One hand giveth
HMRC was responsible for overseeing and implementing the Government’s Coronavirus Job Retention Scheme (“CJRS”) and other furlough schemes. Its ensuring that monies were paid under the Government’s various furlough support schemes has been impressive. Although the guidance on who was entitled to monies under the CJRS was amended frequently and was ambiguous in places, HMRC nonetheless managed to ensure that £billions were swiftly paid.
Of course, this came at a cost to HMRC’s traditional compliance activities. HMRC suspended most compliance activities after lockdown, not least by reason that its obligations to maintain taxpayer confidentiality meant that most of its paperwork remained locked in offices. That, combined with the onerous demands occasioned by operating the furlough support schemes, meant that, for example, discussions towards settlement of tax disputes and enquiries slowed almost to a standstill and are only gradually returning to normal.
The other taketh away
HMRC is now re-focussing its attention on its traditional compliance activities. And, it now has an additional, and very large, target – overpaid furlough payments. The grants were paid to recipients under a “pay now, check later” principle. The “check later” phase has started. HMRC has resumed its investigatory functions with vigour. Widespread non-compliance and fraud is suspected.
Legislation contained in Schedule 16, Finance Act 2020 provides for the recovery of overpaid (whether innocently or not) coronavirus grants. The schedule imposes a tax charge equivalent to 100% of any payment to which a recipient was not entitled and has retained. Not being entitled under the CJRS includes situations where a person ceased to be entitled, due to a change in circumstances, or where the grant has not been paid (say by an employer) within a reasonable period to pay costs which it was intended to cover (an employee’s wages). The legislation also enables the imposition of a penalty for failure to notify, which can be up to 100% of the overpaid monies.
In mid-August 2020, HMRC started sending out significant volumes of ‘nudge’ letters to businesses who had received grants warning them that they must either repay overpaid amounts or certify that they have been compliant. This shows that HMRC takes the view that there has been substantial non-compliance. It is not a new approach. A previous example was in relation to the payment of rents to overseas owners of UK residential property in Autumn 2019, where nudge letters were sent, on a widespread basis, to landlords and tenants.
Given the speed with which the schemes were introduced, the significant financial and other pressures from which many businesses were suffering, and the unprecedented amounts of monies paid, that there were errors made is all but inevitable. Simple clerical errors when calculating usual salary, mismatching names, transcription errors made by third party payroll providers, and dealing incorrectly with holiday, maternity or paternity pay are far from rare. In addition, there will be entities that have misunderstood the guidance. And, from the examples that have already been published by HMRC, it seems that some have thought: pecunia non olet and used the schemes as a way of trying to fraudulently benefit from a global pandemic.
Carrot and stick
Potentially in recognition of the likelihood of many of the errors being innocent or careless, but due to difficult circumstances, a ‘quasi amnesty’ has been introduced, where recipients are given a period to notify HMRC of any overpayments.
If notification is made, the overpayment will need to be repaid, but there will be no failure to notify penalty imposed. That is the ‘carrot’ that this quasi amnesty provides.
The ‘stick’ is that non-compliance discovered after the quasi amnesty has expired will be treated as “deliberate and concealed”. That has a number of consequences. First, the penalty will be 100%, unless it can be mitigated down. Secondly, HMRC may “name and shame” the employer. And, thirdly, criminal investigation can not be ruled out.
The onus is very much on recipients to review their operation of the furlough schemes and to ensure that matters are addressed with HMRC before the expiry of the quasi amnesty.
HMRC will be busy. The nudge letters suggest that HMRC is taking a broad, target based, compliance-check approach, initially run by more junior employees and making much use of computer software. However, examples and serious cases will be reviewed by senior officers, from both a civil and criminal perspective. In addition, there may well be disputes over the interpretation of the furlough schemes.
With the national debt over 100% of GDP for the first time since 1961, the likelihood that there will be substantial tax increases announced in the Autumn budget is fairly high. With such tax rises, the likelihood that there will be more tax enquiries and tax investigations is even higher and also a tougher HMRC to manage this.