Overview Of HMRC Bounce Back Loan Investigation
Neither Oscar Wilde nor Walter Map were considering the impact of HMRC Bounce Back Loan Investigation recoveries when they floated the expression:
No good deed goes unpunished
However, the current Conservative Government may perhaps consider that it adequately sums up their period in office. Whereas the Official Opposition may have an altogether different perspective!
HMRC has been tasked with undertaking compliance checks into businesses’ use of the Covid support schemes such as notably the Bounce Back Loan Support. As a result, there is an HMRC team that will look into whether an insolvency event such as a Voluntary Liquidation was improperly used to avoid repaying incorrectly claimed Covid-19 Finance funds. HMRC Covid-19 Finance compliance checks may extend to consideration of a Director’s cooperation with the Insolvency Practitioner, matters associated with keeping company records including delivering them up to the Liquidator and more generally the Liquidator’s investigations undertaken.
Bounce Back Loan Bank Investigations
Businesses may also have noted banks that lent the Bounce Back Loans could now be engaged in carrying out checks into suspected improper receipt of the loan in the first place. There have been instances where banks have even asked business clients for disclosure of bank statements so that a review could be undertaken into the eligibility of the loan. Perhaps in some instances, the nature of the bank’s investigations may have sparked not unreasonable customer confusion after a customer has been asked for copies of bank statements issued by that same banking institution!
If you have been subject to communications from HMRC or your bank about a Bounce Back Loan and have concerns about either the application for the loan or subsequent use of the funds then consider seeking independent professional advice so that you are aware of your position and options.
The Bounce Back Loan Scheme
The Bounce Back Loan Support Scheme has stoked up quite a bit of press, including the results of HMRC Bounce Back Loan investigation work.
The Bounce Back Loan support scheme may have helped many businesses that faced financial ruin due to the Covid-19 Pandemic. Indeed the British Business Bank estimated 150,000 to 500,000 businesses may have been saved due to the scheme, along with 0.5 to 2.9 million jobs. The scale of the scheme was vast with the British Business Bank saying that 270,000 Bounce Back Loans were issued in the first week of its operation and close to 800,000 in the first month.
As of 31 July 2022, businesses had drawn a total of £46.6 billion through the scheme based on the Government report Bounce Back Loan Scheme performance data as at 31 July 2022 (Updated 5 September 2022). According to Statista, this involved over 1.5 million businesses that took out Bounce Back Loans between May 2020 and May 2021.
Why Is There An HMRC Bounce Back Loan Investigation Taskforce?
Whilst the Bounce Back Loan support scheme may have saved businesses and jobs it appears the speed at which it was put in place along with the checks when applications for loans were made may have resulted in insufficient measures for Bounce Back Loan fraud prevention. Bounce Back Loan Scheme fraud has been extensive.
To address matters a taskforce was assembled for Government Action On Bounce Back Badness. However, it seems the results appear so far to have been patchy.
The Government suggested that its Bounce Bounce Back Loan Scheme (“BBLS”) investigations have been effective as it explained in the Performance Report about how it has assembled government departments to work on enforcement matters:
We are working with enforcement bodies including the National Investigation Service (NATIS) and the Insolvency Service to investigate instances of fraud, recover fraudulent loans and penalise fraudsters. Since September 2020, NATIS has opened 273 investigations into BBLS fraud since September 2020, with a total value of £160 million. 78 suspects have been dealt with to date, with 49 arrests made. Meanwhile, Insolvency Service activity on BBLS fraud has so far resulted in 242 director disqualifications, 101 bankruptcy restrictions and 1 criminal prosecution. This enforcement activity is in addition to recovery work being undertaken by lenders as part of their obligations under the BBLS Guarantee Agreement.
However, in a Press Release by the National Audit Office dated 3 December 2021 The Bounce Back Loan Scheme: an update referred to the prospect of 37% Bounce Back Loans (£17 billion) being defaulted on.
