Royal Assent was given to the Finance Bill on 22 July 2020 and with it came an increase in HMRC’s jurisdiction to go after those who have incorrectly claimed Coronavirus Support Payment (CSP) schemes. The powers allow HMRC to identify those who have incorrectly claimed CSPs, to ensure the correct tax is paid on those payments and to penalise the miscreants. The legislation also provides an “amnesty” window during which taxpayers who have made errors can come forward and resolve the situation without any penalties being applied.
Where a person obtained a CSP, the amounts obtained are taxable under normal rules. So if a business claimed coronavirus job support scheme aid, the monies should have been subject to PAYE (Income tax and NI) as normal salary.
We do not explore here whether or not a person was entitled to claim support at the time the schemes were first implemented, though it is something that will need to be reviewed in determining whether the legislation applies.
The CSP legislation applies if either the “recipient is not entitled to the amount in accordance with the scheme under which the payment is made” (s8 (1)) or if “the person ceases to be entitled to retain the amount” (s8(4) relating specifically to the Coronavirus Job Retention Scheme).
If either of the above cases apply, then the tax rates applicable to the CSP change. Where a business may have obtained support and should have paid corporation tax on that support payment, the applicable rate of tax increases under the new legislation to 100% of the value of the support – “the amount of income tax chargeable…is the amount equal to so much of the CSP…as the recipient is not entitled to”. If some tax has already been paid, then only the remainder would fall due. Further, paragraph s8(5) essentially requires persons who are no longer entitled to the support to repay the amounts given to them.
The key here is “ceases to be entitled”, which is defined in the legislation as “(a) because of a change in circumstance, or (b) because the person has not within a reasonable period, used the amount to pay the costs which it was intended to reimburse.”
The implication being that those who had claimed CJRS at the beginning of the crisis on the basis that they anticipated (e.g.) a drop in demand and therefore reduced requirement for employees should have on an ongoing basis been reviewing the situation and determining whether that aid, whether a monthly employment related amount or an initial grant was still needed. Money that was claimed “for a rainy day” or as a buffer for the future depression we are all told is coming will not be sufficient reason for obtaining the funds.
Demanding that the funds are used within a “reasonable period” is also extremely subjective and could vary across industries and company size, amongst others. Needless to say, HMRC’s version of “reasonable period” may not correlate with that of the taxpayer. In practice, it is likely to relate to payroll periods.
For aid such as the self-employment income support scheme grant, HMRC contacted individuals directly to let them know whether they would be eligible – and this did not depend on their circumstances in relation to coronavirus, rather if the person had filed tax returns. The criteria for the second round of funding was similar – HMRC would contact the individuals to let them know if they were eligible for the grant and the individual would need to confirm whether their “business has been adversely affected” by coronavirus.
We all know that when lockdown happened, the majority of people were affected – for a few weeks, the UK seemed to stand still; construction workers were unable to find materials to continue building, people were not going into offices and businesses not already geared for working from home stalled as they worked out how to put new infrastructure in place. So most people were adversely affected to some degree.
In the majority of cases, the grants provided would have been used to buy food and pay for bills and the basics. Even as things are now reopening, the grants that were given have been spent. So where the person “is not entitled” to aid (say a company has now picked itself up and restarted slowly) since receipt of a grant, does that mean the person has to repay it? Hopefully HMRC will take a pragmatic view and understand that aid was provided when needed and that it was used to help families through the crisis. The level of pragmatism may well depend on how desperate the Treasury is for repayment.
In theory, the legislation was designed to catch those who fraudulently applied for Government aid. For example, employers who claimed furlough monies, but who may not have paid it over to the employees or required their employees to continue working. Schedule 16 of the Finance Act 2020 is supposed to give HMRC powers to penalise those who applied for funds when the money was not needed to support the business.
The legislation was not designed to penalise those who made mistakes; however, it has been drafted so broadly that almost anyone could be caught. Given that the legislation has been passed well after the schemes were implemented, there are many individuals who will have inadvertently made mistakes and who may well be caught by these new rules.
S106, Finance Act 2020 states that
“(2) …”coronavirus support payment” means a payment made (whether before or after passing of this Act) under any of the following schemes-
- the coronavirus job retention scheme;
- the self-employment income support scheme;
- any other scheme that is the subject of a direction given under section 76 of the Coronavirus Act 2020…;
- the coronavirus statutory sick pay rebate scheme;
- a coronavirus busienss support grant scheme;
- any scheme specified or described in regulation made under this section by the Treasury.”
If we then look at S76, CoronaVirus Act 2020, it says “Her Majesty’s Reenue and Customs are to have such functions as the Treasury may direct in relation to coronavirus or coronavirus disease.”
