COVID-19 Coronavirus Business Impact – proposed Coronavirus Job Retention Scheme taxation and clawback regime announced

In this OnPoint we report on the UK Government’s recently announced consultation on the taxation and clawback regime which will apply in relation to grants made to employers under the Coronavirus Job Retention Scheme (“the Job Retention Scheme”).

Introduction

The Government announced on 29 May, 2020 a consultation on the draft legislation that it proposes to introduce regarding the taxation of coronavirus business support grants made under various Government schemes, including those made under the Job Retention Scheme and the Self-Employment Income Support Scheme Small Business Grant Fund. The consultation closes on 12 June, 2020. This OnPoint focuses, in particular, on the Job Retention Scheme.

The draft legislation will tax certain payments to which recipients are properly entitled as business income. The draft legislation will also give HM Revenue & Customs (“HMRC”) powers to recover, by way of a 100 percent rate of taxation:

• payments made under the Job Retention Scheme to which recipients were not entitled; and
  
• payments made under the Job Retention Scheme which have not been used to pay the furloughed employee costs that the Job Retention Scheme payment covers (wages, pension contributions, PAYE income tax and employer’s national insurance contributions) within a reasonable period.
  

Taxation

The basic premise of the draft legislation is that grants made pursuant to the various schemes will be taxable on businesses as income because they supplement business revenue. Whether or not any tax will be payable will depend upon the business profits of the grant recipient, taking into account the grant, any other business income and expenses, and any other allowances or reliefs under normal tax rules. Any such taxation will apply at the normal corporation tax or income tax rate applicable to the business and will be payable as a part of, and at the same time as, the business’s normal tax payments.

In addition to treating grant receipts as taxable revenue, the draft legislation proposes to use the tax system as a means to recover grants incorrectly claimed or applied. The rate of tax in such cases will be 100 percent, to ensure full recovery of the grants received.

The clawback of payments under the Job Retention Scheme will apply where the person making the claim:

• was not entitled to the payment - even where the employer has made a genuine mistake in making the claim; or
• is no longer entitled to the relevant payment by virtue of a “change in circumstances”; or
• has failed to apply a grant received under the Job Retention Scheme to pay the costs it was intended to cover within a reasonable period.

Tax due in respect of the clawback of grants must be notified to HMRC and paid within thirty days of the new legislation receiving Royal Assent or, if later, thirty days after the tax becomes payable. The proposed date of Royal Assent is not yet available. In practice, this means that any grants invalidly claimed or incorrectly applied may be required to be repaid to HMRC through the proposed tax mechanism on relatively short notice.

Enforcement

In order to enforce the payment of tax due, HMRC will have powers to:

• utilise its information and inspection powers to verify that a claim under the Job Retention Scheme has been paid correctly and that a payment made by way of a grant under the Job Retention Scheme has been used to pay permitted furloughed employee costs within a reasonable period;
• raise income tax assessments to recover payments made under the Job Retention Scheme from recipient employers; and
• charge penalties in cases of deliberate non-compliance.

The proposed enforcement regime will apply to all grants made at any time under the Job Retention Scheme.

In accordance with normal tax limitation periods, HMRC will have four years from the end of the tax year of assessment to bring an assessment under these new provisions, extending to six years in the case of carelessness on the part of the taxpayer and twenty years in the case of the taxpayer’s deliberate behaviour.

Importantly, where HMRC raises an assessment in order to claw back grants made under the Job Retention Scheme, it would appear that the burden of proof will be on the taxpayer to demonstrate that the claim complied with the provisions of the Job Retention Scheme.

Personal liability of directors in insolvency situations

The draft legislation will make company directors jointly and severally liable for the income tax charge effecting clawback if:

• the company was insolvent at the time when the claim was made;
• the director is responsible for the management of the company; and
• the director knew at the relevant time that the company was not entitled to the payment claimed under the Job Retention Scheme.

Potential criminal liabilities

Where employers have deliberately made fraudulent claims prosecutions may be brought – for example for fraud by misrepresentation under the Fraud Act 2006 or the common law offence of cheating the public revenue. A situation where prosecution might ensue is where, as has been the subject of press speculation, an employer has deliberately breached the rules of the Job Retention Scheme by requiring furloughed workers to perform some or all of their duties during furlough despite the requirement to the contrary under the Job Retention Scheme or where the employer has made a claim intending not to pay the grant money on to employees.

Claiming grants under the Job Retention Scheme when not properly due or failing to apply grants received towards permitted furloughed employee costs should not itself constitute an offence under the failure to prevent the facilitation of tax evasion provisions of the Criminal Finances Act 2017. However, a dishonest failure to account for tax due in respect of any such failures could be within the scope of the regime. Given the potential for criminal liability and the strict liability nature of the relevant offences, this consultation is a timely reminder to taxpayers of the need to ensure that they have reasonable preventative procedures in place so as to address the risk of issues arising in relation to this legislation.

Potential problem areas

The evolution of the Job Retention Scheme has been problematic for employers as the numerous iterations of the guidance for employers and employees and the two Treasury Directions which have been issued have changed the rules governing the Job Retention Scheme in numerous ways whilst also leaving certain issues unclear. There therefore remains concern as to how these enforcement powers will be applied when HMRC comes to audit claims made under the Job Retention Scheme, as it has been clear all along that it will be entitled to do.

One particular area of concern and uncertainty will be the extent to which HMRC will challenge claims by reference to the very general statement in the Treasury Direction that no claim may be made under the Job Retention Scheme in respect of an employee if it is “abusive or is otherwise contrary to the exceptional purpose of” the Job Retention Scheme.

Other areas of concern for employers will include:

• ensuring that the flexible furloughing arrangements to be permitted from 1 July, 2020 are operated in compliance with the Job Retention Scheme – with employees working part of the time for normal pay and receiving furlough pay for the balance of their usual working hours, reporting and record keeping will become more complex.
  
• the ongoing uncertainty as to what qualifies for a grant under the Job Retention Scheme in relation to variable pay as well as to non-discretionary bonuses and similar payments.
  
• how HMRC will deal with claims made by reference to the guidance on the Job Retention Scheme at the time of the relevant claim or furloughing but which subsequently changed - a particular example being the requirement that furloughing be agreed with employees which only became a clear requirement during the evolution of the Job Retention Scheme.
  
• whether HMRC will argue that it was abusive to maintain the employment of employees who were already planned to be made redundant in any event.
  

Actions for employers

Employers will need to continue to ensure that their furlough arrangements comply with the requirements of the Job Retention Scheme, as set out in the relevant guidance and the Treasury Directions on which the Job Retention Scheme is based. Key points for employers to consider in practice are to:

• ensure they keep clear and contemporaneous records of the basis for their decisions to furlough employees and of the relevant employees’ furlough arrangements and their operation.
  
• review the revised guidance on the Job Retention Scheme expected to be issued on 12 June, 2020 – with regard to the extension of the Job Retention Scheme to 31 October, 2020, the introduction of “flexible furloughing” and the contributions to workers’ furlough payments to be required from employers – and update their furlough arrangements as appropriate.
  
• maintain appropriate records of the application of Job Retention Scheme grants towards permitted furloughed employee costs.
  
• consider whether they need to audit their current arrangements in order to be able to correct any errors and declare these to HMRC, not least to reduce their potential exposure to penalties.
  
• consider, in the context of a corporate acquisition, what specific warranties and indemnities may be needed to provide appropriate protection in respect of issues arising in relation to the validity of claims made under the Job Retention Scheme by the company being acquired.