly engaged with, because, as ever, when dealing with HMRC and the like, the penalties for not engaging or non-compliance can be quite severe.

Emily Wright
I think there’s a limit as well to HMRC’s capacity for leniency as there have clearly been high levels of fraud and given the huge amounts of money spend on support schemes HMRC will be keen to recover funds.  Even though the restrictions are being lifted, the impact of Covid and the recovery of misclaimed support scheme payments will be felt for some time to come.  The potential for the Government to increase tax is one way that money can be recovered for The Treasury and we’ve already seen the overseas aid budget being cut to try and assist with the country’s recovery but enforcement action against those who abuse the system is also one option available to HMRC which will be less controversial in some ways and the investment has already been put in to try and recover the funds through enforcement.  So this issue should be on the agenda for businesses right now, but it will also be something to keep on the agenda for a good while to come.

Waqar Shah
Absolutely and I think perhaps the concluding point in this area would be all of what we’ve discussed here isn’t just compliance type matters that might only be dealt with a business’ accountant or day-to-day tax advisor.  There are a lot of complex and quite detailed issues in play particularly given the overlap between tax and fraud and the serious penalties involved.  So, more often than not, if there is any area in which there might be some weakness, that HMRC could look in to, it really would require a specific expertise in reporting matters to HMRC to put businesses in the best possible position rather than focussing simply on the compliance side of things.

Emily Wright
Well, for now, let’s wrap up there.  I’d like to say thank you so much to Waqar Shah for joining me for this Mishcon Academy Digital Sessions Podcast.  I’m Emily Wright and do look out for the next Podcast in the series.  The Digital Sessions are a series of online events, videos and podcasts all available at Mishcon.com and if you have any questions you’d like answered or suggestions of what you would like us to cover, do let us know at digitalsessions@mishcon.com.  Until next time, take care.

The Mishcon Academy Digital Sessions.  To access advice for businesses that is regularly updated, please visit Mishcon.com.

Join Legal Director, Matthew Ewens and Associates Emily Wright and Richard Harvey from our White Collar Crime and Investigations Group where they discuss MPs sitting on the Treasury Select Committee who have recently criticised HMRC's response to the high levels of fraudulent claims reported to have been made to the government's COVID-19 support schemes.

Mishcon Academy: Digital Sessions are a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.


Visit the Academy for more learning, events, videos, podcasts and reports.

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