Furlough alert: Workers face ‘financial nightmare’ as HMRC ‘clawback’ payments – act now

Rishi Sunak says he 'didn't sleep' before furlough launch

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Furlough payments will end from September 2021 as Rishi Sunak, along with the wider Government, confirmed coronavirus related support measures would be wound down from the autumn. The furlough scheme has helped keep millions of workers and businesses afloat during the pandemic but as the winter approaches, ill-prepared Britons may be hit by costly HMRC demands. Nigel Morris, an employment tax director at MHA, warned this could turn the furlough “blessing” into a “major administrative and financial nightmare.”

Mr Morris said: “The furlough scheme was a great success in preventing mass redundancies until the economy rebounded. At its peak 8.9m people were on furlough; the latest figure is 1.9m. The overall cost (as of mid-July) is around £67.4billion and is due to top £70billion, which is nearly double the total UK defence spend in 2018/19! A staggering amount of money and for the most part good value.

“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.

“The advice to all businesses, as the scheme ends, must be to 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 should help to avoid interest and penalties. HMRC and the National Audit Office estimate between five percent and 10 percent of the total furlough money claimed could represent overclaims.”

Mr Morris went on to break down how HMRC could target workers: “Employers should also ensure that their auditors, bankers and investors are aware of any potential clawbacks. 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.

“The most common administrative slip up we have seen is where companies have forgotten to work out claims for flexible furlough on calendar days (365 per annum) and have instead used working days (260 per annum) which they might use for the rest of the payroll.

“Furlough was enough of a success that there is definitely merit in the unions’ suggestion for the creation of 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.”

New figures from HM Treasury highlighted that businesses already appear to be acting proactively in regards to the furlough scheme. Today, HM Treasury confirmed British businesses which have been “buoyed by the UK’s economic recovery” have returned £1.3billion in furlough cash to the Government.

Today’s data showed firms who have overclaimed or decided they no longer need payments received through the Coronavirus Job Retention Scheme handed back £300million in the last three months. In total, they have repaid £1.3billion to HMRC since July 2020 through adjustments to claims and the voluntary disclosure service, which will continue into 2022.

Rishi Sunak commented on these results: “This Government stepped in to help when people needed it most, supporting nearly 12 million jobs through furlough. This worked, nearly two million fewer people are now expected to be out of work in the UK than previously feared.

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“Now with our recovery underway it is heartening to see that £1.3billion in furlough grants have been returned as the economy recovers.”

HMRC also confirmed it is “cracking down on those who have fraudulently claimed furlough through its 1,250-strong Taxpayer Protection Taskforce.”

HM Treasury detailed that, thanks to the vaccination programme and the Government’s roadmap out of the pandemic, the number of people on furlough has fallen to a record low of 1.6 million. Around 340,000 people left the scheme in July, with more than a third aged between 18 and 34 – a “clear sign the Government’s Plan for Jobs is working.”

According to the Government, the furlough scheme has protected nearly 12 million jobs and supported more than 1.3 million businesses, with 910,000 jobs in Scotland protected, 470,000 jobs in Wales and 280,000 jobs in Northern Ireland, securing livelihoods in communities across the United Kingdom.

However, many experts warn the economy is likely to take a hit as the furlough scheme ends, especially as inflationary threats and rising costs loom.

Interactive investor warned the winding up of the scheme threatens to add further pressure to household finances atop the triple threat of inflation, rising energy costs and covid uncertainty. The company also noted consumers could face an additional challenge of reining in spending which has escalated since the lockdown commenced.

In a poll of 801 interactive investor website visitors between September 3 and 6 2021, 40 percent of respondents said they spent more during summer than they did in lockdown, with 17 percent admitting dipping into their savings to do so. Restaurants (67 percent) and holidays (39 percent) were the big spending items cited by the sample, followed by more essential expenditure on food (35 percent) and travel (32 percent).

Eating out (31 percent) and holidays (28 percent) remained the sources of expenditure respondents expected to spend more on for the remainder of the year. Meanwhile, commuting costs rising was an expectation for only seven percent of respondents, while three percent expect an uptick in childcare spend, which could suggest that working from home arrangements are still commonplace despite the scores of workers who have returned to the office working in recent weeks.

In all, the majority of the sample believed they were spending within their means – only six percent expressed concern that they have spent too much and four percent are worried about being able to meet living costs as a result of over-spending.

Myron Jobson, a Personal Finance Campaigner at interactive investor, commented: “The majority of respondents of our poll appear confident that they are spending within their means – most likely because of the bumper amounts many were fortunate to squirrel away during the periods of lockdown. However, the scale of the uptick in the cost of living could knock even the most finely tuned budget off-kilter.

“The furlough scheme is set to be phased out come the start of October, yet the financial situation resulting from the pandemic has far from stabilised – which threatens to leave many Britons financially exposed as the perfect storm for personal finances lies on the horizon.

“Britons face a stark rise in the cost of living in the winter months. The Bank England forecast inflation could reach four percent by the end of the year, and the spiking cost of wholesale natural gas is set to result in higher energy bills – meaning it will cost more to power the washing machine and even take a hot shower this winter as a result.

“The return of costs associated with working from the office such a commuting and childcare costs exacerbates matters for the scores who have transitioned from working from home in recent weeks, while plans to scrap the £20 uplift to the amount received by Universal Credit, could leave the nation’s most vulnerable on their knees.

“With Britons facing an unprecedented rise in the cost of living, it has never been more important to pay closer attention to your financial wellbeing and taking some time to plan ahead to strengthen your finances. This may translate to doing an emergency budget, cutting down on non-essential spending and squirrelling away more money into a rainy-day fund if you can afford to do so. Those worried about being unable to meet payment obligations should contact their providers for support.”

Becky O’Connor, the Head of Pensions and Savings at interactive investor, concluded by urging savers to keep the positive habits they built up during lockdown going forward.

“Just as our finances were turned upside down by lockdowns, the re-entry into more normal times has the potential to unwind some of the positive spin-offs we’ve experienced, such as being able to save more,” she said.

“For months, some people have experienced what it feels like to boost their pension pots and savings balances – particularly those who previously spent a lot on a commute or childcare – two massive cost burdens that decreased dramatically or were even non-existent for some during the last year and a half. It would be great if people could keep some of the more positive financial habits they’ve developed over recent months, such as long-term investing, despite a rise in living costs, and instead cut other forms of spending that have crept into their monthly budgets, such as entertainment subscriptions.

“In reality, the sudden rise in the cost of living from rising food and energy bills, as well as changes such as the end of furlough, are likely to put pressure on people’s ability to set aside savings to the same degree.”

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