Again, we can see how broad the criteria are. In theory, the bounceback loans were underwritten by the Government so even they could be caught albeit they are ultimately repayable anyway. The legislation is (deliberately?) vague and does not specify whether the loans would therefore need to be repaid early and given that they were loans rather than taxable income, whether penalties would apply.
In my article on Tax and Insolvency, I wrote about the Joint Liability Notices (JLNs) that could be issued to Directors of companies being wound up with outstanding tax liabilities. Depending on the nature of the liability, HMRC can now issue a JLN meaning that even if it is a company liability, the tax can be reclaimed from the individual.
The JLN legislation also now applies to companies that are either “subject to an insolvency procedure” or “there is a serious possibility of the company becoming subject to an insolvency procedure” and where there are liabilities outstanding in relation to CSP where the other criteria discussed above are met.
Penalties and protections
If a person is caught by the CSP eligibility criteria, the CSP legislation effectively redefines the applicable tax rate as 100% requiring the entirety of the relevant support payment to be repaid.
The legislation requires persons to notify HMRC if they believe they are caught by the legislation – i.e. if they were not entitled to the support scheme at the time the application was made or if since then their circumstance have changed. If they fail to do so, this is deemed to be a “failure to notify a chargeability to tax” and penalties will apply.
Readers may be aware that tax geared penalties are based on the behaviour of the taxpayer at the time the “failure” or “inaccuracy” occurred and that the penalties for deliberate behaviour are much higher than for mistakes. Behaviour in relation to incorrect or fraudulently claimed CSP, where HMRC are not notified is deemed to be “deliberate and concealed” (s13(3)) and as such penalties of up to 100% of the tax (i.e. CSP repayment) will fall due. The usual possibilities for mitigation apply and the minimum penalty can be as low as 30% of the tax due if the taxpayer comes forward after the end of the notification window, without any intervention by HMRC.
The (relatively) good news is that there are some safeguards built into the legislation to allow those who made mistakes to correct the issue. The taxpayers have 90 days from Royal Assent – i.e. to 20 October 2020 per HRMC – to notify HMRC of the incorrectly claimed amounts. The legislation does not specifically state that the incorrect amounts should be repaid by this time, nor does it specify the method by which HMRC should be notified.
Normally, where there is a failure to notify HMRC of chargeability to tax, this is deemed to be deliberate and HMRC can raise assessments going back 20 years. This will only apply in relation to CSP if a penalty is levied. If a person notifies HMRC within the notification period, then penalties will not be levied.
Finally, the usual safeguards in relation to assessments apply. If HMRC are not notified and later assess a person to tax on the CSP under Sch 16, FA 2020, the taxpayer can appeal the assessment and ultimately has recourse to tribunal if they consider HMRC are incorrect. At the time applications were made for CSP, taxpayers were required to retain documentation to support the claim. This documentation should be retained for at least 6 years (statutory requirement) rather than the 4 years as required for PAYE.
Points to note
HMRC need to reclaim monies they have paid out and wish to be seen to be cracking down on fraud in relation to the CSP schemes. Newspaper headlines (such as this one) clearly demonstrate these priorities given that this article was written on 9 July 2020, before the legislation had been given Royal Assent. Nonetheless, the fact that HMRC allowed the headline to go out clearly shows they are looking to make an example of those who took advantage of the system.
HMRC may well use the whistleblower reports of furlough fraud to investigate companies and the most serious civil cases will be investigated under CoP9 (suspected fraud). HMRC may also look to criminally prosecute those who deliberately set out to defraud the state at the outset. That said, HMRC have not yet advised how they will approach this; a specific taskforce is likely though a lot will depend on the level of HMRC’s resources and at the time the notification period ends. Another option open to HMRC is to issue third party information notices on (e.g.) employees, where they suspect fraudulent behaviour.
Normally, a person who becomes liable to income/corporation tax will notify HMRC by applying for a UTR or setting up a company (and companies house notifies HMRC). In this case, if a person has overclaimed CSP, they can either correct this on their next claim form, or if they are not claiming any more, can contact HMRC. HMRC will then issue with a payment reference number so the amounts can be repaid.
Within the 90-day notification period, a simple repayment of funds should be sufficient, though it may also flag the person for a future compliance check. At the time of writing, HRMC have not advised what their approach will be and nor have they put in place a specific “notification procedure”. Contacting HMRC for the payment reference number may be easier said than done and hopefully they will set up a simpler “disclosure” or repayment route as they have done with other facilities in the past.
If a person misses the notification window, HMRC should still be advised of the issue rather than waiting for an intervention. This can be done in the same way as any disclosure. Advising HMRC of the error without any explanation of the detail (for example, including the amounts in a future return) may give rise to a general tax enquiry in the next return. Where there are reasonable explanations for the error, these should be given to minimise penalties and risk of a full-scale intervention.