Report

by the Comptroller
and Auditor General

HM Treasury, HM Revenue & Customs

Implementing employment support schemes in response to the COVID-19 pandemic

HC 862 Session 2019–2021 23 October 2020

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HM Treasury, HM Revenue & Customs

Report by the Comptroller and Auditor General

Ordered by the House of Commons
to be printed on 21 October 2020

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act

Gareth Davies
Comptroller and Auditor General
National Audit Office

16 October 2020

This report examines the role of HM Treasury and HM Revenue & Customs (HMRC) in implementing the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS). The report considers how well the schemes were implemented, recognising the need to deliver at speed in response to the COVID-19 pandemic.

© National Audit Office 2020

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009194 10/20 NAO

The National Audit Office study team consisted of:
James Ball, David Betteley, Anthony Pitt, Tom Tyson, Nigel Vinson with support from Andrea Jansson and Stephen Jobling, under the direction of Andy Morrison.

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Key facts

Summary

Introduction

1 On 20 March 2020 government announced the Coronavirus Job Retention Scheme (CJRS), followed on 26 March by the Self-Employment Income Support Scheme (SEISS) as part of its economic response to the COVID-19 pandemic. Our report refers to these as ‘the schemes’.

2 Initially government’s overriding ambition for both schemes was to provide financial support to businesses and individuals as quickly as possible in the wake of the COVID-19 pandemic to protect jobs. In summary:

CJRS: The initial aim was to provide rapid financial support to help firms continue to keep people in employment. Employers could put workers on temporary leave and government would pay them cash grants of 80% of employees’ salaries, up to £2,500 a month (CJRS 1). From July and under a ‘flexible furlough’ phase (CJRS 2), the objectives changed to give firms flexibility to support the recovery and in August, by introducing an employer contribution.

SEISS: The aim was to provide fast grant payments to self-employed individuals whose businesses had been ‘adversely affected’ by the pandemic. The grant was intended to help support self-employed individuals with living costs, but they could also continue to work, start a new trade or take up a new employment. A second SEISS grant was available to claim from 17 August 2020.

3 The schemes were only open to existing taxpayers who met certain eligibility criteria. At 20 September 2020 CJRS had supported 1.2 million employers and 9.6 million jobs, with claims totalling £39.3 billion. The Office for Budget Responsibility (OBR) expects CJRS claims to reach £54.5 billion in total. By 20 September 2020 the SEISS scheme had at least 2.6 million claims, totalling £13.4 billion. OBR forecasts SEISS claims will total £15.2 billion, bringing total forecast spending for these schemes to nearly £70 billion. The CJRS scheme will end on 31 October. On 24 September 2020 government announced a new Job Support Scheme (JSS) intended to provide help for short-time working (reduced hours) and an extension to SEISS until April 2021. On 9 October government announced an extension to JSS (referred to as ‘expanded JSS’) to support companies whose businesses are legally required to close as a direct result of coronavirus restrictions.

4 HM Revenue & Customs (HMRC) and HM Treasury – collectively referred to as ‘the Departments’ – were responsible for advising ministers on the design of the schemes. HM Treasury led on policy design and HMRC led on administrative design and then the implementation and administration of the schemes.

Scope of this report

5 The scale and nature of the current COVID-19 pandemic, and government’s response to it, is unprecedented in recent history. This report considers how well HM Treasury and HMRC have managed risks thus far in implementing these schemes. This report considers whether the Departments have:

managed design and delivery risks effectively in implementing the schemes. Part One assesses the Departments’ implementation of these schemes against evaluative criteria that draw upon our work analysing the government’s response to other crises;

understood whether the schemes are reaching the people intended. Part Two examines the Departments’ approach to ensuring that the schemes were reaching their intended recipients, whether they had a good understanding of the consequences of their design decisions and what the impact of those decisions has been; and

managed fraud and error risks effectively. Part Three considers how far fraud and error risks have been addressed.

6 This report does not consider HMRC’s other COVID-19 interventions designed to support businesses, including the Coronavirus Job Retention Bonus and Eat Out to Help Out, or the relationship between the schemes and wider government support such as business loans and benefits. We have previously reported on the Bounce Back Loans Scheme.1

7 Our audit approach is described in Appendix One and the evidence base we used is in Appendix Two. Appendix Three provides international comparisons and Appendix Four shows how the schemes have evolved over time.

Key findings

Designing and implementing the employment support schemes

8 The Departments implemented the schemes quickly and ahead of schedule. Ministers set clear objectives that both schemes should be delivered quickly. Government announced the CJRS scheme on 20 March 2020. HMRC planned to make initial CJRS payments by the end of April 2020, but made it available to employers from 20 April, just a month after the government’s announcement.Government announced the SEISS scheme on 26 March. HMRC intended to make SEISS payments by the beginning of June but made the scheme available from 13 May, two weeks early. HMRC accelerated the original timetable for the SEISS scheme, recognising the need to provide financial support to eligible customers as quickly as possible (paragraphs 1.1 to 1.4 and Figure 2).

9 The scale of the challenge was potentially increased by the lack of pandemic contingency planning and existing employment support schemes the Departments could easily adapt. Instead, HM Treasury told us it drew on economic contingency planning designed for financial rescues, developed following the credit crisis; and draft policy work on wage subsidy schemes and lessons learned from other countries, such as Germany, in implementing short-time working schemes (paragraph 1.7).

10 Given the compressed timeframe to design each scheme, the Departments could not follow standard processes comprehensively. In the circumstances, the Departments had insufficient time to produce detailed documentation – such as business cases, options appraisal and detailed cost-benefit analysis – that we would normally expect to be available to support key investment decisions. Instead, policy and operational officials worked closely together to rapidly develop employment support schemes that they could implement quickly. HMRC agreed clear principles for both schemes, including that the claim process should be simple and the grant calculation straightforward. HMRC used existing supplier relationships and contracts to develop the IT solution (paragraphs 1.5 to 1.6, 1.8, 1.9).

11 HMRC implemented the schemes quickly through strong project management, risk management and service testing. Detailed planning and project management were central to rapid delivery. The Departments took a structured approach to identify and manage risk, using government’s Orange Book on risk management. HMRC’s IT staff took four weeks to implement the CJRS scheme, compared with an average of around 18 months that they normally need to deliver major IT projects. HMRC tested customer journeys and developed guidance for customers and training for staff to enable the effective operation of the schemes (paragraphs 1.10 to 1.18 and Figure 3).

12 Other countries, at the start of the pandemic, were able to adapt existing schemes to deliver support more quickly. We contacted 20 national audit institutions to understand how their respective governments designed and implemented similar employment support schemes. Most countries implemented their schemes faster than CJRS, but almost all had pre-existing arrangements they could adapt. Countries such as Germany and France already had short-time work schemes in place to support companies with salary costs at times of economic crisis (paragraphs 1.19 to 1.23 and Figure 4).

Supporting the people intended

13 The schemes have been largely successful in protecting jobs through the lockdown period, with at least 12.2 million people benefitting from support. The CJRS scheme supported 9.6 million jobs and, at its peak in May, around 30% of the workforce eligible for the scheme across the UK were furloughed. The SEISS scheme supported at least 2.6 million self-employed people, around 77% of the 3.4 million people potentially eligible for the scheme. The number of jobs furloughed fell to around five million by the end of July, while unemployment levels remained broadly stable at around 4% of the workforce. This suggests the schemes provided an effective bridge during the early phases of the pandemic, allowing some people to return to work when the national lockdown eased. However, the number of people on payrolls fell by 0.5 million between March and April. We found one in five people we surveyed who were in paid employment were not furloughed but had their pay or hours reduced, presumably because they could continue to work in some capacity through lockdown without their employer drawing on CJRS (paragraphs 2.12 to 2.16, Figure 7 and Figure 9).

14 A combination of policy decisions and constraints in the tax system meant that as many as 2.9 million people were not eligible for the schemes. People were excluded from the schemes either because of ministerial decisions about how to target the schemes, or because HMRC did not have data needed to properly guard against the risk of fraud. The precise number of people needing help is uncertain because not everyone will have been sufficiently affected by the pandemic to need financial support. Groups ineligible for support were as follows:

CJRS: an estimated 1.1 million people were ineligible because HMRC had limited data to verify claims. HMRC has not estimated the number affected but third-party estimates suggest around 0.4 million short-term contractors moving between jobs were ineligible. Additionally, 0.7 million limited company directors could not claim for company dividends paid instead of salaries. The tax system treats company dividends as investment income and HMRC cannot separately identify those payments from other investments. However, company directors could still claim for earnings registered with the Pay-As-You-Earn scheme and apply for bounce back loans.

