02 December 2021
The coronavirus job retention scheme (CJRS) ended on 30 September 2021, and HMRC’s specialist unit has now increased its checks on claims made under the scheme.
HMRC is not the only one looking at these claims: If you have external audit, and the claims are significant, the audit team is also likely to review them.
In addition, those of you that have to complete tax returns will find that there is also a specific section about the CJRS that needs to be completed. It covers what was claimed and what you might have been entitled to claim.
It is estimated that anywhere between £3.5bn to £7bn has been incorrectly claimed. The Treasury has reported that £1.3bn in furlough payments have already been returned by businesses, with £300m sent back in the last three months.
What should employers be doing?
From our discussions with HMRC, it is clear that employers were expected to check the HMRC guidance each time they made a claim, to see if it had changed and what action should have been taken in view of the sums of money involved.
HMRC also expected claimants:
- to have kept an audit trail of key decisions;
- to have taken advice; and
- to have documented how that guidance was applied to back up the calculations, and kept copies.
So, if you don’t have a clearly documented audit trail, we would recommend preparing something now. Records need to be kept for up to six years and HMRC could review at any time.
If you spot an error while reviewing either the claims or the methodology used, we would recommend assessing the risk and notifying HMRC.
To avoid penalties, Schedule 16 of the Finance Act 2020 imposes a burden on employers to notify HMRC of any amounts that have been wrongly claimed. A 90-day ‘correction window’ is given for employers to make such a notification. The correction window is prescribed as the latest of:
- 90 days from the receipt of the grant; or
- 90 days from circumstances changing, meaning the employer is no longer entitled to retain the grant; or
- 20 October 2020.
The maximum potential penalty is 100 per cent of the amount improperly claimed.
What if HMRC write to you about your claims?
If you get a letter from HMRC requesting a reply by a set date, it should be taken seriously. You should review your claims and reply to HMRC by the set date.
Errors will often tend to fall into the following broad categories.
- Administrative errors made when inputting details of a claim.
- Errors in calculating the amount of grant available to claim, particularly in light of the challenges in applying complex rules.
- Incorrectly including claims for employees for whom the employer is not eligible to claim.
Further information about assessments and penalties is in HMRC's compliance factsheet CC/FS48.
What happens if the claim is for less than the full entitlement?
Surely grant underclaims are not a problem then? Unfortunately, technically that’s not correct. The legislation is drafted in such a way that an underclaim is, from a practical perspective, as serious as an overclaim where it relates to grant pay and where the employee has not received 80 per cent of reference pay. This is because it potentially makes the whole claim for the employee for the period/claim concerned invalid.
We have seen examples of employers that have incorrectly calculated an employee’s reference pay which could jeopardise each and every claim for that employee using that reference pay calculation. On discussing these examples with HMRC, it has been confirmed that where the employer followed the HMRC guidance available at the time of the claim there may be no repayment required and no tax charge or penalty. For example, employees who had significant overtime could have been designated as fixed pay employees until 7 August, when the guidance changed.
However, when the further guidance came out in relation to such employees, HMRC’s view is that the employer should have reconsidered the position, and this might have resulted in those employees being assessed to be variable pay employees for the purposes of further CJRS grant claims. In such cases, we understand HMRC would not propose taking action in relation to the earlier period. It could, however, leave the employer exposed to tax and penalties if they didn’t review the calculations for those employees in light of the updated guidance and make the right decision for claims made from 7 August 2020 onwards.
Common mistakes we have seen in calculating CJRS claims include:
- incorrect day counts or use of working days rather than calendar days;
- reference pay including discretionary payments;
- reference pay not including non-discretionary payments (as defined);
- reference pay not including contractual overtime or employees designated as fixed pay but with significant overtime and no reassessment after the guidance changed on 7 August;
- use of 2019/20 average pay details only or an incorrect method used to calculate the average pay for variable pay employees;
- incorrect use of pre-salary sacrifice remuneration figures;
- employees only furloughed for holiday periods;
- problems with calculating the correct pension payments eligible for claims;
- not restricting NICs calculations where required;
- misunderstanding what employees were able to do when on furlough; and
- invalid earlier furlough days/periods preventing a later valid claim under CJRS Version 2.
