CJRS: How limited company contractors can keep furlough scheme compliant

So-called ‘furlough fraud’ is a hot topic at present. And a genuine concern.

Only last month, HMRC announced it had made their first arrest of a man suspected of fraudulently claiming £495,000 under the Coronavirus Job Retention Scheme.

So it’s high time to pinpoint what steps limited company directors and PSC contractors can take to avoid falling foul of the authorities by keeping compliant with the CJRS, writes Hannah Morrison, associate at law firm Brabners.

Most workers apparently in breach

But first, some context. On August 10th 2020, the Guardian revealed a study by economists at the universities of Cambridge, Oxford and Zurich, showing that 63% of furloughed people have spent some time working for the employer that had furloughed them.

This is despite the fact that it is a condition of the CJRS that furloughed employees must not provide any services or generate any income for their employer while they are furloughed. Interestingly, according to the study, only 22% of furloughed men and 17% of furloughed women say they were formally asked by their employer to work. However, from HMRC’s perspective that is unlikely to make a difference, as employers should not have claimed under the CJRS in respect of employees who carried out work while furloughed -- whether the employer asked them to do it or not.

What powers does HMRC have to punish furlough scheme abuse?

Under the Finance Act 2020, which came into force on July 22nd 2020, HMRC now have the power to claw back Covid-19 support payments made to businesses which they were not entitled to receive.

It is important to be aware that these powers apply not only to cases where payments were fraudulently claimed (such as the two circumstances referred to above), but also where businesses made genuine errors when calculating what financial assistance they may be entitled to.

The Act applies to support payments under the UK government schemes including the CJRS, the Self-Employment Income Support Scheme, the Coronavirus Statutory Sick Pay Rebate Scheme, and the Coronavirus Business Support Grant Scheme.

Forgiven, fragmented, fairness

In the context of the CJRS, employers and contractors could be forgiven for making mistakes when deciding whether, and if so how much, they are entitled to claim under the scheme.

The government guidance on the CJRS has been amended and expanded so many times now that we have lost count. The guidance is spread over multiple different documents/web pages, making it difficult to navigate.

In fairness to the government, the guidance was prepared in a hurry in order to get much-needed furlough payments to employees as soon as possible, in the face of an unprecedented pandemic. However, for employers and PSC contractors, questions are now being raised as to whether furlough payments have been incorrectly claimed and whether the necessary documentation is in place.

Act now to avoid potentially hefty fines

The Act imposes a tax liability at a rate of 100% for those who received government support which they were not entitled to receive, allowing HMRC to claw back any such payments in full. HMRC will also have the power to issue employers with penalties and fines in more serious circumstances.

Employers are currently in a 90-day grace period for reviewing their compliance with the CJRS requirements. If they self-report to HMRC any incorrect claims within this period, they should avoid potentially significant penalties. Businesses therefore have a time-critical window to audit their compliance which will end on October 20th 2020 or, for payments made after that point, within 90 days of the tax liability being triggered.

Key CJRS questions PSC contractors should pose

In our experience, furlough claims give rise to a number of specific legal issues. These issues usually relate to the following key questions contractors ought to ask themselves:

  1. Have you carried out work for your PSC while receiving furlough pay (and if you have any employees, have they)?
  2. Have you documented furlough arrangements (including ‘flexible furlough’ arrangements) properly in line with the specific legal requirements?
  3. Have you made claims in relation to the correct types of payments? Common issues arise in respect of claims for:
  • Commission Payments
  • Bonus Payments
  • Overtime Payments
  • Holiday Pay (particularly ‘rolled up’ holiday pay)
  • Notice Pay
  • PILONs
  • Paternity and maternity pay

Final considerations

Contractors would be well-advised to review both their documentation and any payments which they have claimed during this 90-day grace period. If any errors are identified, contractors should notify HMRC to seek to avoid heavy penalties or fines being issued. Such workers are known for being independent and taking things on themselves, but as professional legal advisers, we too are on-hand to assist with auditing PSCs’ compliance with the CJRS and its almost always-changing requirements.

Thursday 13th Aug 2020