SEISS: HMRC estimated that around 1.6 million self-employed people did not meet the scheme’s policy criteria. Of these, 1.4 million people had trading profit that was less than their non-trading income; 0.5 million people had a trading profit of £0 or made a loss; and 0.2 million people were ineligible because their trading profits exceeded £50,000.2

SEISS: third-parties estimated a further 0.2 million people who were newly self-employed in 2019-20 were ineligible because they had not yet submitted a Self Assessment return. Therefore, HMRC did not have verified records on which to confirm their activity and estimate their income. This figure could have been greater had lockdown occurred further from the January 2020 deadline for annual tax Self Assessment returns. HMRC intends to introduce more frequent (quarterly) reporting for self-employed people under Making Tax Digital from April 2023 (paragraphs 2.6 to 2.11 and Figure 6).

15 The Departments considered the equality implications of their design decisions. The Departments carried out equality impact assessments for both schemes. They identified that a high proportion of Black, Asian and minority ethnic people were self-employed and undertook additional work to raise awareness of SEISS with stakeholder groups. HMRC’s monitoring data provide information on the age and gender profiles of people covered by the schemes but do not report on other protected characteristics, such as ethnicity, as these data are not necessary for the administration of taxes. The data show that a greater proportion of younger workers were furloughed. A greater proportion of men were furloughed initially, but this reduced over time and by September there was little difference between men and women. In August 2020 HMRC began tendering for survey and qualitative research to gain additional feedback on the schemes (paragraphs 2.17 to 2.22 and Figure 10).

16 In the long-term the number of jobs protected will depend on wider government support. Around two million (9%) workers remained furloughed in mid-September. Retail, accommodation and food services, manufacturing and construction have claimed the most financial support from the schemes to date. Many of these sectors have also utilised bounce back loans. The long-term impact of the schemes is likely to be difficult to disentangle from the effects of wider government support and the ongoing impact of COVID-19. The new JSS is intended to support short-time working between November 2020 and April 2021. Government has also announced an extension to SEISS over the period and further furlough support (expanded JSS) for businesses legally required to close due to lockdown restrictions (paragraphs 2.23 to 2.28 and Figure 11).

Managing fraud and error

17 In implementing the schemes, the Departments accepted there may be a higher risk of fraud and error than normal, in order to provide rapid financial support and protect jobs. Recognising the priority placed on speed, the Departments have tolerated greater risk than normal. Limiting the schemes only to taxpayers with current records has helped to reduce the risk of certain types of fraud significantly because applicants had to be known to HMRC and had to be paying tax. However, the aim to make payments within six working days limited HMRC’s ability to carry out pre-payment checks. For example, HMRC did not validate some data upfront or require details of the amounts claimed for every employee before making payments. It made a systematic assessment of the risks and prospects of recovery from different groups and prioritised its response for the time constraints it faced. HMRC did not have the enforcement powers to recover overpayments by the time the schemes went live. It took a calculated risk that powers would be granted and received these in July 2020 (paragraphs 3.5 to 3.9 and Figure 15).

18 There is evidence that significant levels of furlough fraud occurred, with limited controls over employers’ arrangements with employees. Employers committed furlough fraud if they claimed furlough payments but kept employees working for them against CJRS rules. HMRC’s fraud hotline has received more than 10,000 reports, mainly of furlough fraud, but it has not yet carried out survey work or random sampling to estimate the scale of the issue. Of furloughed people responding to our survey, 9% admitted to working in lockdown at the request of their employer, and against the rules of the scheme. Other surveys indicate between 7% and 34% of furloughed employees surveyed worked at the request of their employer while furloughed. HMRC concluded it would tackle fraud through whistleblowing and retrospective compliance work. However, employees would not have known if their employer was part of the government furlough scheme unless their employer had informed them. Controls such as contacting employees directly or publicising which companies claimed furlough payments were considered but rejected. HMRC concluded it would have been unrealistic to contact employees because of the large numbers involved, and that publishing a list of employers risked deterring too many legitimate claims. HMRC intends to publish the names of employers claiming the JSS scheme and to notify employees through their personal tax accounts when an employer has claimed JSS (paragraphs 3.10 to 3.21 and Figure 18).

19 The scale of total fraud and error is likely to be considerable, particularly for CJRS, but HMRC will not know the actual levels for some time. HMRC’s planning assumption was that total fraud and error could range from 5% to 10% on CJRS, which would equate to £2.0 billion to £3.9 billion based on payments made by mid-September. For the first SEISS grant, HMRC’s planning assumption was that fraud and error could range from 1% to 2%. Both these estimates were largely assumption-based rather than evidence-based. At the end of September 2020, HMRC was developing a programme of work to understand the full scale of fraud and error. It aims to refine its provisional estimates again by the end of 2020 and in spring 2021 as it undertakes more compliance work and receives more operational intelligence. HMRC does not expect to have a complete assessment of the total fraud and error it needs to tackle until the end of 2021 at the earliest. HMRC is monitoring the levels of organised criminal activity including the stealing of taxpayer identities and coercion of taxpayers to make fraudulent claims. To date, HMRC has blocked only £10 million of CJRS claims. It intends to measure its effectiveness in mitigating the risk in due course (paragraphs 3.20 to 3.28 and Figure 16).

20 HMRC’s initial assessment was that it must divert resources from tax compliance activities to tackle fraud on these schemes. HMRC estimates it could deploy around 500 staff to recover £275 million on 10,000 of the most high-risk CJRS grants awarded. While this offers a high rate of return, HMRC estimates that redeploying staff will come at a cost to tax revenue because HMRC’s tax compliance work offers even higher rates of return. In June 2020 HMRC concluded that its only option to address grant fraud and error was to redeploy existing, trained staff. It concluded it could not bring in additional staff because they would take up to 18 months to recruit and train to undertake complex compliance work, and this would be too long. In October 2020 HMRC told us that with the announcement of new schemes, and better understanding from the operation of SEISS and CJRS, it was now planning to use private contractors to supplement its compliance capacity where necessary. HMRC does not yet know the scale of fraud and error it needs to tackle to any degree of certainty, and it is not yet clear for how long its compliance activity will be affected by the COVID-19 pandemic (paragraphs 3.29 to 3.31 and Figure 19).

Conclusion on value for money

21 HM Treasury and HMRC met their objective to rapidly implement the schemes and the Departments should be commended for making these available ahead of schedule. The schemes were relatively straightforward to apply for, and payments quickly reached those who applied. Indications are that this has helped to protect jobs in the short term and the numbers of people moving from furlough arrangements back to work are encouraging. However, many other people have lost earnings and have not been able to access support. The long-term impact of the schemes will also depend on wider financial support and the ongoing impact of COVID-19.

22 A key value-for-money test for these schemes will be how far the Departments can mitigate fraud and error. The pace at which the schemes were designed and implemented meant the Departments had to accept a greater risk than normal. As such, there are likely to be considerable amounts of fraud and error, particularly on the furlough scheme. Limiting applications to existing taxpayers should have reduced the fraud risk, but HMRC could have done more to make clear to employees whether their employer was part of the furlough scheme. In future, the Departments should do more while employment support schemes are running to protect employees and counter acts of fraud. The Departments will need to ensure sufficient resources are committed to recover money where it is cost-effective to do so.

Recommendations

23 To learn from their experience in implementing the employment support schemes, and to protect taxpayer interests HM Treasury and HMRC should:

a consider how to ensure that reliable data covering as many people as possible can be used to determine eligibility so that fewer people suffering loss of income are excluded from future similar schemes;

b monitor how far employment support schemes protect jobs, recognising that the approach may need to adapt rapidly in response to how the pandemic evolves over the coming months;

c increase the emphasis on using preventative controls for tackling fraud and error in the new schemes. Where appropriate for future schemes, carry out more direct work with employees to ensure employers treat them according to scheme rules, and increase visibility of which employers use employment support schemes;

d more quickly assess the total value of error and fraud; and explore the feasibility of commencing assessment activity earlier for future schemes so that some testing is undertaken while schemes are live;

e review whether a faster programme of recruitment and training can be provided for grant compliance staff, recognising that the activity may differ to tax compliance work; and

f review how to organise HMRC’s compliance response to ensure that sufficient resources are committed to recover overpayments and fraudulent payments on both schemes where it is cost-effective to do so.

24 As the COVID-19 pandemic continues, leading to ongoing uncertainty, the Departments may need to develop longer-term plans to support businesses and jobs which will involve balancing speed of response with risks to value for money. This includes targeting support to those who need it, treating employees in accordance with the scheme rules, and reducing fraud and error. In balancing these, the Departments should:

g ensure that their consideration of options, including under the JSS and extended schemes, are sufficiently well-documented to demonstrate how risks to value for money have been considered and resultant risks are clearly understood and managed;

h specify how performance and value for money will be judged as the schemes progress, monitoring outcomes and adapting arrangements quickly if required; and

i consider how HMRC should organise its systems and capabilities to provide this targeted support, which may require different choices in digitising the tax system, more frequent filing of tax return data, better linking of customer records, and changes to customer services.

