The furlough scheme compliance challenge
One of the most significant areas of HR compliance relates to the legacy issues surrounding the implementation of the furlough scheme during the pandemic. This article will highlight these issues and analyse what businesses must do in order to ensure they do not fall foul of these changes, protect their reputation and save legal and other costs.
The furlough scheme, more correctly described as the Coronavirus Job Retention Scheme, was introduced in March 2020. As it stands the Coronavirus Job Retention Scheme (CJRS) has been extended until 31 March 2021 and for claim periods running at least until January 2021, employees will receive 80% of their usual salary for hours not worked, up to a maximum of £2,500 per month.
This will be made up entirely of government contributions with employers only expected to make National Insurance Contributions and pension contributions on the amount received by the employees.
Eligibility under the scheme is wide and, currently, any entity with a UK payroll can apply for a payment under the CJRS including businesses, charities, recruitment agencies and public authorities.
Currently, under the extended CJRS scheme, employers can claim for employees who were employed and on their PAYE payroll on 30 October 2020. The employer must have made a PAYE Real Time Information (RTI) submission to HMRC between the 20 March 2020 and 30 October 2020, notifying a payment of earnings for that employee.
Furlough has undoubtedly saved a number of jobs however its introduction and implementation have raised a number of compliance issues. Both Government and HMRC have been aware from early on about the potential for fraud and abuse.
Employees have been encouraged to ‘whistle blow’ on potential abuses such as being asked to work or carry out services during furlough and delay or even claim non-receipt of furlough payments.
This campaign has seen more than 7000 employees reporting potential abuse as of August 2020. In August HMRC also began writing to up to 3,000 employers each week with so-called ‘nudge letters’ to advise them that they may need to repay amounts received under the CJRS. HMRC announced a first amnesty date of 20 October 2020 for employers to report overpayments.
All these initiatives seem to have been effective with latest figures showing that over 80,400 businesses have voluntarily returned more than £215 million in cash since they realised that they either did not need the money or had claimed in error. This is no accident.
Overpayments or incorrect claims can be clawed back by way of a 100% income tax charge. This applies irrespective of whether the erroneous claim was made innocently, carelessly or deliberately.
Clearly, the day-to-day administration of the CJRS has been largely the responsibility of the HR and finance teams however there are a number of wider compliance issues which in house lawyers need to be aware of and these are set out below.
Employers are urged to review records and their claims and demonstrate that this audit has taken place. HMRC accepts that mistakes happen. A previously valid claim may alter when the circumstances change, for example, where an employee leaves or the monies have not been paid to the affected employee due to an administrative error within a reasonable period. Changes between the original CJRS and the new extended furlough scheme need to be understood, for example, the fact that an employee working their notice can no longer be furloughed within the new extended scheme.
Employers must also be able to demonstrate that they have diligently applied the rules relating to the calculation of salary for some individuals. This has become increasingly complex with the introduction of flexi furlough in July 2020 and widely varying patterns of hours and wages in many sectors.
The figure used to calculate 80% of employees’ wages for hours not worked, is made up of the regular payments you are obliged to make, including regular wages you paid to employees, non-discretionary payments for hours worked, including overtime, non-discretionary commission payments and piece rate payments.
Equally certain commonplace payments must not be included when calculating wages such as tips, discretionary bonuses and commission payments and non-monetary benefits like benefits in kind (such as a company car) and benefits received under salary sacrifice schemes (including pension contributions) that reduce an employee’s taxable pay. It is easy to see how mistakes occur.
The first amnesty date has already passed however this is an area which needs regular review. Self-reporting to HMRC always being preferable as the alternative potentially exposes an employer to HMRC’s criminal powers as well as naming and shaming under HMRC’s powers to publish details of deliberate tax defaulter with the attendant damage to corporate reputation and bad publicity.
If an employer has overclaimed under CJRS the scheme and the money has not been repaid, then the employer must notify HMRC no later than the latest of either 90 days after the date they received the grant they were not entitled to or 90 days after the date the employer received the grant that they were no longer entitled to keep because of change in circumstances.
In the longer term, aside from the payments themselves, care needs to be taken to ensure adequate records are kept and maintained for future reference. If an employee is fully furloughed, an employer does not need to calculate the usual and furloughed hours and instead only needs to calculate their maximum wage amount.
If an employee is flexibly furloughed however, an employer must calculate the employee’s usual hours and record the hours they actually work and their furloughed hours in each claim period. An employer must safely retain copies of all furlough notices issued, and ideally, records of employee consents.
Employers must also keep records of the amount claimed and claim period for each employee, the claim reference number and a breakdown of calculations. All of these records must be kept for at least six years. If applicable, copies of any impact statements on the effect of furlough on the workforce and specific genders and ethnicities should also be maintained.
These provisions and the risks of historic claims are largely already well known. Finally, in-house lawyers need to be aware of the newest weapon in the HMRC armoury namely the introduction with effect from 1 December 2020 of the Furlough ‘naming and shaming’ scheme. To deter fraudulent claims, HMRC will publish information about employers who claim for periods starting on or after 1 December 2020. This will include the name of the employer (and its company number or LLP) and an indication of the value of the claim. Claims are banded in ranges from £1 through to £100,000,001 and beyond. At the same time, HRMC will be improving information available to furloughed staff by including details of individual claims made for them in their personal tax account. It is thought that this will also encourage employees to report fraud via the online portal.
It is clear that employer compliance in this area will face even more public scrutiny. The only employers who will avoid this particular type of publication is those who can show that publishing information could result in a serious risk of violence or intimidation to certain relevant individuals, or any individuals living with them.
Judging from the similar provisions contained in the national minimum wage legislation, unfortunately very few employers seem likely to escape publication. Publication seems likely to start as early in quarter one of 2021 so yet another reminder if any were needed, as to the importance of compliance in this area.