More than one in four UK employees (over 9 million people) have been furloughed during the course of the Government’s Coronavirus Job Retention Scheme (the Scheme). HMRC considers that as much as £3.5 billion has been paid out in wrong or fraudulent claims and it has received over 20,000 reports of fraudulent furlough claims from company employees (including allegations of companies claiming for former employees, or claiming for employees who are continuing to work as normal). The UK government is reportedly set to announce a £100m fund to crack down on fraud related to COVID-relief schemes.
HMRC has warned that companies which have misused the Scheme (whether due to a genuine mistake or deliberately) will be expected to repay funds – and could face further penalties where repayment is delayed. In the most egregious circumstances, criminal action will be pursued.
There are also question marks over the way in which the Scheme was implemented vis-à-vis employees. Many employers took comfort from the fact that the guidance in relation to the Scheme (in its early iterations at least) suggested that furlough and pay cuts could be imposed on employees without their prior written consent or via some other valid arrangement (such as via a collective bargaining process). However, as a matter of employment law, without a valid variation to the employees’ terms, employees could claim for the shortfall between what they should have been paid and the amounts paid under the Scheme.
In addition to the risk of scrutiny from HMRC via its use of broad information and inspection powers, we are seeing M&A due diligence in this area becoming much more common – and much more detailed. Both sellers and buyers should ensure that they are well-prepared to deal with due diligence questions on compliance with the Scheme. This blog focuses on the UK position but many jurisdictions implemented similar schemes and similar issues may arise in those jurisdictions.
Considerations for sellers
Sellers need to prepare well ahead of any due diligence process to ensure that they are ready to answer questions about:
- the number of employees that were furloughed (and for which periods);
- amounts claimed under the Scheme and details of any repayment;
- how the scheme was implemented vis-à-vis employees (e.g. was consent obtained or other valid arrangement used?);
- what processes were put in place to ensure that amounts claimed under the Scheme were claimed correctly;
- an explanation of the steps taken to ensure that employees were not working while furloughed; and
- details of any allegations or issues that have arisen and how they were remediated.
Responding to questions, and giving warranties in relation to claims made under the Scheme is complicated by the fact that the guidance in relation to the Scheme was updated frequently in its early stages. Sellers also need to ensure that they consider carefully what warranties can be provided in relation to group companies or joint venture operations.
Considerations for buyers
Buyers need to ensure that they assess the risks of furlough misuse in the target and obtain appropriate contractual protections. Particular care needs to be taken in relation to the terms of knowledge/awareness qualifiers and in many cases, an indemnity may be required but this will not be able to cover the consequences of any criminal actions. Detailed information should be sought, in particular where companies have furloughed a large number of employees and those employees are capable of working from home (e.g. office workers).
Depending on what is identified during the course of due diligence, pre or post acquisition reporting to HMRC may be required in addition to longer term remediation. Where criminality is suspected (for example fraud or cheating the public revenue offences), consent to proceed with the transaction under the UK Proceeds of Crime Act 2002 may be advisable.
W&I insurers are also focused on this issue. In our experience it can be difficult to obtain W&I insurance in relation to claims made under the Scheme and the buyer needs to be able to have done full due diligence, and demonstrate how it has got comfortable with the position.
M&A due diligence in relation to furlough misuse will become an area of increasing focus as HMRC expands the scope of its investigations and enforcement, and the true scale of the issues continue to emerge.