If you’re working in the UK construction industry, understanding the Construction Industry Scheme (CIS) is vital – especially the penalties. HMRC doesn’t take CIS compliance lightly and getting things wrong can lead to hefty fines. Are you submitting your CIS returns on time and accurately? Do you know what happens if you make a mistake or miss a deadline? This guide focuses on CIS penalties: what they are, how they’re calculated, and, most importantly, how to avoid them.
Understanding the construction industry scheme (CIS)
The Construction Industry Scheme (CIS) is a UK tax system managed by HMRC for the construction industry. It makes sure subcontractors pay the right tax.
How CIS works
- Contractors must deduct tax from a subcontractor’s payments. This is like an early tax payment for the subcontractor.
- The contractor then pays the tax to HMRC.
- Subcontractors can claim back CIS refunds.
Registration
- Both contractors and subcontractors need to register for CIS.
- If subcontractors aren’t registered, contractors must deduct a higher rate of tax (30% instead of 20%).
Who it applies to?
- CIS covers a wide range of construction work in the UK, such as:
- Site preparation
- Construction
- Repairs
- Alterations
- Demolition
- Decorating
- Dismantling
- The scheme applies to various types of businesses, including companies, partnerships and self-employed individuals.
- It also applies to foreign businesses carrying out construction in the UK.
Why CIS is important?
- CIS helps prevent tax avoidance and ensures subcontractors pay their income tax on time.
- It makes contractors responsible for deducting tax.
- Non-compliance can lead to penalties for both contractors and subcontractors.
- HMRC monitors contractors and subcontractors and requires monthly CIS returns.
- Missing the filing requirements results in penalties and potential legal issues.
Why does CIS exist?
CIS was introduced to tackle tax evasion in the construction industry. It ensures taxes are collected efficiently and at source.
CIS filing requirements
Contractors have specific obligations when submitting monthly CIS returns. These include:
- Submitting monthly CIS returns by the 19th of each month.
- Providing accurate information, including tax deductions.
- Submitting returns online via HMRC’s online service.
- Verifying subcontractors‘ CIS status with HMRC.
- Deducting tax at the correct rate based on the subcontractor’s status.
Consequences of late CIS filing
Late filing penalties
- If your CIS return is even one day late, you’ll be charged a fixed penalty of £100.
- If the return is still not received:
- After 2 months, you’ll get another fixed penalty of £200.
- After 6 months, you’ll be charged either £300 or 5% of what you should have paid, whichever is higher.
- After 12 months, you’ll get a further penalty. The amount depends on why the return was late. It could be £300 or 5% of the payment liability, or a higher penalty.
What’s a ‘Higher’ penalty?
A ‘higher’ penalty could be:
- Up to 100% of the payment liability
- A minimum of £1,500 or £3,000
You’ll get a ‘higher’ penalty if HMRC finds out you deliberately hid information.
Liability to make payments
This is the CIS deductions a contractor should have taken from subcontractors and shown on their monthly CIS return.
Capping penalties
When you file your first CIS return, if older returns are also late, the total of the £100 and £200 fixed penalties might be capped at £3,000 for some returns.
Gross payment subcontractors
If your CIS return only involves subcontractors registered for gross payments, there’s no payment liability. In this case, the penalty is £300 when the return is 6 months late. After 12 months, the penalty is £300, £1,500, or £3,000, depending on why the return was late.
Reasonable excuses
You won’t be charged cis penalties if you had a reasonable excuse for being late, as long as you filed the return without delay after the excuse ended. A reasonable excuse is something beyond your control that stopped you from meeting your tax obligations, and you took reasonable care to meet them. Examples that are usually not accepted as reasonable excuses:
- Lack of funds, unless due to circumstances outside your control.
- Relying on someone else to file for you, unless you took reasonable care.
If health or personal issues made it difficult to file on time, let HMRC know so they can consider it.
How HMRC charges penalties?
In most cases, HMRC will automatically charge you penalties when each return is late by a day, 2 months, 6 months, and 12 months.
If a return is 6 or 12 months late, they’ll normally charge £300. When you file the return, if it shows a payment liability, they’ll check if 5% of that liability is higher than £300. If it is, you’ll be charged the extra amount.
Sometimes, penalties might not be charged automatically (e.g., if HMRC didn’t know you needed to file a return). In these cases, you’ll get a penalty assessment notice.