The panic to get the Bounce Back Loans out to the businesses that were facing dire descent seems conceivably now more than matched by some of the deprecation dished out. This did not escape the attention of the Public Accounts Committee which has not afforded a ringing endorsement of the HMRC Bounce Back Loan Investigation process.
Public Accounts Committee Bounce Back Loan Reports
Whilst there have been some well publicised cases of Director Disqualification and even criminal prosecutions, the Public Accounts Committee has expressed concerns about the operation and recoveries anticipated from HMRC Bounce Loan Investigation work.
Report 18 May 2022
In the report “Department for Business, Energy & Industrial Strategy Annual Report and Accounts 2020–21” the Public Accounts Committee said:
Given the Department had anticipated a heightened risk with these schemes, we are disappointed that it does not appear to have used all the tools at its disposal to minimise fraud and error.
Report 11 January 2023
In its HMRC Performance In 2021–22 – Report Summary dated 11 January 2023 the Public Accounts Committee said HMRC should be more ambitious in tackling Bounce Back Loan Scheme fraud and ought to rethink its strategy so that those who did not abuse the fund were not at a competitive disadvantage to those that did.
In the report HMRC Performance In 2021–22 dated 11 January 2023 the Public Accounts Committee said:
HMRC estimates that total fraud and error across the lifetime of the COVID-support schemes was £4.5 billion, representing 4.6% of the total support provided … HMRC has been given £100 million to fund a temporary taskforce to investigate fraud and error on the schemes and has opened about 40,000 investigations so far. HMRC forecasts that by the time the taskforce winds down, it will have recovered around £1.1 billion, around a quarter of the fraud and error losses.
Why Was A Bounce Back Loan Scheme Brought In?
The Bounce Back Loan scheme was brought in as part of the following series of measures to save businesses that through no fault of their own were adversely affected by the Covid-19 Pandemic restrictions:
- Coronavirus Large Business Interruption Loan Scheme (CLBILS). For mid-sized and larger UK businesses with a group turnover of more than £45m.
- Coronavirus Business Interruption Loan Scheme (CBILS). For smaller businesses with a turnover of less than £45m looking for up to £5m in finance.
- Bounce Back Loan Scheme (BBLS). For SMEs, micro-businesses and other businesses requiring smaller loans of between £2,000 and £50,000.
The Bounce Back Loan Scheme ended on 31 March 2021.
What Were The Criteria To Obtain A Bounce Back Loan?
The criteria to obtain a Bounce Back Loan meant that a business had to:
- Declare it had been financially affected by the Covid-19 Pandemic.
- Be engaged in trading or commercial activity in the UK at the time of the application for the loan.
- Not already in the process of applying for or has not already received a Bounce Back Loan Scheme facility.
- Not yet obtained a loan through either the Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme, or the Covid Corporate Financing Facility, unless that loan was to be refinanced in full by the Bounce Back Loan Scheme facility.
- Be a company or limited liability partnership incorporated or established in the UK, or tax resident in the UK.
- Have more than 50% of its income from its trading activity.
- Not be in Bankruptcy or Liquidation or some similar position when submitting the application.
- Say if on 31 December 2019 it was a “business in difficulty” and did not breach State aid restrictions under the Temporary Framework; and if it was a “business in difficulty” then it had to confirm it did not breach de minimis State aid restrictions and would not be used to support export-related activities.
- Access the loan to provide economic benefit to the business, and not for personal use.
- Not be a bank, building society, insurance company, public sector organisation, state-funded primary or secondary school, or an individual other than a sole trader or a partner acting on behalf of a partnership.
Bounce Back Loan Fraud Risk Assessment
So that the Bounce Back Loan Support Scheme could be rolled out quickly businesses were permitted to self-certify their fulfilment of the criteria as part of the application process. The main independent checks conducted when a company applied for a Bounce Back Loan were Anti-Money Laundering (“AML”) and Know Your Customer (“KYC”).