1 Comptroller and Auditor General, Investigation into the Bounce Back Loan scheme, Session 2019–2021, HC 860, National Audit Office, October 2020.

2 Some individuals fell into more than one category, meaning numbers add to more than 1.6 million.

Part One

HM Revenue & Customs’ implementation of the employment support schemes

1.1 In late March 2020 the government announced two UK-wide employment support schemes in response to the coronavirus crisis. The schemes, administered by HM Revenue & Customs (HMRC) following HM Treasury’s direction, were:

The Coronavirus Job Retention Scheme (CJRS): to provide grant payments to employers to help firms continue to keep people in employment. Employers could put workers on temporary leave and the government would pay them cash grants of 80% of employees’ salaries, up to £2,500 a month. Phase 1 (CJRS 1) of the scheme operated to the end of June 2020. From July to October 2020 a modified, second phase (CJRS 2) allowed employers to bring employees back to work part-time.

The Self-Employment Income Support Scheme (SEISS): to provide a grant payment to self-employed individuals whose business has been ‘adversely affected’ by the pandemic. The grant was intended to help support self-employed individuals with living costs, and they could continue to work, start a new trade or take up a new employment. A second SEISS grant was available to claim from 17 August 2020.

1.2 The schemes are part of a wider government response targeting businesses and individuals (Figure 1).3

The Departments implemented the schemes quickly and ahead of their schedule

1.3 Ministers asked HM Treasury and HMRC to develop schemes to protect jobs and for these to be operational very quickly. The Departments were set clear targets for each scheme:

CJRS: to build and launch a claims service before the end of April 2020, with claims being processed and paid within six working days.

SEISS: to build and launch a claims service by the beginning of June 2020, with at least 80% anticipated to claim, and claims processed and paid within six working days.

1.4 The Departments implemented both schemes ahead of schedule, with CJRS available to employers from 20 April and SEISS to the self-employed from 13 May. HMRC accelerated the original timetable for the SEISS scheme by almost two weeks, recognising the need to provide financial support to eligible taxpayers as quickly as possible. The two new digital services could be accessed from the GOV.UK website.

Developing the strategic response

1.5 Initial strategy work focused on CJRS. HMRC and HM Treasury officials worked collaboratively to develop the response under lockdown conditions, engaging regularly with senior ministers. Policy and operational staff in both Departments worked closely to ensure that policy choices were feasible, seeking to balance the need to implement support for people quickly with the need to guard against fraud.

1.6 HMRC agreed clear design principles for the schemes including that the claim process should be simple, that the data used to determine eligibility should be easy to obtain and the grant calculation straightforward. The Departments recommended that only people and businesses with an existing taxpayer record could apply for support to reduce the risk of fraud.

1.7 The Departments had little contingency planning for a pandemic and limited experience of designing schemes of this type and scale. Contingency planning for pandemics had focused on the public health response and not on the economic response. HM Treasury told us it drew instead on economic contingency planning for financial rescues, draft policy work on wage subsidy schemes and short-time working schemes, and lessons learned material provided by German counterparts.

Devising robust plans and governance

1.8 Given the compressed timeframe to design each scheme, the Departments could not follow standard processes comprehensively. In the circumstances, the Departments had insufficient time to produce the detailed documentation – such as business cases, options appraisal and detailed cost-benefit analysis – that we would normally expect to be available to support key investment decisions.4 HMRC’s Accounting Officer accepted the Department’s responsibility for delivering CJRS grants following verbal advice on the legality, propriety, deliverability and value for money of the scheme from his officials on 20 March 2020, just prior to the Chancellor’s announcement of the scheme. However, due to time constraints, HMRC’s Accounting Officer did not receive formal written advice on the legality, propriety, deliverability and value for money of the scheme until after the Chancellor’s announcement.

1.9 HMRC moved quickly to put effective governance arrangements in place, with core project teams set up to work on both schemes. It used its experience from EU Exit work and the Statutory Sick Pay Rebate scheme to inform its approach. HMRC deployed staff familiar with EU exit governance arrangements, with high levels of engagement from senior staff. HMRC appointed a senior responsible officer at director-general level and created a dedicated director-led COVID-19 response unit. There was a clear escalation route to HMRC’s senior management with its Accounting Officer involved in decision-making. HM Treasury officials worked with HMRC programme leads and attended meetings. HMRC’s Internal Audit function which provided support and assurance to the schemes noted no significant issues with the Departments’ governance approach.

Implementing the schemes

1.10 HMRC implemented a structured approach to managing and recording project progress, risks, issues and decision-making for the schemes, making use of the government’s Orange Book on risk management best practice. HMRC also consulted with other government departments familiar with good practice in administering grant programmes.

1.11 In challenging circumstances, HM Treasury and HMRC staff worked long hours, at weekends and through the Easter period to develop the schemes. HMRC made use of its existing supplier contract to build the digital systems for the schemes. The demands on the Departments’ core project teams were considerable with its IT project team reporting it completed the work in just four weeks. HMRC’s IT staff told us major IT projects normally take 18 months to 21 months to deliver, while small projects normally take between 8 months and 13 months.

1.12 HMRC developed comprehensive customer journey mapping which it tested internally and with tax agents and developed guidance for customers and staff, providing additional online training.

1.13 HMRC identified that developing the schemes at pace had caused some difficulties. For example:

Record-keeping of key documents such as process maps was not always controlled and internal reviewers found gaps in the logging of project risks, although HMRC told us these omissions were minor.

Guidance to front-line staff was sometimes issued with little notice due to the delivery timescales and HMRC identified issues with staff compliance with the guidance. Changes to guidance were not always communicated clearly, meaning staff used it inconsistently, which increased the risk of fraud and miscommunication. Some staff failed to take customers through security processes or read out key statements to customers.

The planned model for processing claims did not work as anticipated at first. HMRC planned a three-tiered approach in which certain staff would process simple claims, with more experienced staff at a second and third tier dealing with more complicated or higher risk claims. Roles and responsibilities for each tier were unclear, resulting in customer calls being unnecessarily escalated and placing pressure on upper tiers. At one point, 80% of SEISS calls were handed to a higher tier. HMRC believes that earlier involvement of front-line operations teams in the work of the project development teams would have improved implementation. It revised its three-tier model from June 2020 and told us that it became more efficient. HMRC has also since taken steps to clarify advisor roles and responsibilities.

Measuring and evaluating performance

1.14 HMRC developed performance dashboards for reporting CJRS and SEISS progress to support management decision-making, and it published statistics on the take-up of schemes. Dashboards were reported regularly to HMRC’s executive management with information on scheme take-up, claim values, project risks and ‘risk profiling’ of fraudulent claims.

1.15 HMRC achieved most of its early ‘ambition criteria’ for the schemes (Figure 2). The vast majority of payments were processed within target timeframes, meeting the key objective to get financial support to claimants quickly. HMRC was able to maintain processing performance and meet payment targets despite, in the week of 11 May 2020, receiving over 2.5 million claims for support under the two schemes.

1.16 HMRC carried out surveys of employers, employees and self-employed people to understand levels of scheme awareness and understanding, and customer experience. Most (94%) respondents to HMRC’s survey of just over 2,000 employers who had applied to the scheme said they were very or fairly satisfied with the time taken to receive their money and only 1% described their experience of applying for CJRS funds as very poor. HMRC’s weekly customer satisfaction data for SEISS up to August 2020 found that 95% of claimants were satisfied or very satisfied with their experience, with only 2% being very dissatisfied.

Lessons learned

1.17 HMRC undertook lessons learned exercises for both schemes in late spring and used findings to inform its ongoing delivery. Figure 3 uses our own analysis of learning from previous crisis responses to assess the Departments’ approach to designing and implementing these schemes. We saw particular strengths in the following areas:

close working between policy development and operational experts, enabling better understanding of design parameters and inclusion of operational aspects of policy in plans from the outset;

clear governance structures, drawing on proven models;

detailed control frameworks, used to assess and prioritise controls through the design and implementation of the schemes (albeit with some gaps);

detailed project management plans, which had milestones specified to the hour at critical points; and

early mapping of customer journeys and testing of the approach through process walkthroughs and beta-testing with customers.

1.18 HMRC is commissioning further research on its delivery of the schemes and expects to use these results to inform its design of future services. The Departments have not said whether they will commission an economic evaluation of the additional impact of the schemes. HM Treasury told us that it is conducting its own lessons learned exercises to identify how such employment support schemes could be delivered at speed in the future.

Most other countries had existing employment support schemes, and were able to implement support more quickly

1.19 The Departments looked at the experience in other countries to inform the design of the schemes. The experience of other countries can also be used to assess how the schemes could have been implemented more quickly, and the types of support arrangements that enable a more rapid response.

