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The Construction Industry Scheme CIS was implemented to mitigate tax evasion in the industry, and to enforce compliance, it comes with penalties. Late CIS filing penalties per se can accumulate up to £3000. This article provides a comprehensive guide for the sole trader and everyone self-employed involved in the scheme to help improve their tax compliance and avoid CIS penalties, as we discuss all that relates to this tax legislation, including the different types of penalties, penalty calculation, reasons for late filing and how to avoid it, how to appeal against the penalty, and more.
What are CIS Penalties?
Penalties enforce tax compliance in the construction sector, but the latest changes in the scheme are still found to be difficult to grasp for contractors and subcontractors, even for those under limited companies paying corporation tax.
Penalty rates can easily accumulate to £3000 and even worse for subcontractors who might lose their gross payment status, which exempts them from tax deductions to be tackled later on within the accounting period, causing heavy damage to their cashflow as they will have to pay their self employed tax, NICs, and other taxes upfront instead.
There are two major reasons for which HMRC will base penalty rates—non-deliberate or deliberate. Non-deliberate violations, due to carelessness or errors made despite taking reasonable care, attract lesser penalties, whilst deliberate and for concealment reasons are bound to heavier charges.
What are the Different Types of CIS Penalties?
CIS does have a lot of penalties for various violations (and differing rates, discussed further below), which are as follows:
- Failure to submit or late submission of CIS monthly returns
- Incorrect CIS return
- Failure to declare subcontractor’s employment status
- Incorrect declaration of employment status
- Failure to provide Payment and Deduction Statements to subcontractors
- Incorrect provision of Payment and Deduction Statements
If it’s failure to submit CIS returns on time, the penalties will be charged to more than 1 day, 2 months, 6 months, and 12 months late. More than one day late is penalised at £100; 2 months late is doubled (£200). Three months late, in addition to the above penalties, will be penalised at £10 per day for up to 90 days, which makes £900 in total. Six and twelve months late will be penalised further up to £300 or 5 per cent, depending on the due tax amount. A higher second further penalty will be added when it’s more than 12 months late and will depend on the reason for filing late, capped from £1,500 to £3,000.
There will be no penalties for Nil monthly returns, even if penalties were automatically issued. Once the contractor confirms that it is a NIL return, HMRC will waive the penalty, as Nil returns only mean the contractors are not paying any subcontractors that month, although for tax purposes and e-commerce bookkeeping, they are still encouraged to submit their CIS returns every tax period.
Penalties for incorrect CIS returns depend on the behavior of the taxpayer. If out of carelessness, they’re penalised from 15 to 30 per cent of their taxes, if deliberate, 35 to 70 per cent, and if deliberate and concealed, 50 to 100 per cent. No penalties will be imposed on those who took reasonable care of their tax affairs but still made mistakes.
Contractors are also required to make employment status declarations on time, including whether or not the subcontractor is registered or included on CIS return for the previous two years, and if such returns are complete and accurate. The initial penalty will not exceed £300. If the declaration is still not made at such time, daily penalties will be incurred daily, capped at £60.
On the other hand, incorrect declaration of employment status by the contractor, whether by negligence or fraudulence, will be penalised up to £3,000. In worst cases, subcontractors may lose their eligibility for gross payment, which, as mentioned above, will incur heavy repercussions on their any types of cash flow.
When the contractor fails to provide a written PDS copy to their subcontractors within 14 days after every closing of the tax month, the penalty will be up to £300, with daily penalties of £60 per day until they finally provide copies to their subcontractors. For incorrect PDS copies, the penalty will not be more than £3,000.
How to Calculate CIS Penalties
Contractors and subcontractors can use HMRC’s Estimate Your Penalty Online Tool to estimate their penalty rates. HMRC has stages of calculation to work out the amount. Based on the penalty rates above, the penalty percentage of liability will be shown on the taxpayers’ returns. If there’s no “liability” to make payments, they may increase the penalties depending on the behaviours mentioned above and if it is a prompted (higher penalty) or unprompted disclosure (lower penalty).
Unprompted disclosure for deliberate violations will be penalised from 20 to 70 per cent (£1,500 minimum) of the tax liability; deliberate and concealed violations will be charged at 30 to 100 per cent (£3,000 minimum). Prompted disclosure for deliberate violations will be at 35 to 70 per cent (£1,500 minimum) of the tax liability; deliberate and concealed violations will be at 50 to 100 per cent (£3,000 minimum). No penalty increase will apply for non-deliberate reasons.
