James Tillotson FCA, on how HMRC will extract money back from businesses that didn't qualify for support schemes.
The government gives with one hand and might just take away with the other!
This is the potential scenario regarding support for businesses and the self-employed as we ease out of the COVID-19 lockdown.
HMRC are planning tax penalties, and even prosecution, where businesses and individuals are assessed to have claimed when they weren't entitled to make use of policies such as the Coronavirus Job Retention Scheme (CJRS), and Self-Employment Income Support Scheme (SEISS). These initiatives are said to have cost the taxpayer £27bn so far.
The self-employed also face the likely prospect of greater taxation, mooted by the Chancellor when SEISS was first announced, in exchange for government assistance. Given the power of the taxman, this means business owners will need to be able to produce records that demonstrate they were eligible for support.
What HMRC will focus on
To start with, HMRC will focus on the SEISS and CJRS in terms of potentially clawing money back. It's unclear how much time and resource will be devoted to these checks.
SEISS offered grants of up to £7,500 to off-payroll workers hit by the pandemic and subsequent lockdown. HMRC calculated the amount of the grant automatically during the claim process. Taxpayers then had to confirm that they were compliant with the eligibility criteria.
In cases where HMRC believe the SEISS grant was not due, the intention is to recover it through a 100% tax charge. This will be independent of the self assessment tax return. That said the tax return will provide people with an opportunity to declare such liabilities. Penalties are also likely to be applied in cases where deliberate, non-compliance is identified.
Claimants of SEISS will no doubt have used the money to fulfil liabilities and essential living expenses however, they may not have realised that the grant is taxable! This means they need to budget for income tax and national insurance being applied to it.
Checks at the claims stages weren't fraud proof
CJRS saw the government cover the wage costs of workers furloughed by their employers covering 80% of salaries up to £2,500 per month. Unlike SEISS, plenty of checking was conducted during the claim process for businesses that applied.
This focussed on whether employees were recorded in RTI reports filed before 19 March 2020. However, these checks didn't include:
How much was claimed through CJRS
Whether the employee was actually working or not at that time
The likely next steps
New legislation will come into force in July 2020. It's based on reports that some businesses were furloughing employees only to then get them to continue working. There were also many reports of businesses making use of support even though they didn't appear to be adversely impacted by the lockdown.
The legislation will provide businesses and off-payroll workers with a window of 30 days to declare non-compliance. They will then have to reimburse HMRC with the money they received. The taxman already has existing powers that ensures this can be implemented. It doesn't requite new laws.
HMRC are also likely to be conducting an audit of their own data where they suspect businesses and individuals weren't entitled to support. This will help them identify cases for SEISS for example, where self-employed individuals and those in a partnership didn't fit the criteria of continuing to trade during the 2019/20 tax year.
The emphasis therefore will be on business owners and the self-employed to prove their eligibility. Failure to do so will result in a 100% tax charge and then prosecution in instances where there is a failure to pay up.
What you need to do
Clearly the government are determined to recover money paid out unnecessarily. If you run a business then you need to ensure that you back office financial systems can produce records that prove the integrity of your application. Now would be a good time to review this carefully.
As David Prosser points out in MoneyWeek, if investigated by HMRC over CJRS then you'll need to be able to demonstrate that furloughed workers would have continued in employment but for the pandemic. In the case of SEISS applicants, you need to prove the financial damage caused to you by the virus outbreak and hence the need for support.
There are businesses that have found they weren't as adversely hit by COVID-19 as they expected. So whilst they may have made the claims when the schemes were made available, they are looking to repay some of that money where for example employees had to be taken off the furlough scheme quickly and brought back to work. If this was the case for you, it would be wise to follow suit.
Bear in mind that if you receive a tax investigation related to COVID-19 support, this could be a lengthy and expensive process. This will be reflected in the work your accountant does to protect you. The longer it goes on for, the more the fees will accumulate. It could end up costing thousands of pounds.
This is why purchasing tax investigation services can be a sensible option. For a monthly or annual fee the accounting fees of a potential enquiry are covered. That means your accountant can help you defend your case and you have peace of mind that it's already paid for.
The content of this post is up to date and relevant as at 23/06/2020.
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