What is furlough fraud and how can you avoid it?

With HMRC inundated with reports of job retention scheme abuse, legal experts answer some common questions to help employers stay on the right side of the law

As the government’s job retention scheme starts to wind down and additional levels of complexity are introduced, more and more employers will be at risk of falling foul of the strict rules attached to the grants.

According to HMRC, claims of misuse of the system, or ‘furlough fraud’, are on the rise: as of 22 July, 6,749 reports had been submitted, and it is currently investigating 8,000 tip offs made to its hotline. As a result, the tax authority is upping its game, using sophisticated computer software to uncover evidence of fraud, with a spokesperson confirming that in-depth investigations are beginning to take place. HMRC has so far written to 3,000 employees asking them to check their claims.

But what exactly constitutes furlough fraud, and how can employers make sure they stay on the right side of the law? People Management asked legal experts to explain…

What is ‘furlough fraud’?

According to Beverley Sunderland, managing director at Crossland Employment Solicitors, furlough fraud occurs when an employer deliberately claims back wages under the job retention scheme for an employee they know is carrying out work for them. Or, since the introduction of the flexible system on 1 July, it is when an employer claims for days or hours the employee is actually working.

Furlough fraud could also take the form of employers claiming money back for fictitious employees, for example staff who have left the business, or asking staff to take a pay cut beyond 80 per cent while still claiming the maximum furlough grant.

Joanne Frew, national head of employment at DWF, says the main offenders have so far tended to be employers asking employees to carry out work while furloughed, which can range from “a quick phone call asking for some assistance, to a blatant breach of the scheme by expecting an employee to carry on working as normal while claiming the grant from the government”.

How could employers fall foul of the law?

Furlough fraud can also happen accidentally, however. Despite government advice, it’s easy to misinterpret the law, says Frew. "Ordinarily, a scheme the size of the job retention scheme would take two years to implement. Instead, it was implemented in a matter of weeks due to the onset of the pandemic,” she explains. “Understandably, the rules are not as clear as for other government schemes, and the capacity for error is vast due to the complexity and, in places, the ambiguity of the scheme.”

This has been further complicated by the recent winding down of the furlough scheme, says Alan Price, chief executive of BrightHR. Since 1 September, furlough grants have dropped from 80 to 70 per cent of employees’ normal wages, and employers have been required to pay at least the outstanding 10 per cent. “Any employer that claims more than they are entitled to, either on purpose or by mistake, will be contacted by HMRC and told to rectify any such errors,” he says.

Will all mistakes amount to fraud?

Not all ways an employer could wrongly claim through the furlough scheme will amount to fraud, says Sungjin Park, knowledge lawyer in the employment practice at Addleshaw Goddard LLP – the crucial aspect is whether the employer spots and owns up to mistakes in a timely fashion. 

”Employers can inadvertently claim more than they are entitled to, but this would not necessarily amount to furlough fraud as long as they address their mistake by following the HMRC guidelines on what to do if businesses have claimed too much,” he says.

How can businesses prevent furlough fraud? 

Park advises employers to take legal advice if they are unsure: “There are plenty of guidelines published by HMRC on the scheme and the associated rules,” he says.

Sunderland says those responsible for payroll and management need to be spot checking claims to make sure furloughed workers are not working or, in the case of flexible furlough, only working their reduced hours. She also recommends creating a whistleblowing mechanism to give employees who are pressured to work a direct line to report this to management, alongside checking the email and phone activity of furloughed workers.

“Some companies may not be aware that managers are pressuring employees to work even though they are furloughed because it improves the performance of the team overall,” she highlights.

What should employers do if they spot an error?

Hartley Foster, partner and head of tax disputes at Fieldfisher, says errors need to be dealt with swiftly as leaving innocent mistakes could quickly turn into fraud. “HMRC has introduced a 'quasi amnesty' for recipients to come forward to declare these errors,” he says. “Not doing so can result in the error, however innocent, being treated as fraudulent.

“That has a number of potentially serious consequences. First, there will be a 100 per cent penalty imposed, unless it can be mitigated down. Secondly, HMRC may ‘name and shame’ the employer. And, thirdly, criminal investigation cannot be ruled out,” Foster adds.

Price points out that if an error is noticed, employers should notify HMRC within 90 days after receiving the overclaimed payment, 90 days after the day circumstances change and before 20 October 2020. “[Employers] either correct it in their next claim or make a payment directly to HMRC if they will not be making any future claims,” he says.

“However, employers will first need to contact HMRC to receive a payment reference number before paying via bank transfer, online or telephone banking.”

What if an employer receives a letter from HMRC about potential errors?

Ranjit Dhindsa, UK head of employment, pensions, immigration and compliance at Fieldfisher, says that if a business receives a nudge letter from HMRC, it is imperative they take action. 

“HR and payroll teams [need to] join up in a meaningful and transparent way, establish a process, do a self-audit and seek legal advice if there are irregularities before responding to HMRC to make the most of this window provided,” she says.