Employers who ask their employees to work while they are furloughed, and claim for the cost of those employees’ wages under the CJRS are likely to be committing fraud by false representation (Fraud Act 2006 section 2).
Likewise, where the employer CJRS claims for employees who have not been furloughed could also be committing fraud.
Determining whether employees are working for periods for which they are furloughed is difficult for HMRC, and will be even more so when the flexible furlough rules come into effect from 1 July. HMRC will largely have to rely on reports by employees or other parties through its online fraud reporting service.
There is also some evidence that some employees have not been paid the amount of wages the employer has claimed for under the CJRS.
What the law says:
The rules of the CJRS scheme, as set out in para 6.1(a) of the HMRC Direction issued on 15 April 2020, say that a furloughed employee is an employee who “has been instructed by the employer to cease all work in relation to their employment.”
The HMRC Direction goes on to clarify that “training activities directly relevant to an employee’s employment agreed between the employer and the employee are allowable.
This means that employees can undertake directly relevant training to their job while furloughed, but they can’t work to generate income or even do administrative tasks for that employer.
A furloughed employee can take a job with a different unconnected employer or volunteer for a different organisation. But an employee cannot work as a volunteer for their own employing organisation, even if it is a charity.
Directors on furlough
Directors must continue to meet their statutory duties to file returns with HMRC and Companies House, and the HMRC Direction in para 6.5 specifically allows directors to provide information relating to the administration of their company while furloughed. However, a director must not create income for their own business or company.
What power does HMRC have?
Draft legislation was published on 29 May to allow the taxation of the coronavirus business support grants. This draft law also gives HMRC powers to investigate abuse of those schemes, raise assessments to claw-back SEISS or CJRS grants claimed incorrectly or where the grant has not been paid to furloughed employees.
Where the claimant is a company the company officers can be made jointly and severally liable for the tax charge that claws-back the incorrect claim.
What are the sanctions?
HMRC has the power to apply penalties where a person has deliberately made an incorrect claim, or has failed to pay the grant claimed to its employees. However, the tax information note says these penalties will only be applied if the person fails to tell HMRC of the error by the later of; 30 days of making the claim, and 30 days of the law being passed.
These provisions are expected to be included within the current Finance Bill which is expected to receive Royal Assent to become the Finance Act 2020 in late July. Thus any errors made in CJRS or SEISS claims before FA 2020 is passed will need to be notified to HMRC, and potentially corrected, within 30 days of Royal Assent.
Where the error is not notified to HMRC within this period, the penalty imposed will be between 30% and 100% of the tax charge that claws-back the grant, where a voluntary disclosure is made. Where HMRC prompts the disclosure, the penalty will be between 50% and 100% of the tax charge.
In summary, an employer who breaks the CJRS rules will have to pay tax charges and penalties of up to 200% of the amount over-claimed.