1.20 In developing CJRS, the Departments referred to responses in other countries in their discussions with ministers. They looked at several schemes including Germany’s short-time work scheme, schemes in France, Canada, Denmark, Sweden, New Zealand and Ireland but noted their direct application to the UK might be limited given the different labour market and welfare contexts.

1.21 Many countries including Germany and France already had short-time work schemes in place that could be built on in response to the pandemic. These schemes allowed firms to temporarily furlough or reduce the hours of staff at times of economic difficulty, with governments providing income support for employees when not working. Based on correspondence with 20 international audit institutions and other supporting evidence, we looked at how quickly a sample of nine OECD countries with economies of comparable size to the UK had implemented their job retention schemes (Figure 4). We found that other countries implemented employment support schemes more quickly, but most of these already had an existing scheme in place. Eight of the nine had schemes they could adapt, while six reported setting up new schemes.

1.22 Our analysis suggested that the UK had relatively few eligibility criteria for CJRS compared with other countries. Most countries required employers to demonstrate a specified fall in turnover, and many required employers to top-up wages or prohibited redundancies while the scheme was active. The Netherlands prohibited executive bonuses, payment of dividends and repurchase of own shares. The UK CJRS scheme did not make any such requirements of employers (Appendix Three).

1.23 On 24 September 2020 the Chancellor announced a Winter Economy Plan which included a six-month Jobs Support Scheme (JSS), starting in November, to replace the CJRS scheme. The JSS scheme aims to provide help for short-time working to support ‘viable jobs’. To qualify, employees must be working at least one-third of their usual hours. The government will pay one-third of hours not worked up to a cap, with the employer also contributing one-third. This will mean employees earn a minimum of 77% of their normal wages, where the government contribution has not been capped. The level of grant will be calculated based on employee’s contracted salary, capped at £697.92 per month. The JSS will be open to businesses across the UK even if they have not previously used the furlough scheme.

1.24 On 9 October 2020, the government announced an expansion to the JSS to provide extra support to businesses legally required to close as a direct result of coronavirus restrictions set by one or more of the governments in the UK. Expanded JSS is broadly akin to the original CJRS with employers expected to fully furlough employees. Employers are not required to contribute to their employees’ wages apart from national insurance and minimum pension contributions, where applicable. The government will pay up to two-thirds of employee wages, capped at £2,100 per month.

1.25 In September, the government also announced that it would provide a further taxable grant to self-employed people currently eligible for SEISS who continue to actively trade and face reduced demand due to coronavirus. The initial lump sum will cover three months’ worth of profits for the period from November to the end of January 2021. The grant is worth 20% of average monthly profits, up to a total of £1,875. An additional second grant, which may be adjusted to respond to changing circumstances, will be available for self-employed individuals to cover the period from February 2021 to the end of April 2021. Appendix Four sets out the different levels of support for these schemes.

3 Our May 2020 report on government’s response to COVID-19 gives a fuller description of its crisis response. See Comptroller and Auditor General, Overview of the UK government’s response to the COVID-19 pandemic, Session 2019-21, HC 366, National Audit Office, May 2020.

4 See HM Treasury, Guide to Developing the Business Case, 2018 at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/749086/Project_Business_Case_2018.pdf

Part Two

Beneficiaries of the employment support schemes

2.1 This part considers how far the employment support schemes have supported businesses and people. It examines:

how the schemes aimed to support business and individual taxpayers;

why some existing taxpayers were ineligible for the schemes;

the cost and impact of the schemes thus far;

the extent to which the schemes have supported different demographic groups, regions and sectors; and

the number remaining furloughed as the current schemes wind-down.

How the schemes aimed to support business and individual taxpayers

2.2 On 20 March, the Chancellor announced a package of economic support aimed at protecting jobs through the lockdown period, including the Coronavirus Job Retention Scheme (CJRS). This was followed on 26 March by his announcement of the Self-Employment Income Support Scheme (SEISS). The broad aim of the employment support schemes was to provide security for employers to retain employees and to protect the self-employed so that there would not be a large spike in unemployment and to give the UK the best chance of a rapid economic recovery.

2.3 Figure 5 summarises the scope of the schemes. For the first phase of CJRS (CJRS 1), furloughed employees were not allowed to work, to avoid government supporting those employers not adversely affected by COVID-19. For CJRS 2, from July 2020, these aims shifted to allow furloughed workers back on a part-time basis, encouraging firms to increase production and, where necessary, make redundancies if jobs had become unsustainable. Employers not already in the CJRS 1 scheme were not allowed to claim CJRS grants during this second phase.

2.4 The SEISS scheme was open to the self-employed and members of a partnership who claimed to have been ‘adversely affected’ by coronavirus and:

had submitted their Self Assessment tax return on or before 31 January 2020 for the 2018-19 tax year;5

continued to trade in 2019-20; and

intended to trade in 2020-21.

2.5 Those claiming the second grant had to confirm that their business had been adversely affected on or after 14 July 2020. Unlike the first phase of CJRS, SEISS recipients were allowed to continue working.

A combination of constraints in the tax system and policy decisions restricted eligibility for the schemes

2.6 Combined, the employment support schemes had supported at least 12.2 million jobs by 20 September 2020. HM Revenue & Customs’ (HMRC’s) data show that 1.2 million employers – 61% of those eligible – claimed a grant under CJRS. By 20 September 2020, CJRS had supported 9.6 million jobs. Of 3.4 million people potentially eligible for the SEISS scheme, 2.6 million (77%) claimed the first grant and 2.2 million had applied for the second grant by 20 September on the basis that the pandemic adversely affected their self-employed incomes.

2.7 HMRC has estimated that 1.6 million people were ineligible for SEISS because of the decisions ministers took to restrict support to people whose main income came from self-employment and who earned up to £50,000.6 However, other groups of people were rendered ineligible for support because the way the tax system has been set up limited the data HMRC could use to help it guard against fraud (Figure 6). Third-party estimates suggest a further 1.3 million people were excluded, although some may not have been adversely affected by the pandemic.

2.8 To manage the risk of fraud, access to both schemes was restricted to taxpayers with current tax records, which meant that people who were between jobs or had recently become self-employed were not eligible. HMRC extended the cut-off date for CJRS to people being on an employer’s payroll from 28 February to 19 March 2020 – the day before the details of the scheme were publicly announced. HMRC estimates this benefitted at least 0.2 million extra employees.

2.9 For SEISS, HMRC used self-assessment records up to and including the 2018-19 tax year, which meant that claims from around 0.2 million newly self-employed people were not allowed. Around 47,000 self-employed people who had not submitted their 2018-19 Self Assessment tax return on time were allowed to claim provided they submitted their return by 23 April 2020. However, people who had already submitted their Self Assessment returns were not allowed to amend them in order to increase their SEISS payment.7 In addition, a significant number of limited company directors who were mainly remunerated through company dividends were excluded because this is not treated as earnings by the tax system and tax returns do not disaggregate these data from investment dividends. Very small (micro) businesses and private limited companies have taken up the majority of business bounce back loans, suggesting many company directors have been able to access alternative government support on behalf of their companies, albeit in the form of repayable loans rather than income.8

2.10 The number of self-employed people excluded could have been greater had lockdown occurred further from the annual tax return deadline. Lockdown occurred just two months after the deadline to submit a Self Assessment return, which meant the time period affecting the newly self-employed was relatively small. HMRC’s Making Tax Digital programme should enable more frequent (quarterly) reporting of income and expenditure. However, modernising the tax system is an extremely complex undertaking. HMRC was originally due to implement the programme by April 2019 but it is now scheduled to be in place from April 2023 for the self-employed.

2.11 Given the speed of their initial response to the crisis, the Departments were not able to fully work through the implications of their design decisions on different groups of taxpayers. Subsequently, the Departments adjusted processes and eligibility criteria, including:

updating the online ‘eligibility checker’ – used by the self-employed to determine whether they would be eligible for SEISS. The details of some people who were late in filing tax returns were not available when the tool went live, and the checker concluded, wrongly, that some people were ineligible;

allowing people on parental leave and around 200 military reservists to apply for both SEISS grants, even if they had not submitted a tax return in 2018-19. HMRC estimated that 10,000 people on parental leave may potentially be newly entitled by this adjustment but by late September only around 500 had applied; and

HMRC manually entered the trading profits of 800 self-employed people to avoid a known technical issue preventing submission of their tax returns.

The cost and impact of the schemes

2.12 HMRC forecasts total grant spending for the CJRS and SEISS schemes to reach £69.7 billion by the end of October 2020. It paid a total of £39.3 billion in CJRS grants to 20 September 2020 and the Office for Budget Responsibility (OBR) expects this to reach £54.5 billion by the end of the scheme.9 By 20 September 2020, SEISS claims had reached £13.4 billion. OBR forecasts total claims for the first two SEISS grants will reach £15.2 billion.

2.13 HMRC expects to spend around £98 million administering the schemes up to March 2021. The CJRS scheme will cost around £53 million to administer, and the SEISS scheme £45 million.