Their behaviour or how cooperative they are with HMRC will help to reduce their penalty. If out of carelessness and they tell how the error happened, penalties will be reduced by up to 30 per cent, if they help to quantify the accuracy, up to 40 per cent, and if they give access to records, 30 per cent.
This means that the total increase of the penalty will depend on the penalty range (according to days or months late and the taxpayers’ reasons) minus the percentage reduction of the penalty in accordance with the taxpayers’ extent of collaboration with HMRC.
Here’s an example:
A contractor was prompted to disclose their information and divulged that their late filing was done deliberately, which means a 35 to 70 per cent penalty from their tax liability. However, the contractor collaborated enough during the disclosure process, and HMRC decided the quality of their disclosure cooperation to be 100 per cent.
| Penalty for Prompted Disclosure of Deliberate Violation = 35 to 75 per cent |
|---|
| To Arrive At | Computation | Result | |
|---|---|---|---|
|
Penalty Percentage Rate |
Maximum minus minimum penalty percentage |
75% – 35% |
35% |
|
Penalty Reduction Percentage |
Penalty percentage multiplied by disclosure quality reduction percentage |
35% x 100% |
35% |
|
Increased Penalty Percentage |
Maximum penalty percentage minus reduction percentage |
70% – 35% |
35% |
|
Increased Penalty Percentage = 35 per cent |
|||
| To Arrive At | Computation | Result | |
|---|---|---|---|
|
Penalty Percentage Rate |
Maximum minus minimum penalty percentage |
75% – 35% |
35% |
|
Penalty Reduction Percentage |
Penalty percentage multiplied by disclosure quality reduction percentage |
35% x 100% |
35% |
|
Increased Penalty Percentage |
Maximum penalty percentage minus reduction percentage |
70% – 35% |
35% |
|
Increased Penalty Percentage = 35 per cent |
|||
First, HMRC works out the difference between the minimum and maximum penalty percentages, which is 70 per cent minus 35 per cent, which arrives at 35 per cent. That is then multiplied by the disclosure quality reduction percentage (100 per cent) to arrive at the percentage reduction, arriving at 35 per cent. They then subtract that percentage from the maximum penalty percentage (70 per cent), making up 35 per cent. That means the increased penalty percentage for the contractor will be 35 per cent.
Reasons for Late CIS Filing
HMRC accepts reasonable excuses for late CIS returns filing as long as the taxpayer does them without unreasonable delays once the excuse is no more applicable. They may not have been able to comply with their tax on rental income and other tax liabilities on time due to the following reasons:
- Lack of funds
- Health or personal matters out of their control
- Major events that leave them no time to sort their income tax on investments and tax affairs
- Dependence on other parties to file on their behalf
It will depend on the taxpayer’s circumstances or abilities, which means what may be accepted by HMRC may not apply to another person. HMRC automatically does not grant lenience to those who lack funds to pay unless it’s due to circumstances outside their control (e.g., serious ailment), dependence on another party to file on their behalf, and qualifying corporation tax on losses unless their tax history shows they conscientiously tend to avoid late CIS filings.
HMRC highly encourages taxpayers to inform them immediately once they foresee that they will not be able to comply with their CIS tax obligations on time for health or personal reasons. The sooner they inform HMRC, the more chances their reasons will be accepted.
How to Avoid Late CIS Filing
Monthly CIS returns are supposed to be filed on or before the 19th of each month. Once contractors fail to submit returns by that date, the 1-day, 2-month, 6-month, and 12-month late penalties will apply accordingly until they settle their obligation. Higher penalties will be issued once they go past 12 months. To avoid the penalties, they should:
- File on or before 19th of each month
- Work their tax matters with tax professionals
- Appeal against their penalties (e.g., for Nil returns)
Contractors have to juggle their business and tax responsibilities at the same time, leaving less time for the latter. Tax experts can handle all the details of their obligation and make sure they are all completed accurately and on time. Having good tax records increases their chance of getting HMRC’s lenience once they are found to have discrepancies on their part.
