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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. L ate 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.
CIS penalties only apply to contractors and subcontractors (self-employed), not to regular employees, as the latter is covered under the Pay as You Earn (PAYE) framework. Subcontractors, on the other hand, can be contractors if they hire another party to do the work. The Construction Industry Scheme went as far as to cover non-construction businesses as well—not just property builders or developers—if their average spend on construction activities within the last three years exceeds £1 million.
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.
CIS does have a lot of penalties for various violations (and differing rates, discussed further below), which are as follows:
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 an d e-commerce bookkeeping , th ey are still encouraged to su bmit 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.
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 increa se 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 |
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