UK firms should beware furlough 'clawback' as scheme ends

03 September 2021 Consultancy.uk 4 min. read

The UK’s furlough scheme is finally winding down – something which could leave a number of firms financially exposed if they are not careful. According to MHA Director Nigel Morris, businesses must take action now to ensure HMRC does not try to claw furlough money back from them.

The effects of the coronavirus recession pushed businesses across the UK to the brink of collapse – threatening huge losses in asset value and jobs. Throughout the past year, the worst possible impacts of this situation have been offset, with UK corporates being supported with state initiatives during the height of the Covid-19 pandemic.

Arguably the most prominent of these schemes was the furlough programme, which was introduced in spring 2020, to stop people being laid off by their employers during the Covid-19 lockdown. It applies across the UK, with the government initially paying 80% of the wages of people who could not work, or whose employers could no longer afford to pay them – up to a monthly limit of £2,500. This has gradually been scaled back in 2021, with employers required to pay 10% of salaries from July, and the government's contribution falling to 70%. In August and September, this fell further to a 60:20 split.

UK firms should beware furlough 'clawback' as scheme ends

At its peak 8.9 million people were on furlough; while the latest figure has 1.9 million workers still on it. According to Nigel Morris, an Employment Tax Director at professional services firm MHA, the overall cost is expected to top £70 billion – nearly double the total UK defence spend in 2018/19. While the “staggering amount of money” was for the most part “good value,” however, he has warned that the withdrawal of furlough payments presents a number of challenges to companies.

At the end of September, the furlough scheme is set to finally close, and with it many experts are already bracing for major economic repercussions. With a slowing insolvencies market indicating that many firms had been on state-sponsored life-support through much of the pandemic, more alarmist figures have warned that the UK’s business scene has become a ‘zombie nation,’ and the end of government aid will lead to a sea of collapses.

To that end, a study by the London School of Economics recently found one-in-16 firms say they are now at risk of closure in the next quarter, placing over 1 million jobs at risk. At the same time, a recent analysis of the UK’s job retention scheme by Grant Thornton estimated that more than one-in-ten mid-sized businesses may have incorrectly applied for support. Meanwhile, one-in-five firms have not reviewed their initial claim to ensure its accuracy – suggesting that even more firms than expected may come under intense financial pressure in the coming months.

Noting this threat, Morris said, “The furlough scheme was a great success in preventing mass redundancies until the economy rebounded… Yet the scheme was complex from the start and kept getting more complicated with various amendments and extensions made by the government. Administrative challenges were usually overcome but at a high cost to many employers. Many now fear innocent errors and incorrect claims will be pursued for many years by HMRC.”

In order to avoid this, he added that as the scheme ends, companies must review all their furlough claims and “ensure that if they have over-claimed, they make arrangements to pay HMRC back as soon as possible.” This can help to avoid interest and penalties, which would be disastrous for firms at a difficult time.

“Employers should also ensure that their auditors, bankers and investors are aware of any potential clawbacks,” Morris went on. “If the clawbacks are not budgeted for companies could end up in breach of borrowing and covenant requirements when they are called on to pay HMRC off. Furlough was a blessing at the time: you don’t want it turning into a major administrative and financial nightmare down the line.”

MHA is a network of independent accountancy firms, including MHA MacIntyre Hudson, MHA Moore & Smalley, MHA Monahans and MHA Tait Walker. The network has 136 partners and 1,375 staff across the UK. Morris revealed the most common administrative slip up the network has seen among clients is where companies have forgotten to work out claims for flexible furlough on 365 calendar days, and have instead used the 260 working of the year, which they might use for the rest of the payroll.

Looking to the future, Morris concluded, “Furlough was enough of a success that there is definitely merit in the unions’ suggestion for the creation of a long-term version of it to guard against another pandemic or perhaps a major economic downturn. Furlough 2.0 could draw examples of best practices from Europe, where these types of schemes already exist. A ‘permanent’ scheme would also help businesses to plan with added assurance, and give confidence to markets and funders should the unthinkable happen again.”