2.14 Data suggest the CJRS scheme has been successful in helping to protect jobs in the short term:

The number of people in employment was broadly stable between April and August 2020 (Figure 7).

The number of redundancies between April and June 2020 was far lower than in the last global financial crisis: around 134,000 people were made redundant between April and June 2020 compared with 311,000 people made redundant between February and April 2009.

The number of furloughed jobs under the scheme has fallen steadily from a peak of 8.9 million in May 2020 to around five million by the end of July, while unemployment levels remained broadly stable at around 4% of the workforce. The absence of a significant deterioration in employment up to the end of July suggests that many furloughed employees returned to work (Figures 7 and Figure 8). The Office for National Statistics (ONS) data also show that the furlough rate had fallen from around 30% of the workforce of UK businesses in May 2020 to 9%, or around two million employees, by mid-September.10

2.15 However, a 0.5 million reduction in the number of people on employer payrolls in HMRC’s Real Time Information tax reporting system between March and April 2020 does suggest that some people were not covered by the support provided by these schemes at the outset. Between March and May 2020, the number of people not in employment on Universal Credit also increased by nearly 1.5 million. We surveyed employees to better understand their experiences during the first months of the CJRS scheme (see Appendix Two on the limits on the quota sampling methodology). More than half of respondents to our questions said that their main job had been impacted by COVID-19, with more than one-quarter saying they had been placed on the furlough scheme and 4% saying that they had been made redundant between March and June (Figure 9).11 Our survey also suggests that the initial requirement that furloughed employees should not work did help to keep costs down – around one-fifth of respondents were not placed on the furlough scheme, despite their hours of work or pay being reduced, presumably so they could keep working.

2.16 It is likely that the schemes will have supported some firms which would have otherwise failed, even without the pandemic. Data from the Insolvency Service shows that company insolvencies fell by around one-third between April and June 2020, compared with the previous year.12 The long-term impact of the schemes to protect jobs is unlikely to be known for some time, as firms struggle with the ongoing impact from the COVID-19 pandemic.

HMRC is commissioning further research to better understand take-up of the schemes by different groups

2.17 HM Treasury considered the equality implications of the schemes as part of early work on their development. For CJRS, it noted that employers could discriminate between workers but concluded that furloughed workers would retain their employment rights. It also highlighted a risk that some women moving on to maternity leave could be affected if their reduced furloughed earnings were used in the calculation of maternity pay.

2.18 For SEISS, HM Treasury recognised that some young people might be disadvantaged by the requirement for self-employed people to have traded in the 2018-19 tax year. It also noted that people of Pakistani or Bangladeshi heritage are more likely to be self-employed than the general population.

2.19 HMRC’s further analysis to support its communication strategy showed that one-third of self-employed workers had a Black, Asian or minority ethnic background, with almost half based in London. HMRC developed a range of communication and engagement plans for the schemes and worked with ethnic minority and faith-based organisations to publicise the schemes.

2.20 For SEISS, HMRC has no data to monitor rates of take-up among different ethnic groups. Other than age and gender, protected characteristics’ data are not needed to calculate income tax. HMRC has also monitored take-up of SEISS for “customers who may need extra support to claim” who it identified from people using its ‘extra support’ service over the past 18 months. It also monitored potential claim rates among the ‘digitally excluded’ using data on Self Assessment ‘paper filers’.

2.21 HMRC is planning further survey work to understand customer experience of the schemes across different claimant groups but most results from this work will not be available until after the current schemes are closed. HMRC also intends to survey employers eligible for CJRS who did not use the scheme. No equivalent work is planned for those who did not claim SEISS.

2.22 HMRC has published extensive data on take-up for both schemes (Figure 10). This data shows that a greater proportion of younger workers were furloughed compared with older workers, and that a greater proportion of men were furloughed overall, but this has reduced over time and by September there was little difference between men and women. For SEISS, a greater proportion of potentially eligible men took up the grant than did women. ONS data show that younger people were also far more likely to lose their jobs; there was a 5.9% decrease in employment levels of people aged 16–24 in June to August 2020 against the previous quarter, compared with a 0.5% decrease in overall employment levels.

2.23 HMRC’s data also include sectoral and regional information which enables an understanding of who has been using the schemes and in which locations. These data show that a greater proportion of employees from smaller employers were furloughed. Business sectors in retail, construction, accommodation and food services, manufacturing and transportation drew the largest amounts of financial support. There is close alignment between the sectors making greatest use of CJRS, SEISS and the Bounce Back Loan Scheme (Figure 11).

2.24 Figure 12 and 13 show the rates at which grants have been claimed, by parliamentary constituency. CJRS take-up has been high in areas popular with tourists and communities close to major south-east airports. SEISS take-up has been highest in Northern Ireland, parts of Wales, areas around Glasgow, parts of northern England and the West Midlands, and North and East London. We found that areas that had periods of local restrictions since the lifting of the national lockdown had only a marginally greater proportion of self-employed people making claims under the first phase of the scheme.

Many people remain furloughed as the Departments’ support moves to a new phase

2.25 Both schemes are due to end in their current form in October 2020. CJRS will be replaced by the Job Support Scheme (JSS). For the self-employed there is a modified SEISS scheme (see paragraphs 1.23 to 1.25 and Appendix Four). It is not yet certain how employers will respond to the JSS. The JSS scheme is intended to provide help for short-time working with government providing less support and employers expected to pay more. The expanded JSS is available for firms legally required to close. This will cover two-thirds of the wages of furloughed employees, without requiring an employer contribution.

2.26 With around two million people still furloughed at September 2020, there is a significant possibility of large-scale redundancies. Before the government’s recent announcement of its Winter Economy Plan and the JSS,13 HM Treasury published a summary of independent UK economy forecasts in September14 which showed unemployment ranging from 6.2% to 12.7% (average 8.3%, around three million) by the final quarter of 2020. Analysis by the Institute for Employment Studies – published after the government’s Winter Economy Plan and expanded JSS – estimated around 600,000 redundancies in the final two quarters of 2020, based on employer redundancy notifications to employees. The latest unemployment data, published on 13 October, reported unemployment had reached 4.5% of the labour force in the three months to August 2020, an increase from 4.1% in the previous three months.

2.27 The Departments will need to consider how the current schemes have operated to date, who has benefited and what this implies for the modified schemes going forward. For example, it is not yet clear how the government’s revised schemes will address the issue that some people will continue to be excluded from support based on the tax information held by HMRC. The expanded JSS scheme adds further administrative complexity with eligibility criteria based on location and lockdown restrictions in place at particular points in time.

2.28 It will be difficult to disentangle the specific impact of the existing schemes from other forms of government support (including the JSS and Bounce Back loans), as well as the ongoing impact of COVID-19. Recent analysis gives more insights into the range of effects of the schemes, finding that the average SEISS grant came close to fully compensating recipients for the effects of the crisis. However, furloughed employees under CJRS saw an average 13% decline in net income and new claimants of Universal Credit a 40% decline.15 Stakeholders, including the Treasury Select Committee, have suggested careful consideration should be given to extending employment support on a targeted basis, recognising that some sectors and regions may have been more acutely affected by COVID-19 than others. The Confederation of British Industry and the Trades Union Congress have both supported the measures announced in the Winter Economy Plan and believe the JSS will help to support some people to stay in work. The Resolution Foundation and Institute for Employment Studies have, however, questioned the extent to which the original JSS will prevent significant job losses over the coming months.

5 A self-employed person or partnership could be adversely affected by coronavirus for a variety of reasons such as illness or suspended trading, but no minimum level was specified. HMRC later extended the Self Assessment tax return deadline to 23 April 2020 – see paragraph 2.9.

6 £50,000 is the Higher rate income tax threshold and the threshold at which Child Benefit tapers take effect.

7 Taxpayers could amend their returns for the calculation of tax due but amendments were disregarded for grant calculations to counter the risk of fraud.

8 Comptroller and Auditor General, Investigation into the Bounce Back Loan Scheme, Session 2019-2021, HC 860, National Audit Office, October 2020.

9 Grants paid under CJRS and SEISS are taxable so the net cost to the Exchequer will be lower. Table 3.4 in OBR’s July 2020 central estimate shows tax receipts of £5.2 billion for CJRS: Office for Budget Responsibility, Fiscal sustainability report, July 2020, p58, available at: https://obr.uk/fsr/fiscal-sustainability-report-july-2020

10 Office for National Statistics, Business impact of Coronavirus (COVID-19) Survey, Waves 6 and 14, June and October 2020, available at: www.ons.gov.uk/economy/economicoutputandproductivity/output/datasets/businessimpactofcovid19surveybicsresults. Based on businesses that had not permanently stopped trading. This survey source is different from HMRC’s own data on CJRS scheme take-up.

