CJRS: How could HMRC seek to interpret the measures going forward?

If there is a cliché in the world of tax it is the comment from the Duke of Westminster case that “every man is entitled, if he can, to order his affairs so that the tax…is less than it otherwise would be”.

That phrase has been frequently mis-used and it has been wearing particularly thin for many years. In fact, it was not long after the Duke of Westminster that the Second World War was already changing attitudes to artificial tax planning. Such schemes were not consistent with the “discharge of the duties of good citizenship” (Latilla v IRC [1943] AC 377). 

Whether there are genuine historical parallels between now and the Second World War, there is increasingly a new measure by which businesses are judged: to what extent have they discharged their duties of good citizenship in order to help the country through the current crisis.

The Coronavirus Job Retention Scheme (CJRS) came into force at the beginning of the UK’s lockdown to allow employers to apply for a grant to cover 80% of the salary costs of furloughed employees, up to £2,500 per month, plus associated National Insurance contributions and employer pension contributions. The CJRS has now been extended, albeit in a more limited form from 1 August, and is set to come to an end on 31 October 2020. Equivalent support was provided to the self-employed under the Self-Employment Income Support Scheme. 

The CJRS has held up a large proportion of the UK’s workforce over the last few months. In his statement on 8 July 2020, the Chancellor confirmed that over one million employers have taken advantage of the CJRS in respect of over nine million jobs, representing more than a quarter of the UK workforce.

Now that the UK is beginning to emerge from the Coronavirus lockdown, many businesses will have formed a clearer picture of the impact the crisis has had on their finances. Businesses that have utilised the CJRS may have a better opportunity to reflect on whether those amounts were actually needed in the first place and what, if anything, they should do if it turns out that their financial position is better than feared.

HMRC has announced that it will deal firmly with businesses that have taken the support offered by CJRS in the knowledge that they do not or will not meet the conditions for it, and on 29 July a factsheet was published outlining HMRC’s plans to start recovery action of overpaid grants under the CJRS. It is understood that HMRC has received thousands of reports of fraudulent claims.

The question we consider below does not concern the strict conditions of the CJRS but the extent to which it might be asserted that there is a more general condition that the CJRS should not be used unless the alternative is to put employees at risk of being made redundant. The CJRS has clearly been essential to supporting the position of millions of workers, but questions may be asked of some whether the assistance of the CJRS was necessary. And with any question that depends on behaviour, who judges what is “necessary” and what is not? Even at the start of the lockdown period, some businesses were facing criticism for furloughing staff. A number of companies, such as the Telegraph, the Spectator and ASOS, have now publicly pledged to pay back the government support they received, on the basis that they have not taken the hit to profits that was feared earlier this year when the measures were introduced. These may be examples of commendable corporate citizenship but they could also be pre-empting concerns that they could face criticism otherwise. Might it even be the case that HMRC will feel pressured to investigate businesses that are seen as never needing the benefit of the CJRS?

Considering what the CJRS does require has been a challenging question for many businesses. There have now been three Treasury Directions setting out the conditions for claims under the CJRS, and the accompanying guidance for employers has been updated 14 times since it was first published on 26 March 2020. Each iteration has modified the wording and application of the scheme from the date of its issue, and the guidance is in some respects in direct conflict with the Directions.

The scope of the CJRS has been the subject of a lot of debate, and there remains uncertainty as to how HMRC will seek to interpret or amend the measures going forward.

There is, therefore, a risk that the rules – and their purpose – will be interpreted with the benefit of hindsight.

The purpose of the scheme, as set out in paragraphs 2.1 and 2.2 of the Schedule to The Coronavirus Act 2020 Functions of Her Majesty’s Revenue and Customs (Coronavirus Job Retention Scheme) Direction dated 25 June (the 25 June Direction), is:

“to provide for payment to be made to employers on a claim made in respect of them incurring costs of employment in respect of furloughed employees who are within the scope of CJRS arising from the health, social and economic emergency in the United Kingdom resulting from coronavirus and coronavirus disease.”

Paragraph 2.2 goes on to say:

“Integral to the purpose of CJRS is that the amounts paid to an employer pursuant to a CJRS claim are used by the employer to continue the employment of employees in respect of whom the CJRS claim is made whose employment activities have been adversely affected by the coronavirus and coronavirus disease or the measures taken to prevent or limit its further transmission.”

This wording is tweaked slightly from the original Direction issued on 15 April 2020 (the 15 April Direction), which stated that amounts paid to an employer pursuant to a claim “are only made by way of reimbursement of the expenditure…incurred or to be incurred by the employer in respect of the employee to which the claim relates.”

HMRC has express powers to audit applicants, and no claim may be made in respect of an employee if it is “abusive or otherwise contrary to the exceptional purpose of CJRS” (paragraph 2.5 of the 25 June Direction).  

The tenor has therefore changed from the 15 April Direction to the 25 June Direction, the latter potentially imposing a higher threshold on businesses to consider whether the support is actually needed.

There is nothing explicit in any iteration of the Direction that required a business to assess its current and projected financial health to determine whether or not it would actually need the grant in order to retain its employees. Given the enormous uncertainty, and the short timeframe in which the businesses had to decide whether to apply, that would have been an almost impossible exercise for many businesses. Even businesses that may appear financially secure now may still suffer during the longer-term impact on the economy. This is presumably part of the reason why the eligibility requirement for employees to have “otherwise been made redundant due to the crisis” was removed from the first iterations of the guidance and not explicitly carried into any of the Directions.

However, whatever the rules may say (or may have said before they were changed), increased media attention and press commentary regarding the use of the CJRS may prompt businesses to perform their own audit of decisions taken in relation to claims made under the CJRS to ensure that they hold up to any future compliance check.

If business are subject to such an audit, it may be helpful to think of the test as a judicial review for private bodies. Judicial review is reserved as a way of challenging bodies that are exercising a public function. In the current crisis, however, it may be argued that we all have a public function to protect the wider community, both physically and financially.

By that measure, the question will be whether businesses acted reasonably based on the information to hand. This should not be a high standard for businesses to fulfil. In judicial review, it must be shown that bodies acted irrationally or made their decision without due regard to the appropriate facts and circumstances. Given the current crisis, businesses can hardly be challenged for acting cautiously. Short of exceptional cases, it should be difficult to criticise businesses who took advantage of the CJRS in these circumstances. That is right. Businesses have been equally criticised for making staff redundant rather than taking the support of the CJRS. It is as much a public duty for a business to protect its workforce (with the help of the CJRS) as it is to protect the Exchequer.

That is, however, only part of the answer. At a time when many businesses (and individuals) are suffering, companies may find that they face increased scrutiny. Whatever the justification in acting cautiously at the time, that scrutiny will come with the benefit of hindsight if it turns out that the crisis is not as bad financially for that business as initially feared. High profits will lead to questions; significant payouts to shareholders and senior management could lead to debates in the press. HMRC may feel compelled to investigate.

At such a time, whether or not HMRC can (or do) try to recover amounts from those who are accused of being too quick to take advantage of the CJRS and whatever the changing rules may say, it is a steady principle that businesses should be prepared to justify their behaviour and, in this case, their rationale for claims made under the scheme.

For more information on the application of the CJRS, please see: 

CJRS update – new rules announced for the furlough scheme extension

Furlough fraud: HMRC makes its first arrest

Coronavirus Job Retention Scheme goes live – practical tips for employers