Now that the Government’s Coronavirus Job Retention Scheme (CJRS) scheme has closed, HMRC’s attention will be shifting more onto the detail of claims made. In particular, HMRC will be reviewing claims to ensure they were accurate.
In September 2020, it was announced that HMRC were planning to inquire into 27,000 high risk claims and has already begun reviewing incorrect and potentially fraudulent CJRS claims. It was estimated that that the error and fraud rate in the furlough scheme could have been between five and ten per cent (£1.75 - £3.5 billion). While the estimated error and fraud rate has not changed in the following twelve months, the amounts claimed in total under CJRS has and therefore potentially £3.5 - £7 billion may have been incorrect claimed (deliberately or mistakenly).
Given the short timeframe of introduction and the complex nature of the CJRS claim calculations, it is unsurprising that errors and over and underpayments have occurred. Even hospitality companies with large HR departments are expected to have made errors due, in no small part, to the often complex rules.
In this article we look at:
- Problem areas
- What if my claim is incorrect?
- What steps to take next?
There were 4 different versions of the scheme implemented since March 2020, with changes to contribution percentages and elements of pay subsidised, the difficulties of weekly vs monthly pay periods and where pay periods overlap different calendar months. The main areas likely to result in claim errors for the hospitality sector are:
- The reference pay used to calculate the CJRS claim,
- The hours worked by staff before furlough (used as the reference for calculating time on furlough) and hours worked/on furlough while on flexi-furlough.
While regular salary forms part of the reference pay, discretionary pay such as tips or commission does not. Furthermore, the use of zero-hours contracts increased the complexity of calculating reference pay requiring a comparison with equivalent pay before furlough or the average pay since April 2019.
The number of hours worked for the purpose of calculating the claim also presented an issue and whether the employee worked during the furlough period added further complexity. Also In the first stage of the CJRS, furloughed employees were not able to work although there were some exemptions, for example in relation to training and directors performing statutory duties.
In addition to these, businesses with a younger workforce demographic needed to be careful in making claims up to and including July 2020. This is because while employer’s NIC could be claimed under CJRS, which was only the case if employer’s NIC was due for the particular employees, i.e. not where there are exemptions from paying employer NIC for employees aged under 21 or apprentices aged under 25. Similarly, claims could be made for employer pension contributions, but only where the employee had not opted out of the pension scheme.
There were also complexities around which employees could be furloughed as this changed over the 18 months of CJRS’s lifespan. For example, the third version of CJRS saw restrictions on which employees could be claimed for (as they needed to be on the payroll on or before 30 October 2020 and couldn’t be serving their notice period). The final version had further restrictions as furloughed employees needed to be on the payroll between 20 March 2020 and 2 March 2021 and required claims have to cover at least a seven day period and (ordinarily) could only cover days within the same calendar month.
Each of these changes was not hugely complex in its own right, but the interaction of all the changes meant the possibility of errors in claims increased exponentially: in our experience, almost all hospitality employers have made mistakes.
What if my claim is incorrect?
Any over-claims must be notified to HMRC directly and arrangements made to make direct repayment to HMRC. Failure to notify errors could lead to significant penalties. Read more on correcting CJRS errors.
It will be important to remember that the last CJRS claim is far from the end of the matter and at the very least businesses must ensure that the CJRS payments received and any amount over-claimed are declared accurately on the organisation’s tax return. Therefore, any CJRS errors that remain uncorrected by the time a business comes to submit its tax returns means that it may end up submitting an incorrect return. Valid CJRS receipts are taxable business income and excess claims are liable at 100% to claw them back, but errors in your return can lead to interest and penalty charges.
If HMRC takes the view that any errors in CJRS claims or reporting them on tax returns were “deliberate behaviour” it can public name and shame businesses as well as pursuing tax, interest and penalties. The CJRS legislation also includes powers to pursue company office holders where businesses become insolvent, with joint and several liability.
In addition to ensuring any errors are corrected, hospitality businesses must also remember that if they have underpaid a member of staff, the employee has a legal entitlement to be paid their full cash entitlement for the furlough period.
What steps to take next?
It is important to look back at previous CJRS claims submitted during the year, particularly at the formulas being used to calculate the relevant reference pay and what amounts factored into this calculation.
It is important to take pro-active steps to review your own calculations, so that if an error is identified, any amounts can be made good with HMRC on a voluntary basis – usually the cheapest and least time consuming option. BDO have been helping clients across the hospitality sector to review their CJRS claims, including those where HMRC have opened active enquiries into claims.
If you would like to discuss any of the points raised above, please reach out to your BDO contact, who can put you in touch with our Employment Tax team to discuss how we can help.
Or contact Geraldine Browne.