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Furlough audits by HMRC and how to prepare

The Coronavirus Job Retention Scheme was introduced to support employers during the pandemic by assisting with the payment of employees’ salaries.

It was made clear from the outset that HMRC would be carrying out audits of claims under the Scheme. We are hearing reports that this process has started. HMRC estimated in September 2020 that up to £3.5 billion may have been claimed fraudulently or paid out in error under the Scheme. They will be looking for errors.

HMRC has the right to retrospectively audit claims for five years after the Scheme ends or up to 20 years if fraud is suspected. The Scheme is currently due to end on 30 September 2021. HMRC is likely to investigate many employers during this time with the intention of claiming back money paid out that employers were not entitled to. They may impose penalties of up to 100% of the amount wrongly claimed. There are also potential criminal sanctions in the event that deliberate fraud is uncovered.

A member of the public can report an employer to HMRC if they suspect it has made a false claim. A disgruntled employee could therefore cause a major problem. HMRC publishes details of claims.

Employers should take the time to check old and current claims are accurate. Due to the Scheme’s rapid introduction, complex provisions and frequent changes, accidental mistakes will have been made. Many employers have already taken this step, with £700 million of furlough grants having been repaid to the Government as of March 2021. In April 2021 Primark announced that it would be paying back £121 million of furlough grants.

What should employers do to get ready?

We advise employers to get their house in order now, before HMRC comes knocking. If HMRC conducts an audit they are likely to give a tight deadline for providing documents to show a claim was legitimate, perhaps only two weeks. An internal audit will provide a good opportunity to ensure these documents are easy to access.

An internal audit will also enable employers to spot and report any mistakes.

Employers should retain all relevant documents for at least six years from the end of the Scheme (currently due to end on 30 September 2021). The furlough guidance states that employers should retain the following:

  • written agreement (or record of the agreement) with each employee confirming that they have been furloughed and/or flexibly furloughed (and any updates to this documentation);
  • the amount claimed and claim period for each employee under the Scheme;
  • the claim reference number;
  • your calculations;
  • details of usual hours worked by employees, the number of hours they were furloughed and (in the case of flexibly furloughed employees) their actual hours worked;

HMRC is also asking for:

  • employee names, addresses and NI numbers;
  • details of how usual pay is calculated;
  • evidence that the employer has paid each employee at least the amount claimed in respect of them;
  • the amount claimed and paid in pension and NI contributions, with evidence in relation to each employee claimed for; and
  • details of any adjustment/correction to a claim.

We suggest employers should also keep a record of the impact of COVID-19 on their business and the reason(s) for making a claim under the Scheme, with evidence where possible, so that these can be provided if required.

What should employers do if a mistake has been made?

The Finance Act 2020 places a legal obligation on employers to notify HMRC of any claim to which it was not entitled. If you discover an overpayment, or otherwise wish to pay back any of the grant received, the Government has published guidance on how to pay back Scheme grants here.

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Marc Long

Head of Employment and HR Team/COFA

Southampton and London
Marc Long is the Head of Clarke Willmott’s Employment and HR team specialising in TUPE and outsourcing.
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