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The Finance Act 2020

Piercing the corporate veil and putting business owners at personal risk

It was inevitable that once the immediacy of the Covid-19 pandemic began to pass and the Country continued to adapt, that the Government would turn its focus to address any misuse of the emergency support mechanisms that it made available. I use the word misuse deliberately rather than abuse, as given that the criteria for the schemes and supporting legislation were hastily put in place – with guidance changing on a daily basis – there will be some businesses and individuals out there who might have inadvertently claimed for something that with the benefit of hindsight they were not entitled to. Clearly there will also be some unscrupulous people who have deliberately sought to abuse the support on offer.

On 16 July 2020, HMRC reported that it was considering 4,462 cases of potential misuse of the Coronavirus Job Retention Scheme (CJRS), including cases where employers have asked employees to work while they have been furloughed. At the start of July, HMRC also arrested an individual who was suspected of a £495k CJRS fraud. The Government is clearly trying to send a message to everyone that they are taking abuse seriously, and this is supported by the new provisions contained with the Finance Act 2020 which received Royal Assent on 22 July 2020.

This new legislation contains provisions to enable HMRC to claw back payments made to businesses and individuals that were not entitled to them, or in the case of CJRS, did not use the funds to pay employment costs. Everyone is given a 90 day window in which to self-report whether a mistake has been made. This will enable them to repay the sums without any penalties being applied. If you fail to make the notification within the relevant period and you are found to have received funds incorrectly, the legislation says, “The failure is to be treated as deliberate and concealed,” opening up the ability to add punitive penalties. Penalties for wrongdoing will start at 100% of the sums incorrectly claimed. If remedial action is taken swiftly this may be reduced but the penalty will not fall below 30%. Where HMRC has already commenced questioning then the minimum penalty will be 50%. HMRC has also warned that it will consider criminal charges in cases of deliberate misuse. There is also a real risk that HMRC will seek to bring prosecutions against corporates for the offence of failing to prevent tax evasion, under the Criminal Finances Act 2017.

If that wasn’t bad enough, here comes the twist. The legislation goes further still, in the event that a company is insolvent (either in a formal process or a serious possibility of it being subject to a formal process) where the four conditions are satisfied, an individual can be made jointly and severally liable with the company for a liability. An individual is described as either a company director, a shadow director or “a person who is concerned (either directly or indirectly) in, or takes part in, the management of a company.” There are corresponding provisions that apply to partnerships too. This new provision blows apart the protection usually enjoyed by directors in terms of a limited company being a separate legal entity that is responsible for its own affairs (the veil of incorporation).

There is also a potential for a second twist. We are seeing businesses having to reconfigure themselves in response to the pandemic, and as the Government reduces the level of support on offer via CJRS, inevitably this will take the form of redundancies. What if a business owner made an employee work during the period of them being furloughed and now the time comes to make them redundant? Will we see disgruntled employees acting as whistle blowers to HMRC? I guess only time will tell.

What to do next?
My advice would be for business owners to review the support received and, armed with a better understanding, take a positive step to declare any omissions to HMRC within the notification period. Perhaps some business owners may need the support of their professional advisers in undertaking this review.

If the level of repayment due to HMRC is not affordable, then there are mechanisms that can be used to assist business owners that may find themselves in this unfortunate position. But a more favourable response is likely to be received from HMRC from those who are proactive.

If you need any advice and support regarding any issues detailed in this blog, please do not hesitate to contact us at BLB Advisory. We’re here to help.