Practical tips to help accountants and clients manage HMRC Covid-19 enquiries.
It has recently been reported that up to £3.5bn in Coronavirus Job Retention Scheme (CJRS) grants amounting to as much as 10% of the total CJRS cost may have been overclaimed as a result of fraud or error. Now that the CJRS is winding down, Covid-19 related enquiries are expected to feature prominently on HMRC’s enquiries agenda, alongside standard tax investigations.
Approach to a Covid enquiry
As with most enquiries, HMRC’s approach in Covid enquiries will be risk-based and focus largely on fraudulent claims rather than genuine errors. Pulling historic and current data from across HMRC’s systems as well as utilising information from other available sources including third party reports of incorrect CJRS claims will be aimed at identifying high risk cases.
With the high volume of cases and automation that is likely to be involved in identifying potential high-risk claimants, it is possible that practitioners may encounter situations where an enquiry is opened despite no evident irregularities to the best knowledge of the practitioner or the client. In these cases, it would be advisable to consider making contact with HMRC to understand their concerns and build a relationship with the investigating officer, although this may not always be possible or effective.
Time limits of enquiry
Once a high-risk claim is identified, the enquiry will look at the whole period of the claim to assess whether any grants need to be repaid.
What will HMRC look for during an enquiry into CJRS claims?
HMRC is likely to focus on assessing whether the qualifying conditions to make a claim were met at the relevant time. This broadly means:
that employees for whom claims were made were genuine employees and that they were on the payroll on the qualifying dates and submissions were made with respect of these employees at the relevant times: for claims made before 15 April 2020 - as at 28 February 2020 and for claims made on or after 15 April 2020 - as at 19 March 2020
that the process of designating affected employees was followed and employees notified of the change to their contract
that the employees were not working when on furlough with a particular employer
that directors for whom claims were made were not involved in any activities that involved revenue-generation or supply of services to the company
that the correct amount was claimed
that grants obtained under CJRS were correctly passed to employees as wages.
Why should you comply?
Provided HMRC’s request for information and documents is reasonable and relevant for the purpose of the enquiry, there is no reason not to comply with the request and timely cooperation during the process will enable the enquiry to be concluded sooner.
How to best handle the enquiry process
The best way to handle the process is to be forthcoming with the information as long as the request is reasonable and relevant to the enquiry. Demonstrating goodwill on the part of the client and disclosing any errors to HMRC at this stage may help mitigate penalties in case of certain errors. Where information cannot be provided within the timescales set by HMRC, for example due to Covid-restrictions on movement, making contact with the investigating officer to obtain any time extension will enable the enquiry to progress.
How long will the enquiry last
The enquiry will remain open until the officer is satisfied that all the points of the enquiry have been addressed. An enquiry into CJRS claims is an aspect type of enquiry focusing on one particular area, therefore the process should be relatively quick to conclude in most cases. Where disputes arise with regards to CJRS eligibility due to complex circumstances, or where significant irregularities identified lead to a full or cross-tax enquiry, the process may be lengthy and require significant resources to handle. Practitioners should refer to their engagement letter to establish if ongoing assistance with the enquiry is part of the schedule of services already agreed.
Concluding the enquiry
Where HMRC accepts that no adjustments or repayments of the grant are due, a closure notice will be issued by HMRC.
Where the enquiry concludes that the CJRS grant was improperly or incorrectly claimed and not corrected, the amount overclaimed will be repayable. It is not currently known how long the claimant will have to repay such amounts and whether HMRC will allow any repayment plans.
Penalties levied in CJRS enquiries are likely to be based on the client’s behaviour. If reasonable care was taken by the client when making a claim, no penalty is likely to be charged. Where the incorrect claim was a result of carelessness or the behaviour was deliberate and concealed, penalties are likely to be significant. Being able to successfully argue that a client has been merely careless rather than acting with intent is likely to make a significant difference to the investigation outcome, penalty percentage applied as well as the potential to have the penalty suspended.
By their very nature, HMRC enquiries lead to and focus on disputed areas. In the case of CJRS enquiries, disputes may arise in relation to the eligibility criteria, amount of the repayment, or amount of penalties. One of the tools clients may use to resolve such disputes is to apply to HMRC’s separate Alternative Dispute Resolution (ADR) team to mediate and broker a resolution. If done at the earliest opportunity once it becomes clear that the dispute may come to a grid-lock, ADR may be the best way to enable the enquiry to move forward.
It is not currently known whether claimants will be offered any form of formal independent review similar to those offered in some tax enquiries. It seems unlikely that referring Covid-related cases to a tribunal will be cost effective and increase clients’ prospects of success, although any future disputes in large corporate claims could create a precedent if heard by a tribunal.
How to protect yourself
Up to date and accurate book-keeping and payroll records, email correspondence, eligibility and risk assessment checklists maintained on client files, bank statements and other properly kept records will be essential in case of CJRS investigations. Poor record keeping will leave clients in a vulnerable position and open them up to closer scrutiny as part of a potential wider-ranging enquiry. It is important to keep any records on tax advice sought if applicable, in order to justify a claim made at a later date or mitigate client exposure to penalties. Obtaining fee protection insurance may cover the cost of dealing with CJRS claims.
Scrutiny beyond CJRS
As it has been announced that extensive post payment review of stimulus and support payments will be carried out by government agencies to identify fraud and recover the money, we may expect that similar level of scrutiny will be applied in time across other Covid schemes, including grants for the self-employed and business loans. The qualifying condition of impact of Covid on the business as well as reliability of financial performance figures used as a basis for a claim are likely to be the focus point for SEISS and business loan applications enquiries in future.