Capping fixed penalties
When you file your first CIS return, the £100 and £200 fixed penalties for that and earlier returns might be capped at £3,000. This only applies to returns due on or after 19 November 2011.
Penalties after 6 and 12 months
Normally, after 6 and 12 months, you’re automatically charged £300 or 5% of the payment liability. The amount is based on the information HMRC has at the time. If the return shows a higher payment liability than expected, the penalty amount might increase. After 12 months, HMRC will also consider if a ‘higher’ penalty is needed if you deliberately hid information.
Special rules
If the £100 and £200 fixed penalties were capped at £3,000, special rules might apply to the penalties after 6 and 12 months. In these cases, you’ll normally be charged 5% of the payment liability, even if it’s less than £300.
‘Higher’ penalties after 12 months
You might get a ‘higher’ penalty if your return is over 12 months late and you hid information that would have helped HMRC work out your correct payment liability. This is more likely if HMRC finds out during a compliance check.
Deliberate behaviour
This means you knew that not filing the return was hiding information from HMRC.
Deliberate and concealed behaviour
This is where you knew you were hiding information and took extra steps to cover it up. This carries the highest penalties.
If you know you’ve hidden information, tell HMRC straight away. If you tell them before you think they’re about to find out, it’s called an ‘unprompted disclosure,’ which has lower penalty rates than ‘prompted disclosures’ (telling them after you think they’re about to find out).
Reducing penalties
The amount of any higher penalty can be reduced depending on how much you assist HMRC with your disclosure. This includes:
- Telling them about the hidden information.
- Providing all possible details.
- Helping them work out the payment liability using your records.
- Answering questions fully.
- Giving access to your records.
The penalty will be reduced as much as possible if you provide full assistance quickly.
Special circumstances
If there are special circumstances that should be considered, let HMRC know immediately.
How Penalties Are Calculated
- Calculate Payment Liability: The penalty will be a percentage of any payment liability on the return.
- Determine Behaviour: Identify if the behaviour was non-deliberate, deliberate, or deliberate and concealed.
- Disclosure Type: Determine if the disclosure was unprompted or prompted.
- Penalty Range: The penalty percentage depends on the behaviour and disclosure type.
- Reductions: Reductions are given for the quality of disclosure (telling, helping, and giving access to records).
- Calculate Penalty: The final penalty amount is determined by the penalty range and any reductions.
Example
If a customer deliberately hid information and then admitted it after being challenged (prompted disclosure), the penalty range is 35% to 70% of the payment liability. If they provided full assistance, the penalty could be reduced to 35%.
What happens next?
HMRC will send you a calculation of what they believe you owe. If you disagree with something, let them know.
Serious wrongdoing
If you deliberately did something wrong (e.g., providing false information), HMRC might carry out a criminal investigation.
Managing serious defaulters
If you deliberately got your tax affairs wrong, HMRC might monitor your tax affairs more closely through the ‘managing serious defaulters’ program.
Disagreements
If you disagree with a decision, you can:
- Provide new information.
- Have your case reviewed by a different HMRC officer.
- Appeal to an independent tribunal.
You can also ask for Alternative Dispute Resolution (ADR), where a specialist officer helps resolve the dispute.
Your rights
You have certain rights under the European Convention on Human Rights, including:
- The right not to answer questions that might lead to a penalty.
- The right to get advice from a professional adviser.
- The right to appeal.
- The right to funded legal assistance for certain penalties.
- The right to have the matter dealt with without unreasonable delay.
FAQs
Are HMRC penalties allowable for corporation tax?
No, HMRC penalties for corporation tax are not allowable as tax-deductible expenses.
What are HMRC penalties for incorrect returns ?
HMRC penalties for incorrect returns can range from 0% to 100% of the potential lost revenue, depending on whether the inaccuracy was due to lack of reasonable care, deliberate action, or deliberate action with concealment.
How much CIS can I claim back?
You can claim back CIS deductions of up to £50 for overpaid tax, depending on your specific circumstances.
How to pay CIS payments to HMRC?
To pay CIS payments to HMRC, you must use the HMRC online portal or make a bank transfer using the correct reference number.
How to appeal late filing penalty?
To appeal a late filing penalty, submit your appeal online through your personal tax account or by writing to HMRC, providing a valid reason for the delay.
