CIS penalties

Change to Penalty Regime in 2010/11

The CIS penalty regime changed with effect from 1 November 2011.  The new rules will apply for any returns due to be filed after 1 November 2011. 

Position up to 31 October 2011

The rules pre-1 November 2011 are summarised below:

If a return was not made, or was late, the following penalties became chargeable:

• £100 for each month or part month (up to twelve) during which the failure continues and for each 50 persons (or part thereof) in respect of whom particulars should have been included in the return; and
• if a return is remains outstanding after 12 months, an additional “final” penalty in the range of £300 to £3,000 will become chargeable.  The amount of the penalty will depend on how many other “final” penalties had been charged in the previous 12-month period.
• if the failure continues beyond twelve months, an additional penalty of the amount payable for the tax year to which the return relates which remained unpaid at 19 April following that year.

The following example considers the fixed penalty position prior to 31 October 2011:

 Q. Mr Partridge is a contractor in the construction industry who uses the services of two sub-contractors.  He failed to make any sub-contractors returns for the whole of the 2010/11 tax year.  What would be his exposure to penalties for 2010/11 as at 1 May 2011?

A. The fixed penalty position would be as follows:

Return month:                                 Penalty £:
  
5 Apr 2011 £100 x 1 month                        100
5 Mar 2011 £100 x 2 months                      200
5 Feb 2011 £100 x 3 months                      300
5 Jan 2011 £100 x 4 months                       400
5 Dec 2010 £100 x 5 months                      500
5 Nov 2010 £100 x 6 months                      600
5 Oct 2010 £100 x 7 months                       700
5 Sep 2010 £100 x 8 months                       800
5 Aug 2010 £100 x 9 months                       900
5 Jul 2010 £100 x 10 months                    1,000
5 Jun 2010 £100 x 11 months                   1,100
5 May 2010 £100 x 12 months                 1,200
    
Fixed Penalties due as at 1 May 2010      £7,800

Under these rules, the fixed penalties can escalate very quickly.

From 1 November 2011, the position will change.  The new rules will apply for any returns due to be filed after 1 November 2011.  The new penalty regime will be as follows:

1. An initial penalty of £100 is charged if the 19th of the month deadline is not met;

2. A further penalty of £200 is charged if the return is still outstanding more than two months after the due date; 

3. A tax-geared penalty becomes due if the return is still outstanding six months after the due date. This penalty is the greater of:

            • 5% of any deductions shown on the outstanding return, or

            • £300

4. A second ‘tax geared’ penalty becomes due if the return is still outstanding more than twelve months after the due date, as follows:

If HMRC determines that withholding information on the return has been deliberate and concealed, the penalty is the greater of 100% of any deductions shown on the return or £3,000. 

If HMRC determines that withholding information on the return has been deliberate but not concealed, the penalty will be the greater of 70% of any deductions shown on the return or £1,500. 

In all other cases, where HMRC determines that information on the return has not been withheld deliberately, the penalty will be the greater of 5% of any deductions shown on the return or £300.

The new penalty provisions are contained within Schedule 55 of the Finance Act 2009.

Continuing the above example, let us roll the clock forward two years, beyond the transitional year, and look at what the position would be if Mr Partridge (assuming all other factors are the same) made no CIS returns for 2011/12, looking again just at the fixed penalties: 

The fixed penalty position would be as follows:

Return month:                                          Penalty £:
  
5 Apr 2013 £100                                                             100
5 Mar 2013 £100                                                            100
5 May 2012– Feb 2013 (£100 + £200) x 10           3,000
  
 Total Fixed Penalties due as at 1 May 2012       £3,200

Contractors who are new to the CIS scheme, who file their first returns late under the new rules will be entitled to the following concessions:

• Any fixed penalties, i.e. the £100 and £200 penalties, will be subject to a total cap of £3,000, and
• For tax-geared penalties, the £300 minimum penalty is removed.

In most cases, the amount of penalties due under the new regime will be less than under the existing regime. 

It is possible to apply for early adoption of the new rules.  Although the new penalties do not start until October 2011, any contractor who has been charged penalties for filing a monthly return late before October 2011, may ask HMRC to:

• work out how much the penalties would be under the new rules, and, if less than the amount already charged; and
• agree that their penalties should be reduced to the lesser amount.
  

Although the new penalty regime is potentially less punitive than the old system, all CIS clients should be made aware of their filing obligations under the CIS scheme and of the potentially severe penalties that can arise in the event of non-compliance. 

Where HMRC has delayed in sending out penalty notices and this has resulted in them escalating to a disproportionate level, please refer to the 2011 Tribunal case of  HMD Response International v HMRC.