11 Based on 4,498 responses. We asked our survey questions as part of Ipsos MORI’s telephone and online omnibus surveys. The quota sampling methodology used and the limits of the approach in terms of how generalisable the results are to the wider population are set out in Appendix Two.

12 Some of this reduction will likely be because of reduced operational running of courts, temporary restrictions placed on the use of statutory demands and certain winding-up petitions during this time.

13 HM Treasury, Policy Paper – Winter Economy Plan 2020, CP 297, September 2020, available at: www.gov.uk/government/publications/winter-economy-plan/winter-economy-plan

14 HM Treasury, Forecasts for the UK Economy: September, September 2020, available at: www.gov.uk/government/statistics/forecasts-for-the-uk-economy-september-2020

15 I Delestre et al, Income protection policy during COVID-19: evidence from bank account data, Briefing Note, 10 September 2020, available at: www.ifs.org.uk/publications/15002

Part Three

Fraud and error affecting the employment support schemes

3.1 The Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS) are both grant schemes administered by HM Revenue & Customs (HMRC). Inevitably grant schemes are at risk of fraud and error:

Fraud occurs where the claimant (the employer for CJRS, the self-employed individual for SEISS) deliberately sets out to misrepresent their circumstances to get money to which they are not entitled.

Error occurs where the claimant inadvertently receives the wrong amount due to incorrect information being provided, but with no deliberate intent to mislead, or incorrectly calculate the award.

3.2 This part of the report considers HMRC’s:

overall approach to compliance, including the control environment and its tolerance of risk;

management of the fraud and error risks;

understanding of the scale of fraud and error; and

plans for recovering grant overpayments.

HMRC’s compliance approach

The control environment

3.3 HMRC has a long-standing approach to tackling non-compliance. In administering the tax system and paying out tax credits, HMRC considers “the best way to tackle non-compliance is to prevent it happening in the first place, while cracking down on the minority who do break the rules”.

3.4 In designing the schemes, HMRC recognised that it would need to make certain trade-offs in its normal approach of preventing as much fraud and error as possible and the need to ensure grants reached claimants quickly. HMRC drew up longlists of potential controls for both schemes. In total it identified 42 potential controls for CJRS, of which 24 were implemented by the go-live date and 57 for SEISS, of which 38 were delivered by the end of April. HMRC identified certain controls as critical to delivery and implemented all of these. It did not implement all possible controls because it viewed them either as unfeasible to deliver within the time available or not sufficiently effective. This was particularly the case for CJRS, which had to be implemented more quickly than SEISS (Figure 14). HMRC’s COVID-19 compliance approach prioritised developing pre-payment checks to prevent risk of organised criminal attacks on the schemes over other types of risk such as opportunistic fraud, where there is a greater likelihood it can recover overpayments retrospectively.

3.5 HMRC has maintained strong oversight of its control framework for both schemes, which sets out in detail what all the controls do, the stage of the claims process they operate in and the risks they were seeking to mitigate against (Figure 15).

HMRC’s assessment of risk

3.6 HMRC conducted a detailed initial risk assessment on both schemes to establish the key fraud and error risks. For example, HMRC was almost certain that organised criminals would target the system for weaknesses and viewed the likelihood of opportunistic fraud, where claimants exploit the rules of the scheme to their own advantage, as being very likely (Figure 16). As such, HMRC recommended limiting the schemes only to taxpayers with current records, a move that reduced the risk of fraud considerably because applicants had to be known to HMRC at the time the schemes were announced.

3.7 HMRC has assessed that the risk of fraud and error is greater for the CJRS scheme than for SEISS as it was able to put in place more preventative controls for SEISS (Figure 14). For SEISS, Self Assessment taxpayers were invited to apply, rather than for CJRS where taxpayers could make applications themselves. It also calculated the SEISS grant using existing tax return data. This reduced the scope for individuals to either erroneously or deliberately misstate their incomes to increase their claim award.

3.8 Under the CJRS scheme, employers were responsible for informing employees about whether they were being furloughed under the government scheme and for making payments to them. Employers retained the responsibility for calculating claims. The scheme allowed a degree of tolerance around the amounts employers applied for, up to a maximum of £2,500 a month per employee. HMRC did not ask small employers to state how much was being claimed for each employee because it concluded it was not feasible to build this into the new system in the time available. HMRC considered validating claim amounts for employees but rejected this because the range of variations seen in people’s pay (for example, from promotions or performance-related pay) would have introduced too much complexity. HMRC’s internal audit team warned before the scheme went live that checks on amounts claimed per employee were critical to effective and efficient compliance.

Tolerance of risk

3.9 In order to get money to claimants quickly HMRC accepted some factors would contribute to significant fraud and error risks. These factors included:

reducing the scope for preventative controls. HMRC gave itself a maximum of three days to validate CJRS and SEISS claims so it could make payments as quickly as possible. This is much faster than for Tax Credits and Child Benefit, where the target for both is 22 days;

HMRC not initially having the powers to undertake compliance work for the grant schemes, as with tax investigations, and it could only investigate cases where it suspected criminal intent. This delayed its ability to commence compliance work until the 2020 Finance Act passed into law in July;

processing large volumes of claims quickly, HMRC needed to prioritise preventative checks for the most high-risk cases. This meant concentrating on suspected cases of organised crime, where the potential to recover money is normally much more difficult than for opportunistic fraud committed by known taxpayers. HMRC’s decision to send out invitations for SEISS over a four-day period further narrowed its window to perform preventative checks. The invitations to apply over a four-day period resulted in four times as many SEISS claims in the first week compared with CJRS; and

HMRC concluding that it had limited control of the relationship between employers and employees. It recognised there were risks that employers claim furlough money while continuing to get their employees to work but decided that it would need to tackle this risk in post-payment checks. We consider HMRC’s management of furlough fraud in paragraphs 3.11 to 3.19.

How HMRC has managed risks

3.10 We looked in more detail at three key risks which HMRC viewed as almost certain or highly likely. We considered: how HMRC assessed the risk; the mitigation controls it put in place; and the extent to which these controls operated effectively:

1 Employers claiming money while their furloughed employees continue to work.

2 Self-employed individuals inflating their claims in late Self Assessment returns.

3 Organised criminals hijacking agents’ details to submit fraudulent claims.

1. Working while furloughed

3.11 Under CJRS an employer commits ‘furlough fraud’ if they claim furlough payments for an employee but continued to require them to work (in any capacity under the first phase of the scheme (CJRS 1), or on a full-time basis under the second phase of the scheme (CJRS 2)). Other forms of furlough fraud include employers falsely inflating the amount of grants they claim or failing to pass on the full amount of furlough payments due to their employees.16

3.12 HMRC recognised that there was a high risk that employers would exploit the initial CJRS rules and continue to get their employees to work for them while claiming support. It informed the Chancellor it could not establish strong preventative controls. The only specific controls in place for the risk were an honesty declaration in the online form, whistleblowing routes, other forms of intelligence and retrospective investigation. HMRC set up an online fraud reporting form in addition to its telephone hotline. The telephone hotline was not available for the duration of CJRS 1 because home-working restrictions meant staff could not take calls in a secure environment.

3.13 HMRC ruled out further checks which could have helped to mitigate the specific risk of furlough fraud. It considered that pre-payment checks were impractical in the timeframe. The potential to contact furloughed employees retrospectively to check whether they were working was considered but ruled out on the basis it would be too resource-intensive and require resources to be diverted away from helping employers make claims.

3.14 Employees did not know if their employer was part of the government furlough scheme unless their employer informed them. HMRC ruled out publishing the details of every company claiming furlough payments, which might have alerted some employees that their employer was acting fraudulently. HMRC concluded it would have been unrealistic to contact employees given the large numbers of recipients of the furlough scheme. It was also concerned that naming companies could deter too many legitimate claimants and be detrimental to the primary policy objective to get support to those who needed it. HMRC believed it had comprehensive and robust controls to mitigate the risk of fraud.

3.15 HMRC has announced additional controls for the Job Support Scheme (JSS) to deter fraud and to prompt employees to disclose fraud. It intends to publish the names of employers who have used the scheme and it will use personal tax accounts to inform employees that their employer has claimed JSS.

3.16 Up to 14 August, employees reported 8,600 potential fraud abuses through the online form, with 8,100 of these relating to CJRS. The telephone hotline received a further 1,600 reports, bringing total reported cases to more than 10,000.17 The Department’s experience, however, is that whistleblowing is only likely to identify 1% to 3% of fraud cases.

3.17 HMRC has investigated around one-quarter of CJRS fraud allegations reported online. Of those investigated, the majority of allegations relate to employers asking employees to work while furloughed (Figure 17). In around 8% of cases, the employer has admitted some form of error. Only one employer has accepted that they deliberately falsified their claim. In the remaining 92% of cases, the employer has either refused to engage with HMRC to date or denied any wrongdoing. HMRC continues to pursue these cases. HMRC has considered naming employers who are subsequently found to have committed fraud. Under its compliance powers received in July 2020 it can now do so but is yet to exercise these powers.

