Company Top Guns May Face HMRC Investigation

• Published date: 05 April 2021
• Subject Matter: Corporate/Commercial Law, Criminal Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Reynolds Porter Chamberlain
• Author: Mr James Wickes and Alison Clarke

HMRC clamping down on furlough fraud by companies in Danger Zone

The latest statistics show that over 11 million workers have been furloughed in the UK as part of the government's job retention scheme (that equates to 16% of the population or one in six people) and 41% of employers had staff furloughed. The scheme has so far cost the government over '40 billion and this figure will continue to rise until the end of September this year when the scheme is set to wind down.

With so much at stake, legislation was introduced as part of the Finance Act (the Act) last year providing HMRC with certain recovery powers. Under the Act, which came into force last July, HMRC can investigate and claim back falsely obtained employer grants. Those found guilty of abusing the system will face penalties. HMRC are cracking down on claims by insolvent companies or companies where there is a "serious possibility" of insolvency. For companies unable to repay monies obtained under the scheme (clawed back as a tax liability), those responsible for management of the company can be held jointly and severally liable. This will not only affect directors, officers and senior management but potentially shadow directors and even shareholders. Given these companies may have few assets, it's likely that HMRC will seek reimbursement from individuals, where recovery may prove more fruitful.

Individuals engaged in furlough fraud against HMRC, constituting fraud against the government, may also face criminal sanctions. Directors may also face claims for breach of their statutory duties and disqualification under the Company Directors Disqualification Act 1986.

According to EY's report on profit warnings, over 60 quoted companies (one in twenty) entered the profit warning "danger zone" by issuing their third (or more) profit warning in a year. That's double the number for 2019. Ordinarily, and statistically speaking, one in five of those companies would be placed into administration within one year of the third warning. However, none have failed. Thanks to the retention scheme, it has been reported that, in December 2020 half of the UK quoted companies most at risk of insolvency claimed support from the government.

EY predicts that 11 of the 62...