A Guide to the Construction Industry Scheme Penalties Regime

Many contractors are often caught unaware by the significant penalties that HMRC can charge where they consider the CIS scheme has not been operated correctly. We have set out below a detailed summary of the type and level of penalties which can be applied where HMRC consider a failure or an error has occurred.

Failure to submit (or late) monthly CIS300 return

• These penalties are strictly imposed by HMRC and relate to each monthly return.
• Up until April 2015, these penalties would be imposed even if the return was a ‘nil’ return. From April 2015 HMRC no longer charges a penalty for a late ‘nil’ return.
• The penalties due for failure to submit (or late) returns covering monthly returns due from 6/10/11 are due under Schedule 55 Finance Act 2009, paragraphs 7 – 13.
• The penalty date is the day after the filing date. (e.g. filing date 19 May, penalty date 20 May).
• Further penalties arise where the return remains outstanding for 2, 6 and 12 months from the penalty date.
• After 12 months from the penalty date, the amount of penalty also varies depending on the reason for the failure.

However, the 12 months’ further penalty can be higher where the behaviour for the failure is considered to be (i) deliberately withheld but not concealed or (ii) deliberately withheld and concealed:

• Where deliberate but not concealed: Penalty is greater of £1,500 or 70% of liability that would have been shown on the return.
• Where deliberate and concealed: Penalty is greater of £3,000 or 100% of liability that would have been shown on the return.

Incorrect CIS300 Return

• The penalties due for incorrect monthly returns due to be filed from 19/4/09 are charged under Finance Act 2007/Schedule 24/PARA1.
• HMRC will consider the behaviour that lead to the inaccuracy occurring, to decide the level of penalty.
• There are 4 types of inaccuracy:
  • Mistake made despite taking reasonable care
  • Careless
  • Deliberate
  • Deliberate and Concealed.
• The minimum penalty percentage ranges are as follows:
• A further reduction for the quality of the disclosure will determine where the penalty range lies. The reductions depend on the assistance provided and cover telling, helping and giving.  Telling how the error occurred (up to 30%), helping in quantifying the inaccuracy (up to 40%) and giving access to records (up to 30%).
• The amount liable to the penalty calculation is deemed to be the Potential Lost Revenue (PLR) which is the tax liability considered due.
• HMRC can look to suspend a penalty but this is only for ‘careless’ behaviour and where conditions can be set that will help the contractor avoid penalties in the future and where it is considered that those conditions will/can be met.

Failure to make a declaration on CIS300

• A contractor is required to include a declaration in the CIS300 return which states that none of the contracts to which the return relates is a contract of employment, that each sub-contractor on the return has been verified or included on previous CIS returns in the last two years and that the return is correct and complete.
• Failure to complete a declaration can make the contractor liable to an initial penalty not exceeding £300 followed by daily penalties not exceeding £60 per day.

Making an incorrect declaration on CIS300

• A contractor who fraudulently or negligently makes an incorrect declaration can be liable to penalty not exceeding £3,000.

Failure to provide the sub-contractor with a Payment & Deduction Statement

• A contractor is required to provide a written statement of payments to each sub-contractor no later than 14 days after the end of each tax month.
• This penalty consists of an initial penalty not exceeding £300 followed by daily penalties not exceeding £60 per day until the failure is remedied.

Providing the sub-contractor with an incorrect Payment & Deduction Statement

• A contractor who fraudulently or negligently provides an incorrect written statement may be liable to a penalty.
• The maximum penalty is £3,000.

Working with The Guild and our dedicated compliance teams reduces the risk of clients being subject to such penalties. If you have any questions regarding the CIS penalty regime or would like to discuss these issues further, please feel free to contact The Guild.