Claiming a second bite of the furlough cherry

The UK Government’s furlough scheme proved to be – in many respects – the one true success story from the handling of the Coronavirus crisis. Its introduction served as a valuable lifeline for many businesses, and helped to reduce the fears of mass redundancies and business closures.

Now, with a second lockdown beginning and further uncertainty looming for businesses across the board, the Government has extended the furlough scheme through to the end of March 2021. As before, many businesses will be relying on this scheme to help ensure their survival during the winter months ahead.

At the outset of the scheme in March 2020, the Government imposed tight deadlines and eligibility requirements for potential applications. This in turn placed a great deal of pressure on accountants to ensure that their clients’ affairs were in full order with HMRC in order to make them eligible for a claim.

Whilst many businesses (and their accountants) were able to rise to the challenge, there were also many cases where, owing to a range of different factors, the eligibility requirements were not demonstrated and the necessary financial reports were not submitted to HMRC before the Government’s cut-off date. This resulted in many firms losing out on the chance to apply, With no appeal mechanism in place by HMRC, many of these businesses have been turning to their accountants for answers as to why their claims were unable to succeed and, more importantly, how they intend to compensate their clients for their losses.

Accountants are like all professionals vulnerable to claims of professional negligence, however, the volume of claims received has seen a substantial rise following the introduction of the furlough scheme. In many of these cases, accountants have been forced to accept liability for clients’ losses owing to their failure to have taken steps – prior to the scheme’s announcement – to ensure that clients were being chased for outstanding information and that information regarding clients was being submitted to HMRC in a timely and pro-active manner.

It is perhaps unfair to take a blanket-blame approach, as the nature of the industry and the reliance on annual accounting year deadlines means that information regarding a client’s finances is often not received until ‘the eleventh hour’. More importantly, no professional would ever have been expected to predict a situation such as the one we face now, and so the sudden introduction of the furlough scheme and the deadlines involved will have caught many professionals out. However, the law is clear and ultimate liability still rests with the professionals if it was their failure to ensure information was being requested and subsequently sent to HMRC in good time.

The length of the original furlough scheme and the percentage of wages eligible to be claimed meant that many clients lost out on very sizeable claims. The sums being claimed from accountants, therefore, vastly exceeds the typical sums seen in professional negligence claims, where clients will typically just be seeking recompense for late-filing penalties and interest.

The potential exposure of many firms is, therefore, high, and claims in the region of £100,000 are not uncommon. Whilst many professional indemnity insurance policies will be able to help professionals meet these claims, the impact on renewal terms, premiums and excesses in the future remains to be seen.

The events of the past year should therefore be viewed as something of a wake-up call for professionals across the industry. Rather than sending out a request for information and paperwork on an intermittent basis and awaiting the usual end-of-year rush, accountants should now be revising their processes and ensuring that clients are being chased on a regular basis to provide financial returns and other relevant information.

Whilst the furlough scheme is now extended to March 2021, the future thereafter is unknown and there is every chance a new scheme could be brought in to replace the existing scheme. A new system may again impose tight deadlines for applicants, so professionals should take the time afforded by the furlough scheme’s extension as a valuable opportunity to review their clients’ affairs and to ensure that they are as prepared as possible to respond to any new schemes which may follow, so to minimise the risk of having to encounter a costly negligence claim. To try and safeguard against claims, professionals may wish to audit client files with a view to identifying and dealing with any obvious ‘gaps’ in records.

Practitioners may also wish to send emails to their clients updating them on the current furlough scheme and reminding them of the need to ensure that any and all requests for information which are received should be actioned as possible and that it is important to avoid the temptation to leave this until the last minute. This would demonstrate that the accountants are keeping on top of the developments in this area and keeping their clients updated. It might also serve to reduce the risk of claims by ensuring that clients are aware of their obligations and the consequences that might arise should they fail to comply with requests for information. Finally, if claims are made, such e-mails might prove to be useful in their defence.

This article was first published by Accountancy Today.