Oliver Elliot’s CEO, Elliot Green on 19 May 2021 issued a Freedom of Information Act request about the government’s Bounce Back Loan Scheme to attempt to understand the Government’s Bounce Back Loan fraud risk assessment in light of the Public Accounts Committee’s reference to the heightened risk with the scheme. The following information was sought:
1. Confirmation if BEIS had anticipated heightened risk with Bounce Back Loan Schemes (“BBLS”).
2. Copies of the risk assessment undertaken of fraud with the BBLS was contemplated.
3. Copies of the minutes of meetings that recorded the heightened risk.
4. Details of what was done to mitigate the risk and copies of documents that record that position.
The Department of Business, Energy and Industrial Strategy response was received in June 2022 which declined to provide much of this information. However, it did say it had anticipated fraud with the Bounce Back Loan Scheme and a risk assessment undertaken by PricewaterhouseCoopers was sent to the British Business Bank on 29 April 2020. This was referred to as Project April – Fraud Risk Review from which it can be seen lenders were concerned about the scheme’s potential to be abused:
… by individuals (in distress) with no real business and inactive or dormant accounts …
What Bounce Back Loan Fraud Has Occurred?
A review of Director Disqualification reports during the three months from September to November 2022 appeared to highlight what was causing Bounce Back Loan investigations, being commonly a failure to use Bounce Back Loan funds for the economic benefit of the business and overestimating the level of turnover required in order to justify the level of loan applied for.
There have been other types of improper use of Bounce Back Loan funds which may in some instances constitute fraud such as:
- Repaying Director loans which may give rise to a Preference on Liquidation.
- Purchasing personal assets.
- Applications for multiple loans across several companies, then being used by other companies in the group.
- Loans being obtained by zombie or dormant companies that did not or never traded.
- Incorporating new companies to hoover up Bounce Back Loans.
- Transferring the Bounce Back Loan to a personal account of the Directors or Shareholders.
- Making a distribution to Shareholders which may be an Unlawful Dividend.
First Successful Criminal Prosecution For Bounce Back Loan Fraud
Abuse of the Bounce Back Loan Scheme resulted in action being taken by the Insolvency Service and on 27 June 2022 a Government Press Release highlighted the case of a Bounce Back Loan fraudster jailed. This was the first instance of a criminal prosecution due to a Bounce Back Loan.
A £20,000 Bounce Back Loan had been obtained which resulted on 24 June 2022 in a company Director being sentenced to 24 months and disqualified from acting as a company Director for 7 years. A particularly noticeable feature of the case was that two weeks prior to the application for the Bounce Back Loan being made the Director had already applied for the company to be dissolved. A further aggravating issue was that the money had been used as follows:
- £14,000 given to family abroad; and
- £6,000 to buy a car and insurance
The press release said:
He pleaded guilty to charges of fraudulently claiming Covid-19 financial support to which he was not entitled contrary to the Companies Act 2006 and the Fraud Act 2006 at Manchester City Magistrate’s Court on 9 May.
Action can now be taken by the Insolvency Service when a company is struck off using Form DS01. Prior to Section 2 of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 coming into force the Insolvency Service had no remit to investigate dissolved companies. It can now investigate the conduct of Directors of dissolved companies that may have inappropriately applied for and or deployed funds obtained from the Bounce Back Loan Scheme.
Facing An HMRC Bounce Back Loan Investigation?
Any investigation into matters of financial conduct can be worrying even when there is no wrongdoing involved. However, there is no point or purpose behind ignoring matters because the evidence suggests that these issues are not typically going to go away by themselves.
It is perhaps worth bearing in mind what Jim Harra, CEO of HMRC said when he attended as a witness before the Public Accounts Committee on 20 October 2022 in the published transcript Oral evidence: HMRC Annual Report and Accounts 21-22, HC 686:
I can assure you that every single allegation of fraud is looked at.
The sooner you contact us the sooner we can start to help you.
