So far, making a claim for furloughed employees’ pay under the Coronavirus Job Retention Scheme (CJRS) seems to be relatively pain free. But HMRC has five years to check your calculations. How can you avoid trouble down the line?
Initial declaration
When you signed in to make a Coronavirus Job Retention Scheme (CJRS) reclaim you made a legal declaration that you were claiming appropriately and in line with the guidance supplied by HMRC. You also confirmed that HMRC reserves the right to review claims to recover amounts deemed to have been inappropriately claimed.
Pro advice. If you chose to make a claim based on amounts in your payroll, rather than as per the guidance, you can expect to be challenged. You may consider that you acted in good faith and relied on the four iterations of the guidance that were provided before the calculation guidance was received on 17 April, but these debates may well end up at tax tribunal as HMRC insists that you should have used that final guidance. Remember it is very unusual to have guidance ahead of legislation, and the legislation is silent on the detail of the calculation but takes precedence. An HMRC Direction is still legislation (see Follow up ).
Checks during the reclaim
HMRC had put in place the following checks:
- the requirement for an employer to have already been authenticated through a Government Gateway ID provided either to it or its agent
- a six-day payment processing window to allow background checks
- checks by customer compliance managers with large employers to verify the bank details supplied belong to the company making the claim
- the introduction of a whistleblower helpline to report abuse of the scheme, for example employees not being paid 80% or being asked to work.
Pro advice. If you must make employees redundant after lockdown you should ensure that you have followed a fair process as disgruntled employees might use the whistleblowing hotline to cause trouble, even for a compliant employer.
Paperwork
In order to get money to SMEs quickly there was less checking on small claims (under 100 employees in the claim) before payment was made, but that doesn’t mean these won’t be followed up in the future, as HMRC has made it clear that it reserves the right to audit claims for five years.
Pro advice. Hold on to records for longer than the three years currently required for PAYE purposes.
After the event
To qualify for payment under the CJRS you must follow set processes in respect of employees, so these eligibility criteria will be the focus of any future compliance activity. Let’s consider each criterion:
Step 1. Were employees and directors furloughed correctly? Is there written correspondence identifying the start and end date of the furlough, what could and couldn’t be done during furlough and the amounts to be paid? Did employees consent to this contract change? Have decisions to furlough directors or trustees been correctly minuted by the business? What information is there in respect of those who were on SSP that was ended in order to furlough them or other statutory leave that continued during furlough, and was this handled correctly, i.e. only any enhanced contractual pay was recovered for those on statutory leave?
Step 2. Look at evidence of what took place during the furlough:
- do training records support that the national minimum wage (NMW) has been paid for all hours where the employee was training?
Pro advice. Be careful in respect of apprentices who must be paid the apprentice rate of NMW and are likely to have more training hours than other employees.
- email and mobile phone records: do they support that employees were not working during furlough?
- was anybody working who has two employment contracts with the same employer whilst furloughed on one of them?
- what activities were being undertaken by any directors who had furloughed themselves?
- were these just limited to statutory duties as outlined in the Companies Act 2006 , and not activities related to generating revenue for the business?
Pro advice. HMRC will be able to check marketing activities such as social media posts which do not fall within the definition of statutory duties.
Step 3. Do payroll records support the number of employees as at 19 March 2020?
Pro advice. The CJRS legislation requires that for an employee to be eligible for the scheme they must have had both earnings for 2019/20 and that these earnings had been reported by midnight on 19 March 2020 on a full payment submission.
Step 4. What amounts were included in the CJRS reclaim? Were any discretionary payments included, such as bonuses and tips, as these are expressly excluded? Was the CJRS reclaim based on the formula in HMRC’s guidance (see Follow up)? Was the full amount of the CJRS reclaim passed on to employees; this will not be the case if any salary sacrifice reduced pay below 80%. Were the appropriate amounts recovered in respect of NI and pensions?
Pro advice 1. It’s important to remember that amounts through the payroll are based on an employee’s contract so may have been calculated on working days, whereas the reclaim is based on calendar days. Plus, it’s an unusual calculation in respect of NI and pensions which does not follow payroll norms.
Pro advice 2. You must not have claimed any NI in excess of what has been paid through the payroll, so if you claim the employment allowance this cannot be reclaimed again; equally any pension schemes in excess of 3% have to be funded by the employer and cannot be reclaimed.
Step 5. Were any inappropriate expense claims paid during lockdown, for example taxis to work as employees did not want to travel on public transport or for the reimbursement of computer equipment needed to work at home?
Pro advice. Whilst there is an exemption in s.316 Income Tax (Earnings and Pensions) Act 2003 in respect of employer-provided equipment used away from the workplace, this does not extend to reimbursing employees for expenditure. Where this has happened, the amount needs to be grossed up and subject to tax and NI through the payroll.
Step 6. Is there any evidence that the business wasn’t solvent before its decision to furlough, for example were salary and pension payments being made on time for January and February?
Who will do the compliance work?
As there is a major concern that there has been fraudulent activity in respect of claims made under the CJRS, it’s likely that the compliance and enforcement work will be handed to the Fraud Investigation Service which will not hesitate to utilise its formal information powers in appropriate circumstances.
Pro advice. There is little doubt that HMRC will seek to conduct risk-based audits to recover overpaid CJRS reclaims and that this work will go on for the next five years, outside the normal cycle of employer compliance work. This will be time consuming and burdensome for employers and agents who feel that they acted in the spirit of the scheme. But given that £1.5bn was claimed on day one of the scheme HMRC is duty bound to get reassurance for the National Audit Office that money was handed out appropriately.
Your CJRS reclaim must have been based on the HMRC guidance that was issued on 17 April, even if this means you have claimed back less than you paid out via payroll. Work through the six steps to ensure your claim won’t result in enforcement action long after the pandemic is over.
The next step
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.