In a case at the First Tier Tribunal, Bandstream Media and Corporate Communications Limited, appealed a demand from HMRC for repayment of covid furlough payments made to employee and company director, Graham Smith.

The payments were included in his annual tax returns, triggering the HMRC investigation.

During the pandemic lockdowns, Bandstream Media made three claims for Coronavirus Job Retention Scheme (CJRS) payments for Smith covering 19 months between April 2020 and September 2021 totalling £33,250.

As a director, Smith was paid £600 a month, with a further £2,500 paid as dividends, bringing his total earnings to £3,100. As a result, he was only entitled to a monthly furlough payment of £600.

The first furlough payment was for £15,250 from 1 April 2020 to 30 November 2020, the second for £8,000 from 1 December to 31 March 2021, and the third for £10,000 from 1 April to 30 September 2021.

Smith’s accountant, John Tann, of John Tann & Co Accountants, provided PAYE records that showed from 2019 until 31 March 2020, Smith was paid £600 a month from his company and also received £2,500 a month in dividends. Smith claimed he would not have been able to cope financially on a salary of £600 a month.

HMRC opened a check into the furlough payments on 26 October 2020 and contacted Bandstream Media, but the company did not respond until 10 March 2021. HMRC then notified the appellant that their records showed that Smith was earning just £600 a month.

Tann then sent an email to HMRC where he pointed to an exchange in parliament between then Chancellor, Rishi Sunak and the leader of the Liberal Democrats, Ed Davey, about the ‘unfairness of the lockdown on those directors who paid themselves by dividends’, indicating that it inferred that directors should “make use of the furlough system”. Because of this, Tann told his client to increase Smith’s salary to £30,000 a year.

In November 2021 HMRC stated that any claim for the relief would be based on the £600 from the last real time information PAYE submission.

In February 2022, HMRC issued notice assessments totalling £25,547.40 under paragraph 9 of Schedule 16 Finance Act 2020. The total was later reduced to £25,264.98 when a different HMRC officer took over the investigation after Tann complained about the conduct of the first investigating officer.

The claims for the support package revolved around paragraphs 7.2 and 7.12 of the first Coronavirus Direction. The most relevant being 7.12 states that ‘in the period beginning 1 March 2020 and ending on the third day after the making this direction an amount by wages or salary is paid in respect of a period of employment to an employee’. It carries on by saying the original payment must be less than the amount required for claiming CJRS.

Tribunal judge Nigel Popplewell said: ‘We reject any submission that Mr Tann advised his client to increase Mr Smith’s salary, at the expense of dividend payments, for improper motives.

Mr Razzak [HMRC litigator] suggested that there was no evidence whatsoever of the Parliamentary exchange referred to above, between the Chancellor and Mr Davey. This is wrong.

‘Mr Tann gave evidence of the fact that he viewed this exchange on television, and it was the Chancellor’s suggestion that those prejudiced by the fact that they had been previously taking remuneration by way of salary should use the furlough scheme, which provided the basis for the advice he gave to Mr Smith (and which was taken) regarding the replacement of dividend by salary.

‘So, for the purposes of this appeal, it is our view that paragraph 7.12 does not allow the appellant to claim support payments on the increased salary of £2,500 which it made to Mr Smith during the periods under assessment.’

Bandstream Media’s appeal was dismissed which Mr Smith was the sole director of.