Furlough: a review of CJRS court cases, with clues for limited companies fearing HMRC

Given the complexities, it is quite understandable that there have been unintentional and entirely innocent errors made by Personal Service Companies (PSCs).

I could be referring to just about any of the complicated legal frameworks which limited company contractors are subjected to. But the one which is the focus here may have been forgotten by many PSCs even though it has now landed four limited companies in court.

It’s the Coronavirus Job Retention Scheme – or ‘furlough’, under which the complicated calculation of grants has resulted in both underpaid and overpaid sums, writes Naseerah Mussa of law firm Chartergates.

HMRC has acknowledged the complexities of the CJRS and on the face of it, adopted an understanding approach, suggesting its focus would be on those its officials consider having made questionable or outright fraudulent claims.

Key behaviours on HMRC's furlough radar

Inevitably, due to the fast turnaround to get the scheme on its feet during the pandemic, the CJRS was always at risk of fraud and error. The behaviours can be summarised as follows:

• Fraud occurs where the claimant (or the ‘employer’ for CJRS purposes) deliberately sets out to misrepresent their circumstances to get money to which they are not entitled to; and
• Error occurs where the claimant inadvertently receives the wrong amount due to incorrect information being provided, but with no deliberate intent to mislead, or incorrectly calculate the award.

As mentioned, we have now seen a number of CJRS-related tax tribunal judgments. Carlick Contract Furniture Ltd was the first furlough case in July 2022; followed by Luca Delivery Ltd, then in April 2023 Oral Healthcare Ltd -- and the most recent (but also handed down in April), Zoe Shisha Events Ltd.

'Serious cases prioritised' -- apparently

HMRC has highlighted in various evidence sessions with Public Accounts Committee that it would effectively distinguish those people who may have made honest errors from deliberate wrongdoers, by saying it would continue “prioritising the most serious cases of abuse”.

However, PSC contractors should be aware that the general gist if not ‘policy’ is to claw back monies wherever possible, even in instances where honest and innocent errors were all that were made in relation to CJRS claims. 

While this goes against the general tenor of the evidence given to the PAC, it’s not all that surprising that HMRC is forcefully prosecuting cases where genuine errors or mistakes have been made on the one hand, and writing off fraudulent claims on the other!

CJRS guidance covered contractor companies 

Various HMRC guidance pages that were published during covid referred to directors of PSCs and confirmed that the CJRS guidance was applicable to them. Where an individual of a PSC was to be put on furlough, then the company’s board must decide to place the director on furlough and the decision should be appropriately noted in the company records and communicated to the director, the guidance stated.

The decision to furlough a director was subject to various debates because where there was a decision to furlough, the director was still required to observe any statutory duty they had under the Companies Act 2006. One of the notable conditions of furlough, was that the employee could not undertake work for his/her employer. The difficulty with directors of PSCs is that despite being on furlough, they continued to have an overriding obligation to the company under the Companies Act 2006 and therefore could be required to carry out certain statutory duties to ensure the company meets its obligations under the aforementioned act.

What did you do during covid as a furloughed limited company director?

The HMRC guidance seemed to cater for this (albeit briefly) and outlined that where furloughed directors need to carry out duties to fulfil the statutory obligations owed to the company, they may do so despite being on furlough. The director cannot do any more than would be reasonably judged as necessary to fulfil that statutory purpose, stated the guidance. The prohibited example provided stated that furloughed directors should not do work that they would carry out in normal circumstances to generate commercial revenue or provide services to or act on behalf of their company.

Typically, PSCs remunerate a director of a company an amount by way of salary and the remainder is often by way of dividends. Where this was the case, the amount that could be claimed was 80% of the salary, as of February 28th 2020 (subject to the cap of £2,500 per month). 

Dividends, reference salary, and inflation

This was a key point which was brought up in the very latest furlough case -- Zoe Shisha Events Ltd V HMRC, in which a director outlined that up until December 2019, her wage was £600 per month, and this had been increased to £3,000 from January 2020, prior to the implementation of the furlough scheme. 

Bank statements, RTI information from HMRC, contractual documents between the company and the director, as well as payslips, did not reflect the inflated amount. HMRC argued that the director, Ms Zoe Muntean, had received a CJRS overpayment because the company had submitted an inflated claim. Ms Muntean argued that prior to the increase, she was paid £600 per month as salary and as she was the director of the company, any further monies were paid as dividends. 

At the crux of this issue was whether Ms Muntean’s “reference salary” (i.e. the amount payable to Ms Muntean in the latest salary period ending on or before March 19th 2020, not taking into account anything which was not regular salary or wages), was £3,000 as she claimed -- or £600 as argued by HMRC. 

More cases like Muntean's are probable

Having regard to the evidence that was made available to them, the tribunal were not satisfied that the increase to £3,000 had in fact occurred. This on the face of it seems a simple case for the tribunal to have dealt with and one that perhaps should not have been appealed to the tribunal given the overwhelming evidence in HMRC’s favour. That said, it is also not uncommon that directors consider dividend payments as part of their overall remuneration package (assuming they are shareholders), so there may well be a few more similar cases that we see in the tribunal.

Even if this outlook of more PSCs in the dock does not worry you, we would always advise undertaking a targeted review, to retrace and carefully analyse claims made under the CJRS for directors who were remunerated by way of salary as well as dividends.

Key recommendations for contractors who furloughed themselves

Contractors should further be aware that since the Taxpayer Protection Taskforce has now redeployed to other HMRC departments, any concerns into a limited company’s use of covid-related support payments will now form part of a wider compliance review by HMRC.

While those ending up in hot water over their CJRS claims will likely remain a very low proportion of the total number of organisations that made a claim under the scheme, we would strongly recommend that companies who have claimed a grant, should carry out a thorough review of all records, documents, and claims in readiness for HMRC inspection.

We expect HMRC to continue to home in on the nuances of the scheme via compliance checks with the aim to recover amounts which have been overpaid by way of error -- or fraudulent behaviour. The latter would undoubtedly attract HMRC penalties. To mitigate risk, preparation is key to include an awareness of the areas that such a HMRC compliance check would cover as well as the inspector’s likely approach overall – not an approach we recommend contractors face unadvised or alone.