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.
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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.
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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