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Bounce Back Loan data pilot examines sole trader fraud

Author: ICAEW Insights

Published: 17 Jan 2024

The government is setting its sights on unincorporated businesses that fraudulently took out Bounce Back Loans during the pandemic.
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The Department for Business (DBT), the Cabinet Office and HMRC have established a pilot scheme to look for potential fraud committed by sole traders against the Bounce Back Loan Scheme (BBLS).

The pilot aims to identify sole traders who either applied for a Bounce Back Loan when they were not trading during the eligibility period or misrepresented their turnover to obtain a loan. This follows a similar pilot in 2021 to detect fraud by limited companies who applied for BBLS loans.

The first stage of the pilot will see the Cabinet Office and DBT sharing sole trader borrowing data with HMRC, which will match this data to information it holds on those individuals. The Cabinet Office will then identify high-risk populations where fraud is suspected, which will be shared with DBT to enable it to select cases for investigation.

In the second stage of the pilot, the Cabinet Office will share the identified risk flags with accredited BBLS lenders to support its investigations. Where lenders suspect fraud, they could then share this data with DBT.

Sole traders received £9.6bn through the scheme prior to its closure to new applications on 31 March 2021. Based on a previous pilot addressing limited companies that borrowed through the scheme, the government anticipates that the risks of fraud relating to falsified income or turnover is probable in the sole trader population as well.

Announced in 2020 at the height of the pandemic, the BBLS was designed to support small and medium-sized businesses affected by COVID-19, enabling them to borrow between £2,000 and £50,000 at a low interest rate, guaranteed by the government. Loans were made on the condition that they would provide an economic benefit to the business and would not be used for personal purposes.

The Public Accounts Committee report on DBT’s (previously the Department for Business, Energy and Industrial Strategy or BEIS) 2020/21 annual report concluded that BEIS “did not make full use of all the tools at its disposal to prevent and detect fraud” in COVID-19 business support schemes. Dame Meg Hillier MP, Chair of the Public Accounts Committee, said that the initial COVID-19 response “offered an open goal to fraudsters and embezzlers and they have cashed in, adding billions and billions to taxpayer woes”.

A further report by the Public Accounts Committee in April 2023 slammed the government for continuing to make slow progress on its counter-fraud activities relating to the BBLS and that its “lack of curiosity” regarding lenders’ performance increased the risk of losses for the taxpayer. DBT also accepted that grant payments made through councils on their behalf to local businesses under such COVID-19 support schemes were “not in line with how the scheme was meant to work”. 

Jack Bower, ICAEW Public Sector Audit and Assurance Manager, comments: “ICAEW welcomes this extension by the government of efforts to identify and recover fraudulent loans taken out during the pandemic. Billions of pounds of taxpayer money have been lost to fraud and it is right that action is taken to recover as much as possible.

“The disappointment is that recovery efforts are still at a pilot stage, given the likelihood of recovering fraudulently obtained public money diminishes as time passes. Even more disappointing is the failure to subject loan applications to the most basic of checks before they were approved in the first place. This is a key lesson that needs to be embedded into similar programmes in the future.”

HMRC estimates that error and fraud in COVID-19 support schemes amounts to between £3.3bn and £7.3bn, with a most likely estimate of £5.0bn. This constitutes an error and fraud rate of between 3.3% and 7.4%, with a most likely estimate of 5.1%.

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