3.18 Our survey looked at the possible extent of employees working while on furlough (for full details of the survey see Appendix Two). This found that 9% of survey respondents who reported being furloughed had done some work at the request of their employer.18 An additional 6% reported that they had chosen to do some work despite not being asked to by their employer.19 In addition, we also found that a further 4% of respondents to our survey who had not worked while furloughed said that their employer had paid them less than 80% of their pay, the minimum amount under CJRS.20

3.19 Surveys by other organisations have different results, with the overall percentage of furloughed employees working at the request of their employer ranging from 7% to 34% (see Figure 18). Different sampling methodologies, question framings and time periods surveyed are likely to account for some of this variation. The survey commissioned by the National Audit Office covers CJRS 1 while the other surveys covered narrower periods in time. HMRC has not carried out its own survey of furlough fraud but it was considering this option in September 2020, when we were finalising our fieldwork.

2. Late Self Assessment returns

3.20 SEISS was announced less than two months after the Self Assessment deadline meaning that many taxpayers had not yet filed their returns or still intended to submit amendments. HMRC identified significant risks for taxpayers to inflate the value of their returns in order to obtain larger grants under the SEISS scheme, although this would also have increased their future tax liability. To mitigate this risk it:

did not allow amendments to already-filed returns to be included in calculating the grant because it assessed the fraud risk was too high. Any amendments to filed Self Assessment tax returns after SEISS was announced on 26 March 2020 were disregarded in calculating an individual’s award. An individual may have had a legitimate reason for making such an amendment but HMRC was concerned about the potential for manipulation. Subsequent analysis of amended returns suggests HMRC’s concerns were well founded; taxpayers filed 7,000 amendments the day after the policy was announced with 1,200 of these seeking to increase their trading income by an average of £7,000; and

permitted late returns but sought to perform additional ID verification checks on these before receiving the SEISS claims. Between 26 March and 23 April 2020, 64,000 late returns were filed by self-employed individuals, with 47,000 of these deemed potentially eligible for the SEISS grant. HMRC performed ID verification checks on around 15% (7,000) of these high-risk late returns. Of those 7,000 returns, just over 40% failed these verification checks. Of those that passed the verification checks, 11% were flagged for post-payment compliance checks. While HMRC detected high levels of risk in the sample it checked, it did not carry out additional checks on the other 85% of late returns, instead relying on its standard risk rules applied to all SEISS claims. HMRC told us those standard risk rules were updated to recognise the fact that SEISS claims based on late returns should be viewed as high risk. However, this only allowed HMRC 72 hours to decide whether to accept or reject the claim.

3. Hijacked claims by organised crime

3.21 Organised criminals could exploit the schemes by stealing the identities of legitimate taxpayers or coercing them to make fraudulent claims. HMRC identified a risk that if agent details were stolen, fraudsters would potentially be able to make fraudulent claims on behalf of large numbers of employers or individuals. Agents or third parties submitted more than half (56%) of Self Assessment returns in 2018-19. HMRC research suggests around 50% of CJRS claims were made through agents.

3.22 Given the timescales for implementing SEISS, HMRC concluded it could not develop a claims service for agents that would also mitigate the risk of exploitation by organised crime. It therefore focused on developing a system that would be easy for customers to use directly and said it would not accept applications for SEISS from agents. It did not operate the same restriction for CJRS.

For SEISS, HMRC stipulated that self-employed people must make an application themselves. It monitored activity and prevented some large-scale attempts to attack the system. Over a single weekend in May 2020, HMRC blocked around 87,000 claims worth £242 million due to suspicious activity. It did not have the capacity to assess all these claims within the three-day period and acted prudently to halt the applications. It recognised it could have denied some legitimate claims and subsequently contacted nearly all of these claimants to encourage them to claim themselves rather than through agents.

HMRC did not take the same approach on the CJRS, allowing agents to continue to make applications on behalf of employers, even where the employer had not explicitly consented to this. It did alert businesses through their online business tax accounts that claims had been made in their name, but not until August 2020. This meant businesses may not have been aware that their details had been hijacked and used to make a claim during the first months of the scheme. HMRC also worked proactively to shut down a number of online scams that had been circulating that seek to trick individuals into passing on personal details.

HMRC has detected relatively few CJRS claims where credentials may have been hijacked. It has rejected 224 CJRS claims to date worth £10 million. However, hijacked cases may have gone undetected. Until HMRC has carried out enquires into cases it cannot be sure it has not failed to prevent more attacks. HMRC continues to monitor organised criminal attacks but has yet to assess its effectiveness in mitigating the risk.

Understanding the scale of fraud and error

3.23 HMRC is unlikely to know the total level of fraud and error in each of the schemes for some time. Its planning assumptions were based on comparisons to Tax Credits, Universal Credit and Income Tax Self Assessment repayment fraud. Based on these it initially estimated potential fraud and error levels of 5% to 9% in CJRS and 1% in SEISS. At the time the assessments were made, HMRC’s internal audit function concluded that the comparators were not sufficiently reliable to make conclusive assessments about the scale of the risk.

3.24 HMRC’s most recent analysis predicts similar rates of 5% to 10% for CJRS and 1% to 2% for SEISS (see Figure 16). This would equate to around £2.0 billion to £3.9 billion on the CJRS and £130 million to £270 million on the SEISS based on spend to date. HMRC told us that while these estimates remained assumption-based, they were informed by expert opinion and it was continuing to update the estimates with information collected during the schemes. HMRC believes that the CJRS was less susceptible to organised crime than it initially forecast but also acknowledges that the greater flexibility in the rules that allowed part-time working from 1 July increased the risk of genuine error and more opportunistic fraud.

3.25 Survey data (see Figure 18) indicates that the true level of fraud and error in the CJRS could be considerable. Surveys suggest that furlough fraud due to employees working at the request of their employer could be in the range of 7% to 34%. We also found 4% of respondents to our survey who had not worked while furloughed said that their employer had paid them less than 80% of their pay, the minimum amount under CJRS (see paragraph 3.18).21 Making a precise estimate is complicated because part-time working was allowed in CJRS 2, and the work employees carried out in CJRS 1 may have been on a part-time basis.22 HMRC will need to consider whether the spirit of the rules have been broken and weigh this against the need to treat those who followed the rules fairly. Of those respondents to our survey who had said that they had worked while furloughed at the employer’s request, almost two-thirds said they did so for less than half of their usual hours.23

3.26 HMRC intends to produce a final statistical estimate on both schemes for total levels of error and fraud. It aims to refine its provisional estimates again by the end of 2020 and in spring 2021 as it undertakes more compliance work and receives more operational intelligence. HMRC is monitoring the level of organised criminal attack. It does not expect to produce final estimates until the end of 2021 at the earliest. It intends to use similar methodologies to those used in estimating the tax gap. We recently reported on HMRC’s assessment of the tax gap, noting that it is a comprehensive assessment but with some inevitable uncertainty attached.24 There will also be parallels with the work that HMRC does in measuring error and fraud in Tax Credits and Child Benefit, as well as the work the Department for Work & Pensions does in measuring fraud and error in the benefits system.

3.27 HMRC has made some errors resulting in overpayments of grants worth £14 million. In the first tranche of SEISS payments, 26,000 were miscalculated due to not all tax return data being considered. Around 13,000 of these led to overpayments worth £12 million, equivalent to less than 1% of all SEISS grants. On CJRS, around £3 million was overpaid on 330 cases that were manually processed by HMRC staff. There are also likely to be cases where employers overclaimed CJRS because the HMRC online calculation tool was not accurate. HMRC made changes to the tool in May to rectify identified problems. HMRC does not intend to recover these overpayments despite having the legal powers to do so.

3.28 Up to 13 October, companies had paid back £278 million in grant money claimed under the CJRS. The amounts were claimed in error or were amounts that the company subsequently decided they did not need as they adapted to the pandemic.

Post-payment compliance

3.29 HMRC has set out how it intends to deal with potential non-compliance post-payment. For CJRS, it has set up an approach which gives it multiple opportunities to recover overpayments (Figure 19). HMRC has already made three arrests in relation to suspected CJRS fraud. For SEISS, work commenced in October 2020 targeting the highest risk areas using a similar campaign approach to CJRS. Further SEISS risks will be considered as part of the compliance checks on the 2020-21 Self Assessment tax returns that will be due by January 2022.

