A few weeks ago I wrote an article entitled ‘ The Sleeping Giant – HMRC and COVID-19’ which warned of HMRC seeking to claw back incorrect claims made and the necessity to keep good records to corroborate any claims made. The first signs are being made that HMRC is now waking up.
A draft consultation setting out legislation seeking to tax or recover claims made under the Coronavirus Job Retention Scheme (CJRS) and Self-employed Income Support Scheme (SEISS), as well as any other form of coronavirus support payment (CSP), including business support grants, where the individual or entity was not entitled to claim it has now been produced. A summary of the proposed legislation and how it will impact on individuals and businesses is also available on HMRC’s website.
If approved the proposals will take effect from the date of Royal Assent of the Finance Bill 2020.
Taxation of coronavirus support payments
The legislation will apply to individuals, businesses, individual members of a partnership and employers who receive or apply for a payment from any of the following:
- Self-Employment Income Support Scheme
- Coronavirus Job Retention Scheme
- The Small Business Grant Fund (SBGF), the Retail, Hospitality and Leisure Grant Fund (RHLGF), the Discretionary Grant Fund (DGF), or their parallel schemes in the devolved administrations
- Other payments made by public authorities to businesses in response to COVID-19
- Any other COVID-19 support scheme specified or described in regulations made by the Treasury
Any payments or grants received will be treated as taxable income. The rationale behind this is that the payments being received are supplementing the income of a business. Therefore any business that has not made a profit due to the effects of COVID-19 restrictions will not pay any tax on the support received, after taking into account the payments received and normal calculation of other business income, expenditure and reliefs. However businesses that continued to make a profit after taking into account support payments received and all normal adjustments will pay tax on the calculated taxable profit.
Recovery of incorrect or fraudulent claims
HMRC will seek to make an assessment to tax of any CSP received where:
- There was no entitlement to it, either wholly or partly
- A CJRS payment was not used to pay the costs of a furloughed employee
The assessment will be equal to the amount received to which the business was not entitled to claim.
Where it can be demonstrated that an incorrect claim was made deliberately, or the amount received was not used for the purpose it was intended, then HMRC will seek to charge a penalty on the amount assessed, based on the penalty range for a deliberate and concealed error. The minimum penalty chargeable would therefore be 50% of the tax being assessed with a maximum penalty of 100%.
HMRC is giving the opportunity to avoid a penalty by making a notification to them of any claims made to which there was no entitlement. This will need to be done no later than 30 days of the payment being received, or within 30 days following the Finance Bill receiving Royal Assent if it arose before that.
Personal liability for company officers
The legislation would also give HMRC powers to make a company officer jointly and severally liable for the Income Tax assessment raised in relation to any CJRS payment to which the company was not entitled or any CJRS payment which was never intended to be used to pay furloughed employee costs.
These powers would be only be used where it can be demonstrated that:
- The officer deliberately made a CJRS claim knowing that the company was not entitled to it and;
- HMRC can show there is a serious risk the company will be unable to pay the assessment
It is therefore imperative that any claims made for any of the CSPs have clear documentation and copies of correspondence to demonstrate the validity of the claim, or where an error has been made it can be shown to have been a genuine error and not a deliberate action to make a claim to which there was no entitlement.
HMRC has already received in excess of 750 calls to their coronavirus fraud hotline from employees who have been furloughed by their employer, but do not believe that their employer has followed the rules correctly.
They will also continue to make use of their Connect database system to look for signs of a business having made a claim to which they may wish to look further into and then seek to raise an enquiry into the claim.
There are already signs that HMRC’s relaxing of ongoing compliance enquiries are easing as HMRC officers return to non COVID-19 related duties. It can be expected that HMRC will have a dedicated team of officers looking more closely at CSP claims with a view to opening enquiries to determine the legitimacy of the claims.
For clients of PKF Francis Clark, the tax investigation insurance offered through CronerTaxwise will cover the professional fees associated with an HMRC enquiry into a coronavirus related claim.*
If you have any queries or concerns on the impact of the draft legislation, please do not hesitate to get in touch.
*professional fees where an incorrect claim was made deliberately are not covered