Furloughed limited company contractors warned of where HMRC will investigate

The ‘be meticulous’ advice issued to PSCs over their furlough scheme paperwork and claims has been firmed-up, with steps to take to head-off new 100% tax penalties from HMRC. 

In fact, in light of legislation to grant the penalties for deliberate non-compliance, like taking a Coronavirus Job Retention Scheme (CJRS) grant but not paying staff, advisers say records must be kept for five and six years.

For the five-year retention, both the original furlough agreement (covering the pre-July1st period), and a new agreement for the flexible furlough phase are vital, says Chartergates.

For six-year retention, PSCs must have the amounts claimed and the claim periods for each recipient; the associated claim reference numbers, plus the calculations, the law firm said.

'Minimum requirements'

Also to be kept for six years, is detail on the usual hours worked of workers going onto the flexible furlough, and then under this second phase of the scheme, the actual hours worked.

But in an email update, Chartergates said these were “minimum requirements” only, meaning that keeping the method used to arrive at a claims value, and the rationale used, could help.

“We envisage HMRC will focus and scrutinise specific sectors and will take a particular interest in matters such as the reference pay used in relation to the calculation of claims.”

The firm added: “The issue of furloughed individuals being asked to breach [the ‘no-work’] requirement…is also likely to be one of the key checks undertaken by HMRC.”

'CJRS investigations are a certainty'

ClearSky Accounting reflected: “With the government reported to be spending as much on furlough as it does on the NHS, it is certain that future investigations will come.”

The accountancy firm’s Clarke B added that the fear is a “retrospective clawback regime” which HMRC may use to probe PSCs “four, six or even 20 years” after CJRS claims.

But a tax enquiry specialist says that despite the penalties being set at 100% of the recovered tax, the Revenue will still need to have proof to penalise the most egregious cases.

“The onus will be on HMRC to be able to demonstrate that the employer or individual deliberately submitted an inaccurate…claim,” said the specialist, Jesminara Rahman.

“[And] the penalty will only apply if the person fails to notify HMRC about the situation within 30 days of the compliance powers being granted royal assent.”

'Prove that no work was undertaken'

The difficulty for employers seems greater, however, as if faced with a HMRC investigation relating to CJRS, they will have to prove a negative – that no work was undertaken.

“In proving that no work has been undertaken…[this] underlines the importance of retaining furlough documentation, including written instructions to cease all work,” says Chartergates.

“Now is the time to ensure that these records are comprehensive, as HMRC may undertake checks many years down the road and the passage of time will not assist if record keeping is less than adequate now.”

'Increase pressure'

According to Tax Resolute, where Ms Rahman is a director, the Revenue would be able to clawback tax by raising income tax assessments or requiring taxpayers to submit a tax return.

“New guidance [was] just released on how to pay back furlough grants -- if you have over claimed,” reflected ClearSky’s Clarke B, alluding to a further instance of non-compliance.

“We've already seen some big companies vow to pay back grants. Will it increase pressure on others to [now] do the same?”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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