How do I complete my tax return?
HMRC’s September 2021 guidance states that CJRS grants should be disclosed in the tax return where one is due (for example the CT600, but only if actually received during the relevant accounting period (rather on the accruals basis).
Tax returns have been updated to include entries on:
- CJRS grants received;
- the employer’s entitlement to those grants; and
- details of any overclaims repaid or previously disclosed to HMRC.
This information is required to calculate any ‘claw back’ income tax charge needed to recover overclaimed CJRS grants, or grants the employer was entitled to claim but ceased to be entitled to retain.
This is particularly important as, when signing the tax return, the relevant officer has to confirm that the entries are to the best of their knowledge complete and correct – including those entries relating to CJRS grants received and which the employer was entitled to receive and retain.
Can CJRS claim mistakes lead to other issues?
Yes, potentially – for example, there may be employment law issues and, in relation to salary sacrifice, potential for unlawful deductions. Where the salary sacrifice relates to pensions contributions, there is also the potential for incorrect pensions payments leading to underfunded pension schemes. The availability of the grant under the CJRS does not change an employer’s usual pension contribution payment obligations or processes.
When calculating the pension contribution due for a furloughed worker who has agreed a salary sacrifice arrangement for pension contributions, any contractual obligations the employer has entered into, and the obligations in the pension scheme rules, continue to apply as normal.
The pensions regulator has provided detailed guidance:
What should employers do now?
Employers are advised to carry out a review to make sure that they have complied with the CJRS rules and documented the process followed at the time of each claim. They should also double check that they have not made any errors when submitting their claims. Ideally this should be done within the correction window to preclude penalties or other sanction, but in any event as soon as possible.
It is advisable also for employers to make sure they have paid employees correctly, not only for periods of furlough but also when working. There are added complications, of course, when dealing with flexible furlough.
CJRS income – considerations for charity financial statements
Under the Charities SORP, grant income is recognised where there is evidence of entitlement to the grant, the receipt is probable, and its amount can be measured reliably. In the case of the CJRS, income entitlement will arise when the terms and conditions of the scheme are met. Income from the CJRS scheme that meets the conditions of recognition should be recognised as grant income on a gross basis, and not set off against related staff costs. This is because the income and expenditure are received and incurred independently.
It is expected that the income will normally be disclosed as ‘other income’ and, where material, be presented separately on the face of the Statement of Financial Activities. Charities should also ensure that they meet the disclosure requirements of section 5.58 of the Charities SORP, so that the receipt of the grant in respect of furloughed employees is transparent. In this respect, the Charities SORP requires the following to be disclosed:
- the nature and amounts of government grants recognised in the accounts;
- unfulfilled conditions and other contingencies attaching to grants that have been recognised in income; and
- an indication of other forms of government assistance from which the charity has directly benefited.
Charities need to consider the principles of fund accounting laid down in the Charities SORP when accounting for their CJRS income. It is most appropriate for amounts receivable under the scheme to be classified as unrestricted income. This is because the grant income does not have any restrictions attached to it determining what the grant should be used for, but instead simply relates to the type of cost that has been incurred.
If, on reviewing a claim, errors are identified two issues need to be considered:
- Whether the amount recorded in the financial statements in relation to CJRS income is misstated and therefore needs to be adjusted for any amount due back to HMRC. As noted, in cases where conditions for obtaining the grant have not been met, the whole claim may be treated as invalid and provision for repaying the entire claim may be necessary.
- Whether there are likely to be any penalties that may be imposed as a result of non-compliance. Any penalties should be recognised only if it is probable that there will be a transfer of economic benefits and a reliable estimate of the amount can be made. Charities will need to consider what type of liability should be recognised in respect of these penalties if the criteria for recognising a liability is met. The Charities SORP says that a liability should be recognised as a provision when either the timing or the amount to settle the obligation is uncertain, otherwise it should be recognised as a creditor on the charity’s balance sheet.
Given the uncertainty around how HMRC will treat incorrect claims, charities may consider that it is possible rather than probable, or that a reliable estimate cannot be made for any penalties associated with errors in CJRS claims. In such cases, charities should disclose the potential penalties as contingent liabilities unless the possibility of their existence is considered to be remote.