During the pandemic, with the UK economy on the edge of collapse, the government moved swiftly to inject £80 billion into businesses through emergency loan schemes. Speed was critical, and verification checks were minimal, ensuring funds reached those in need quickly—but this urgency came at a cost.
As the dust settles, HMRC is uncovering staggering levels of fraud, with individuals and businesses exploiting loopholes, stolen identities, and shell companies to pocket millions. Now, a dedicated taskforce is racing against time to recover these misused funds and restore accountability to one of the most significant financial interventions in UK history.
Background on COVID loan schemes
It’s important to contextualise the pandemic, as the impact on individuals, companies, governments and countries goes beyond living memory. COVID was officially classed as a public health emergency of international concern by the World Health Organisation in March 2020. It was not until 5th May 2023 that the global emergency was officially brought to a close, although COVID still poses a degree of threat today.
During that time, several loan schemes were introduced with massive funding:-
- Bounce Back Loan Schemes: Provided £47 billion to more than 1.5 million businesses
- Coronavirus Business Interruption Loan Scheme: Provided £26 billion to 109,000 businesses
- Coronavirus Large Business Interruption Loan Scheme: Provided £5.5 billion to 753 businesses
Working together with the financial community, the UK government very quickly introduced financial support schemes, with the funds guaranteed by the government. This was the quickest way to fill a growing financial void, although preferring speed over checks at the time, bad debts and fraudulent activity are now a huge problem.
Before we investigate the level of fraud and misuse of COVID financial assistance, it’s essential to recognise the challenges and successes over this period, as well as fraudulent activity.
Rise of fraud and misuse
As a consequence of misuse and fraud related to COVID loans, the government has made additional funding available to create a new HMRC taskforce. The taskforce has identified numerous methods of fraud, such as:-
- False claims – the use of dormant or dissolved companies and even non-existent employees.
- Fraudulent use of funds – many gained personally from the COVID loans, with some funds illegally transferred abroad to make them nearly impossible to recover.
- Identity theft – criminal gangs used stolen identities to apply for loans and grants.
- Collusion – many businesses colluded with their employees who were working while claiming furlough support.
- Multiple applications – individuals and businesses making multiple applications using different bank accounts.
- Misuse of Bounce Back Loan Scheme – the creation of shell companies to apply for loans, at which point the fraudsters disappeared
- Exploiting loopholes – urgency over depth of verification saw many individuals and businesses exploiting a lack of cross-referencing between agencies and banks.
- Fictitious business activities – some businesses with limited, if any, trading history were able to claim funds due to relaxed verification requirements.
- VAT and tax fraud – overstated losses and doctored records were used to evade tax while maximising pandemic relief funding.
As the government and businesses became more desperate, we saw the emergence of organised crime gangs. They were able to make fraudulent claims, in some cases involving millions of pounds. Alarmingly, while HMRC created a taskforce to investigate the misuse of COVID financial assistance, there is still uncertainty regarding the UK’s overall exposure and potential fraud.
National Audit Office
The National Audit Office estimates that approximately £21 billion was lost to fraud across government departments during the pandemic, with more than £7 billion linked to COVID support schemes. This equates to just over 2% of total COVID expenditure.
HMRC
In 2022, HMRC estimated that £5.8 billion in public money had incorrectly been paid out as part of COVID financial support schemes. By 2023, initial expectations of recovering 25% of misappropriated funds were revised downwards to just 20%. Consequently, a staggering £4.3 billion was written off as irrecoverable.
Estimates vary as to total expenditure with regards to COVID, ranging from £310 billion million to £410 billion. However, in recent months, we have seen a significant increase in prosecutions through the HMRC taskforce.
The HMRC taskforce
In the spring of 2021, Rishi Sunak, the then-Chancellor of the Exchequer, announced the creation of a Taxpayer Protection Taskforce to combat fraudulent claims during the pandemic. The taskforce cost £100 million and consisted of 1200 HMRC staff. The target was to recover the £1.5 billion, pursuing legal action where there was a reasonable chance of a successful prosecution.
There are numerous forms of assistance and focused analysis, including:-
Cross-referencing and risk profiles
In an ideal world, in-depth cross-referencing would have allowed participating financial institutions to check the details of all COVID-related claims before the funds were made available. The taskforce finally introduced this, identifying duplicate claims and inconsistencies in financial filings. We also saw additional information from banks and other government departments integrated into this process to flag suspicious activity.
With literally millions of claims to process, businesses and individuals were categorised using cutting-edge technology so that the taskforce could prioritise high-risk applicants.
Whistleblower reports
As the electorate and businesses became more aware of the level of COVID fraudulent activity, we saw a significant increase in whistleblower reports. HMRC received 157,000 in the 2022/23 tax year, helping to identify fraudulent activity.
Targeted audits and investigations
Focused on some of the higher COVID support claims, HMRC was able to carry out in-depth audits of many businesses suspected of fraud. Using the latest technology, anomalies and discrepancies were identified, which very often opened the door to much deeper investigations.
As a consequence of the work of the taskforce, various legal tools were used to recover funds and prosecute fraudsters such as:-
- Freezing and seizing of assets
- Director disqualifications
- Prosecutions and publicity
While we await further updates, by May 2023, HMRC revealed that £1.1 billion had been recovered from fraudulent claims, but more work still needs to be done. In the 2023/24 tax year, 62% of director disqualifications (831/1222) related to misconduct and fraud involving COVID support schemes. A staggering 47% of the director bans were more than 10 years long, compared to just 6% before the pandemic.
Challenges in recovery
In theory, seeking redress should be relatively straightforward once the HMRC taskforce has identified fraudulent activity. In practice, this is never the case with an array of challenges to consider, such as:-
- Borrowers who have declared bankrupt
- Funds already spent or dispersed
- Tracing through often complex financial arrangements
- Jurisdictional challenges
- Sophisticated fraud schemes
Even though the UK government made £100 million available for the new taskforce, limited resources in certain areas restricted the ability to investigate potential fraudulent activity. Then there is the moral argument, enforcement vs supporting struggling businesses. Is this the right policy if claiming back fraudulent funds could lead to job losses?
While many will use the moral argument, the reality is that if funds were obtained fraudulently, HMRC has a duty to recover them where possible.
Implications for businesses
In a similar vein to random HMRC audits for legitimate businesses, which can be costly, some businesses will inevitably face COVID-related audits even if they have acted in good faith. As companies are obliged to cover the cost of such investigations, this can be especially troublesome for small to medium-sized businesses. Then there is the knock-on effect, increased compliance and documentation requirements as companies attempt to avoid future expenses.
The advice for businesses looking to stay compliant is simple:-
- Retain records of how loans were used
- Cooperate fully with HMRC enquiries
On paper, this looks relatively straightforward. However, it can be challenging when HMRC asks questions about COVID loans applied for in the depths of a financial crisis. Even those businesses applying for legitimate financial assistance may not have been as focused on documentation as they were on saving their businesses.
Conclusion
The COVID pandemic tested the UK economy like never before, with rapid funding measures averting collapse but leaving the door open to fraud. Now, HMRC’s recovery efforts underscore the importance of accountability in public spending while putting business compliance under the spotlight. The lessons learned during this unprecedented time will shape future financial practices and scrutiny.
If you’re concerned about an HMRC investigation or need clarity on your COVID funding claims, our team is here to help you navigate the process and protect your business. Please feel free to contact us at your convenience, and we can examine your situation in more detail.