The strange and foreboding case of the software developer, furlough grants, and a yacht in Greece

There’s been a steadfast increase in both CJRS and SEISS cases in the tax tribunal over the last few months, writes Naseerah Mussa, a consultant at employment law firm Chartergates.

For those who’ve put the pandemic out of their mind, that’s the furlough scheme (the Coronavirus Job Retention Scheme), and the Self-Employment Income Support Scheme, respectively.

The CJRS case of Laser Byte Ltd v HMRC

A recent case, Laser Byte Ltd v HMRC, highlights that HMRC are firmly committed to recovering grants that were overpaid or claimed incorrectly during covid. 

The case focussed on a small company providing software development services through Mr Puttock, the sole director and employee of Laser Byte Ltd, and who had been trading since 1984. 

A director’s salary that ballooned from £550 to £2,000…

Mr Puttock generally paid himself a modest salary, taking the balance of earnings out as dividends, and the amount from year-to-year was dependant on how well the business was doing. During the 2018/19 tax year, Mr Puttock’s salary was £800 a month, but this reduced to £550 a month during the 2019/20 tax year. Each year, around February to March, Mr Puttock’s salary would vary due to reaching the PAYE and NIC thresholds at the end of the tax year. 

In February 2020, Mr Puttock argued that his salary increased from £550 a month to £2,000 a month effective from February 13th 2020. It was argued that the decision to increase his salary was made prior to Mr Puttock being able to claim under the CJRS. 

'Not effective'

HMRC opened a check into the CJRS claims of Laser Byte on October 2nd 2020.  Initially, an assessment was raised amounting to £8,356.19, on the basis Mr Puttock was a fixed rate employee, and that the £2,000 pay review was “not effective” in February 2020. 

On January 31st 2023, HMRC issued their “review conclusion” letter, effectively stating that Mr Puttock was in fact a variable rate employee and recalculated the CJRS overpayment to be £7,427.92. 

Laser Byte appealed against the assessments raised by HMRC. 

What points were at issue in Laser Byte Ltd v HMRC?

The following points were at issue:

1. Was Mr Puttock a variable rate employee or a fixed rate employee for the purpose of the CJRS calculations?
2. Did Mr Puttock’s salary increase in February 2020 from £550 a month to £2,000 a month (as submitted on a Real Time Information return on March 29th 2020)?

It was agreed that the CJRS claim in respect of Mr Puttock met the conditions of making a claim, and that Laser Byte had operated a PAYE scheme registered on HMRC’s RTI system on March 19th 2020. 

Fixed or variable rate and a mortgage (but not as you probably know it)

HMRC argued that Mr Puttock was not a fixed rate employee under the CJRS, but rather a variable rate employee. It was noted during the hearing that it would be in Mr Puttock’s best interest to be a fixed rate employee, as the averaging calculation would dilute his entitlement if, instead, he was a variable rate employee. 

To add to this, HMRC argued his salary increase was conveniently and allegedly decided prior to the scheme coming into force, which would result in higher CJRS grant payments had he been a fixed rate employee, and that the salary increase was predominantly made to take advantage of the CJRS grants. 

Laser Byte argued that Mr Puttock was a fixed rate employee, and that the salary increase was decided in February 2020, and this was due to a variety of reasons, including, but not limited to, considering the purchase of a yacht in Greece, which required a maritime mortgage.

Puttock claimed that to secure such a mortgage, he was told he’d have to show a “decent salary.”

Laser Byte lost

Unfortunately for the limited company software developer, The First-Tier Tribunal agreed with HMRC on both issues and dismissed Laser Byte’s case, determining that the assessment of £7,427.92 stands. 

Firstly, they concluded that Mr Puttock was not a fixed rate employee, due to the variations in his salary, and, secondly, the tribunal also rejected the claim that Mr Puttock had increased his salary in February 2020, but rather the pay review did not take place until March 2020, and so was not payable to Mr Puttock in February 2020.

A sign of things to come?

This case is a strong reminder for those who have claimed a grant under the CJRS to carry out a thorough review of all records, documents, and claims, in readiness for potential HMRC inspection. 

Not only is HMRC adamant about this recovery process, but the new chancellor, Rachel Reeves, is also set to appoint a “Covid Corruption Commissioner,” who will be dedicated to recouping the billions lost during coronavirus, in a bid to highlight the extensive misuse of public funds during the pandemic.

Interestingly, the Treasury boss is confident that an estimated £2.6 billion from fraud and flawed contracts agreed during the pandemic can be recuperated. Reeves says the commissioner will aim to work closely with the Department of Health and Social Care, HMRC and the National Crime Agency to scrutinise an estimated £7.6billion worth of covid-related fraud, including from various business loans and grants, incorrectly claimed CJRS grants and abuses from the “Eat Out to Help Out” scheme. 

‘Not the best value for the taxpayer’

So far, only 2% of all fraudulent covid grants have been recovered by HMRC’s special taskforce, which HMRC’s chief executive Jim O’Hara admitting to the Treasury Committee that for the Taxpayer Protection Taskforce to focus just on covid error and fraud beyond September 2023, did “not provide the best value for the taxpayer." And therefore, as of that date, covid-related cases have been dealt with by HMRC’s compliance teams. 

While many who want to see the coffers repaired as much as possible before Autumn Budget 2024 might be optimistic at the appointment  of the new corruption commissioner, it seems no new funds have been allocated to this cause in Labour’s 2024 manifesto. Unsurprising, perhaps.

At the risk of repeating ourselves...

Nevertheless, we reiterate our recommendation that to avoid a similar fate to Laser Byte’s, recipients of CJRS or SEISS grants should review all paperwork in an anticipation of possible HMRC scrutiny.