If they have reasonable excuses for the violations, they can appeal to HMRC against their penalties. If acceptable, they will incur no penalty. One example of this is facing penalties even when the contractors’ monthly return is Nil or that no sole trader pay corporation tax. They will only have to inform HMRC of their situation, and the penalties will be waived and/or refunded.
How to Appeal Against CIS Penalties
If the contractor or sub contractor disagrees with the penalty, they have the right to appeal against it. HMRC gives them three options to do so, and they should be made within 30 days after CIS return submission, which are as follows:
- Send their new information to the officer they are dealing with and ask them to consider it.
- Have their case reviewed by another HMRC officer who is not involved in that matter.
- Arrange for an independent tribunal to have their appeal heard and settled.
Regardless of their choice, they will need a neutral facilitator, another HMRC officer, to give unbiased resolutions, for that matter. They can also appeal online using CIS Online, select “Appeal a Penalty,” which will provide the list of penalties that can be appealed (unique ID, type of penalty, issue date, tax return, amount of penalty), then press Unique ID, which is shown on the penalty notice, for their specific appeal.
The result of the appeal will show on “Generic Notice,” accessed below the “Appeal a Penalty” option. It may take weeks for HMRC to complete the review, and if accepted, their tax penalty payments will be refunded.
How Legend Financial Can Help
Filing returns on time is crucial as CIS penalties can pile up massively over time. And while contractors are aptly on it, they also need to declare their subcontractors’ statuses and give copies of CIS Payments and Deduction Statements to their subcontractors promptly and accurately, as these, too, incur relatively hefty fines. But once they have reasonable excuses, they can always appeal to HMRC against their penalties.
CIS shows to be a complicated burden for contractors and subcontractors alike, which is where tax experts at Legend Financial can help. We have been handling CIS matters for various clients, whether for their construction business or mere involvement in the activity that makes them covered under the scheme, helping them from completing their tax returns, making a CIS repayment claim, to appealing against penalties, amongst other tax matters. Reach us today for your CIS needs!
References
Penalties for failure to file returns on time — the Construction Industry Scheme (CIS) — CC/FS18b. (n.d.). Retrieved from Gov.UK: https://www.gov.uk/government/publications/compliance-checks-penalties-if-you-dont-file-construction-industry-scheme-returns-on-time-ccfs18b/penalties-for-failure-to-file-returns-on-time-the-construction-industry-scheme-cis-ccfs18b
A Guide to the Construction Industry Scheme Penalties Regime. (n.d.). Retrieved from Guild Hub Service: https://www.guildhubservice.co.uk/resource-article/guide-to-the-cis-penalties-that-hmrc-can-impose/
What are the penalties for a late CIS tax return? (n.d.). Retrieved from Tax Rebate Services: https://www.taxrebateservices.co.uk/tax-faqs/cis-tax-refund-faqs/cis-penalties
What Are The CIS Penalties For Filing Returns Late? (n.d.). Retrieved from Patterson Hall Accountants: https://www.pattersonhallaccountants.co.uk/cis-penalties/
Construction Industry Scheme CIS – Appealing Penalties. (n.d.). Retrieved from PD Tax Consultants: https://www.pd-taxconsultants.co.uk/cis-appealing-penalties/
CIS — penalties for late payment, returns or incorrect registration. (n.d.). Retrieved from Tolley: https://www.lexisnexis.co.uk/tolley/tax/guidance/cis-penalties-for-inaccurate-returns
CIS Administration and the Risks of Getting it Wrong. (n.d.). Retrieved from EEBS: https://eebs.co.uk/why-eebs/cis-administration-penalties/
Simplify late payment penalties and defer CIS changes, says ICAEW. (20 April 2021). Retrieved from ICAEW: https://www.icaew.com/insights/tax-news/2021/april-2021/simplify-late-payment-penalties-and-defer-cis-changes
Construction industry scheme compliance and penalties. (12 January 2023). Retrieved from Coveney Nicholls: https://www.coveneynicholls.co.uk/news/blog/cis-compliance-penalties/
Appealing online against a Construction Industry Scheme (CIS) late-filing penalty using the Penalty and Appeals Service (PAS). (n.d.) Retrieved from BASDA: https://www.basda.org/blog/appealing-online-against-a-construction-industry-scheme-cis-late-filing-penalty-using-the-penalty-and-appeals-service-pas/