3.30 HMRC plans to redeploy 500 full-time equivalent (FTE) staff to enable post-payment compliance work. Its assessment in June 2020 suggested that this work would bring in around £275 million. The work offers a positive return on investment (we estimate around 9:1) but HMRC estimates it would come with an opportunity cost to tax revenue of £100 million to £200 million as it would need to redeploy staff from tax compliance. HMRC does not believe it can recruit additional staff because there is an 18-month time-lag between starting recruitment and getting staff fully trained to start work. In June 2020 it considered outsourcing but concluded at that stage that there were no existing commercial mechanisms to recruit at the speed it needed. It was also concerned about the challenges experienced through outsourcing HMRC functions in the past (such as using Concentrix to administer Tax Credits’ claims) and that this would not be worthwhile given furlough arrangements may not be extended, making this a one-off. In October 2020 HMRC informed us that with the announcement of new employment support schemes, and informed by learning from the operation of SEISS and CJRS, it was now planning to use private contractors to supplement its compliance capacity where necessary.

3.31 Until it has a robust estimate of the total levels of error and fraud, HMRC cannot reasonably know how much resource it should commit to recovery. Its provisional assessment of £275 million is based on investigating around 30% (10,000 claims) of the highest-risk CJRS cases. If total levels of error and fraud prove to be higher than initially forecast the work may take some time to complete. HMRC will also need to consider the long-term impact of the pandemic and the risks this poses to tax revenue and the ability of taxpayers to repay grants in the short-term.

16 Under SEISS, self-employed individuals were free to continue trading while claiming the grant providing that they stated that their business had been ‘adversely affected’ by COVID-19.

17 A very small number of these relate to potential fraud in the Statutory Sick Pay Rebate (SSPR) that HMRC administers. SSPR was the reason for 15 online notifications.

18 Based on 1,178 survey responses. We asked our survey questions as part of Ipsos MORI’s telephone omnibus and online surveys. The quota sampling methodology used and the limits of the approach in terms of how generalisable the results are to the population of furloughed workers are set out in Appendix Two.

19 Based on 1,178 survey responses.

20 Based on a sample of 503 computer-assisted telephone interviews. Due to an error in the online survey routing, the base size for this particular question is smaller than for our other survey questions.

21 Based on a sample of 503 computer-assisted telephone interviews. Due to an error in the online survey routing, the base size for this particular question is smaller than for our other survey questions.

22 There were some very limited circumstances in CJRS 1 where working while furloughed was allowed, such as a director carrying out director’s duties.

23 Based on 1,178 survey responses, of which 117 indicated that they had worked while furloughed at the employer’s request. These are raw respondent counts rather than the weighted ones used for calculation of proportions elsewhere in this report. See Appendix 2 for further detail.

24 Comptroller and Auditor General, Tackling the tax gap, Session 2019–2021, HC 372, National Audit Office, July 2020.

Appendix One

Our audit approach

1 This report examines the role of HM Treasury and HM Revenue & Customs (HMRC) in implementing the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS). The report considers how well the schemes were implemented, recognising the need to deliver at speed in response to the COVID-19 pandemic. Our key audit questions were:

Did HMRC and HM Treasury manage design and delivery risks effectively in implementing the schemes?

Do HMRC and HM Treasury understand whether the schemes reached the people intended?

Are HMRC and HM Treasury managing fraud and error risks effectively thus far?

2 This report does not consider HMRC’s other COVID-19 interventions designed to support businesses, including the Coronavirus Job Retention Bonus and Eat Out to Help Out, or the relationship between the schemes and wider government support such as business loans and benefits. We have previously reported on the Bounce Back Loans Scheme.

3 Our audit approach is summarised in Figure 20.

Appendix Two

Our evidence base

1 Our conclusions on the two employment support schemes were reached based on our analysis of evidence collected between June and October 2020. Our overall audit approach is outlined in Appendix One.

Using our back catalogue

2 In designing and carrying out our work we took account of previous National Audit Office (NAO) analysis examining the Departments’ responses to financial and humanitarian crises using the learning from this work to inform our evaluative criteria. We also deployed our framework for assessing the Departments’ approaches to managing fraud and error, an audit method that builds on significant past experience of government interventions.

Departmental meetings and information

3 We met with key officials from both HM Treasury and HM Revenue & Customs (HMRC) involved in the design and delivery of the schemes. Specifically:

the senior responsible owners for both the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS), and the key staff members supporting them;

staff from HMRC’s Customer Compliance Directorate who led on the compliance regime for both;

HMRC’s internal audit team, who offered initial advice to their Departmental colleagues on the appropriateness of the schemes’ control environments;

staff from HMRC’s Knowledge, Analysis and Innovation Team to discuss the monitoring and evaluation of the schemes; and

staff from HMRC’s Behavioural Insights and Trials Team.

4 We reviewed relevant documents, including: options papers, ministerial submissions and strategy documents, accounting officer advice, controls frameworks, risk and decision logs, scheme overviews and customer journey maps, lessons-learned documents, performance dashboards and internal audit papers.

Stakeholders and experts

5 We reviewed key external reports and data sources including those published by the Office for National Statistics (ONS), the Organisation for Economic Co-operation and Development (OECD), and the Treasury Select Committee.

6 We engaged with experts from the Institute for Government, National Institute for Economic and Social Research, and the Resolution Foundation. We also discussed with the authors the results of findings from a survey conducted by Dr Abigail Adams-Prassl and colleagues from Oxford, Cambridge and Zurich universities. We corresponded with Crossland Employment Solicitors in relation to their survey work. For the surveys featured in Figure 18 in the report, we asked: who conducted the survey; what questions were asked about furloughed working; and over what time period the survey was carried out. We have not audited the underlying data.

Survey research

7 To gain feedback from employees furloughed as part of CJRS, we commissioned Ipsos MORI to carry out primary survey research on our behalf. Ipsos MORI interviewed a sample of 8,445 adults aged 18+ in the UK using a quota sampling method. Research was conducted using its telephone omnibus and online interviews. For both methodologies, quotas were set on age, gender, working status, education level, ethnicity and government office region to reflect the general population. The quotas were set based on the 2020 mid-year population estimates for UK adults 18+ published by the ONS. Quota sampling techniques provide accurate information about the responding sample, but findings derived from this approach cannot generally be used to make inferences about a wider population in the same way as having taken an entirely random sample of respondents from a defined population, where each potential participant has a known probability of being selected.

8 A total of 4,367 interviews were conducted via the telephone (CATI) omnibus between 14 August and 2 October 2020. The CATI omnibus is a nationally representative sample of adults (18+) using standard landline Random Digit Dialling (RDD), mobile RDD and targeted mobile samples. Interviewing took place over a four-week period, from a Friday to the following Wednesday and interviewing was conducted between 9am and 9pm on weekdays and 10am to 7pm on weekends.

9 A total of 4,078 interviews were conducted online between 26 August and 8 September 2020. For the online survey, a nationally representative sample of adults aged 18+ were interviewed online. The research was conducted by contacting respondents through Ipsos Interactive Services. The panel consists of individuals who have volunteered to take part in market research surveys. The respondent panel is continuously maintained and monitored on response rates, attrition, data quality and respondent engagement, as well as on demographic composition to ensure gender, age, regional and socio-economic representation. Panellists receive appropriate incentives to participate in surveys. Email invitations were sent out to the selected respondents, with a unique survey link for each respondent. Respondents participating in the study were actively monitored during fieldwork across a number of criteria, such as response time, multiple participation, and so forth, and this process was repeated at the end of fieldwork. Of the sample, 47 cases were removed as a result of noticeable primacy effect, speeding or odd answer profiles and are not included in the totals above.

10 Telephone and online data were weighted separately to the known offline population proportions for age within gender, social grade within gender, region within gender, working status within gender, ethnicity and education using rim weighting. The weight targets were based on the 2020 mid-year population estimates for UK adults aged 18+ published by ONS. An additional second stage rim weight was applied to both data sets to yield an even blend within the final combined weighted data.

11 We observed some variation in response between online and telephone survey methods on the key question “Still thinking specifically about the period between 19 March – 30 June 2020, did your employer of your main job ask you to work while you were furloughed, or not?” The figure of 9% of furloughed employees who worked following a request from their employer is an aggregated result; separate figures for respondents interviewed by telephone and for those undertaking the survey online were 4% and 14% respectively.

International comparison

12 We also engaged with our national audit counterparts in other countries to better understand the different ways in which their respective governments were implementing short-time working or wage subsidy schemes in response to the pandemic. See Appendix Three for more details.

Limitations

13 In reaching our independent views, we are aware of the following limitations to our review of HMRC’s employment schemes and the value for money conclusion we draw:

We conducted our audit at a relatively early stage and the full impact of the schemes is not yet clear.

We conducted all our feedback remotely and, in the context of the pandemic, could not supplement our fieldwork with site visits.

Survey research draws on quota sampling techniques which cannot generally be used to make inferences about a wider population (see above).

The absence of a clear estimate of the nature and extent of fraud and error meant we were unable to definitively conclude on how well risks have been managed. HMRC expects to produce a more certain estimate, but not before the end of 2021, and we will need to consider that as part of any future work.

Appendix Three

International comparisons

Appendix Four

Evolution of HM Revenue & Customs’ employment support schemes

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