Businesses judged to have breached the terms of government rescue schemes during the Covid-19 pandemic could face unprecedented demands for tax penalties under a planned crackdown – and even criminal prosecution. Firms are being warned to be meticulous about record-keeping amid increasing fears that HM Revenue & Customs will aggressively claw back financial support.
HMRC will initially focus on the Job Retention Scheme (JRS), through which the state has picked up the wage costs of millions of workers furloughed by their employers, and the Self Employment Income Support Scheme (SEISS), which has so far offered grants of up to £7,500 to self-employed workers hit by crisis.
New legislation due to come into force next month will give businesses 30 days to declare any mistakes they have made when applying for JRS or SEISS support. They will then be required to repay the cash they have received.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Where HMRC suspects businesses were not entitled to support, it will investigate, with firms required to prove they were eligible. Unless they do so, HMRC is likely to demand a 100% tax charge on the money and will prosecute businesses that do not pay.
Fleecing the taxpayer
The tough approach comes amid concern that some firms have taken unfair advantage of the JRS and the SEISS, which have so far cost the taxpayer almost £27bn. There have been some examples of flagrant breaches, such as employers asking furloughed staff to work. But there have also been examples of businesses seeking financial support even though they haven’t been damaged by the crisis.
The legislation enabling HMRC to charge tax at 100% signals a determination by the government to recoup money paid out unnecessarily. The mechanism provides officials with a rapid route to recovery that effectively uses HMRC’s existing powers rather than requiring new laws.
Most businesses applying for financial support will have acted with integrity. But it is crucial to keep records of the application process and supporting evidence. For the JRS, for example, this would include evidence that employees would have continued to work had it not been for Covid-19; SEISS applicants must show they suffered financial disadvantage because of the virus and needed support.
Review record-keeping and documentation now, well in advance of any inquiry from HMRC. Some businesses may find they have not needed all of the support they anticipated would be required. In that case, consider paying it back before HMRC launches an investigation.
A loan to help you bounce back
Businesses that have borrowed relatively modest sums through the government-backed Coronavirus Business Interruption Loan Scheme (CBILS) could dramatically reduce their interest costs by switching to the Bounce Back loans facility.
Ministers launched the Bounce Back scheme several weeks into the Covid-19 crisis, responding to criticisms that smaller businesses were struggling to access cash through CBILS. By then, however, many businesses had secured finance through the original scheme.
Both schemes are administered through the banks, with the state underwriting the loans. Crucially, however, Bounce Back loans come with an interest rate set by the government at 2.5% a year, while with CBILS, lenders set their own rates; many are charging 6% a year or more.
The maximum Bounce Back loan is £50,000, so for businesses that have borrowed less than this from CBILS, it makes sense to switch. The Bounce Back loan scheme isn’t open to businesses that have already secured finance from CBILS, but there is an exception for firms borrowing in order to pay off a CBILS loan in full. Your bank should be able to help you refinance.
The government has pledged to keep the Bounce Back loan scheme open for applications until 4 November. Both Bounce Back loans and CBILS carry no interest charges or fees in year one, so for businesses confident about repaying CBILS there may be no need to switch. But for any business that expects to begin incurring interest, moving scheme makes sense. On the maximum £50,000 Bounce Back loan, interest charges will cost £1,250 a year from year two onwards. Assuming an interest rate of 6%, the same loan from CBILS will cost £3,000 a year to service.
-
Pension vs property: which option provides the best income for your retirement?News With the cost of a comfortable retirement on the rise, future retirees need to weigh up which strategy offers the best returns. But is a pension a better bet than property?
-
The industry at the heart of global technologyThe semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
-
Should your business invest in a VoIP phone service?Here's what you need to know about VOIP (voice over IP) services before landlines go digital in 2025.
-
The end of China’s boomLike the US, China too got fat on fake money. Now, China's doom is not far away.
-
What is the future of Royal Mail in the UK?With fewer of us sending letters and parcels, the Royal Mail is finding dealing with the nation’s post is an increasingly unprofitable and costly business.
-
What's the secret of Manolo Blahnik's success?Fashion maestro Manolo Blahnik shows little sign of slowing down at 81, and his company notched up a record financial year in 2022. What is the secret of his success?
-
Michelle Mone's "tough year of pain"Michelle Mone liked to portray herself as a working-class heroine who worked her way to the top through grit and determination. But her pedestal is built on sand.
-
Trevor Milton, the Elon Musk wannabe, is jailed for fraudThe former CEO of Nikola, Trevor Milton, has been found guilty of lying about the development of the company's electric trucks.
-
Directors should think twice before waiving limited liabilityShould small-business directors ever provide a personal guarantee in return for bank finance?
-
Why Russia's economy is doing better than predictedSanctions were supposed to strangle Russia’s economy, but it seems to be thriving. What’s going on?
