In this section:
  • Changes to penalties for late CIS contractor returns

Changes to penalties for late CIS contractor returns

Penalties for late CIS contractor monthly returns will change from October 2011.

In many cases, the new penalties will be less than what would be charged now. In particular, for new CIS contractors, there will be an upper limit to some of the penalties that are charged. This upper limit will apply when new contractors first send a monthly return, if that return and any other monthly returns that are sent at the same time, are late.

Although the new penalties do not start until October 2011, any contractor who has been, or is, 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
  • agree that their penalties should be reduced to the lesser amount

Will the penalty under the new rules always be lower than it is now?

No. The penalty under the new rules will not be lower in every case.

The minimum penalty for each late monthly return will remain £100.

The penalty may still exceed any liabilities shown on the return.

But, the penalty under the new rules may be lower if:

  • you have been charged more than one penalty in respect of any one monthly return
  • you have been charged more than £100 in respect of any one monthly return
  • you are a new contractor who has been charged penalties for more than one late monthly return

Click here for examples of when the penalty under the new rules may be lower or here for examples where the penalty under the new rules may not be lower.

How do I find out whether my penalty would be lower under the new system?

If you have been charged a penalty for sending HMRC your contractor monthly return(s) late and want to know if the new penalty would be lower, you can ask HMRC to work out how much the penalty would be under the new rules.

You can ask HMRC to do this if you have been charged a penalty, whether or not you have already paid it.

If the re-calculation shows that the penalty would be lower under the new rules, HMRC will reduce your penalty to the lower amount and will repay the excess to you if you have already paid the higher amount.

What if I disagree with the penalty I have been charged?

If you disagree with the penalty you have been charged, not taking into account any reduction under this arrangement, you will be able to appeal against it. The penalty notice will tell you how to do this.

You can send HMRC further information and they will try to reach agreement with you or you can

  • ask for the penalty to be reviewed by an HMRC officer not previously involved in the matter, and/or
  • send your appeal to an independent tribunal

You can still ask HMRC to work out how much the penalty would be under the new rules if you have appealed and to agree that any penalty should be reduced to this amount.

But you cannot appeal against HMRC's decision about whether and by how much any penalty should be reduced under this arrangement. You may instead use the complaints process. Alternatively, you can apply for Judicial Review. This could be very expensive, so you should seek legal advice first.

You can find further information on appeals and reviews here.

What penalties currently apply under Section 98A TMA 1970?

Late submission of the contractor monthly return will currently incur a penalty under Section 98A Taxes Management Act (TMA) 1970 for each month that the return misses a monthly due date.

The penalty is charged at £100 for each of up to twelve consecutive months that the return is not submitted by its due date or by the 19th of each consecutive month.

After twelve monthly penalties have been charged, if the return is still outstanding, a final penalty in the range of £300 to £3,000 is charged depending on how many other final penalties had been charged over the previous twelve-month period.

When the returns are eventually received, the initial penalties of £100 will be increased where the returns show entries for more than 50 subcontractors.

If returns for several months are not submitted, the total penalty under Section 98A can grow quite rapidly.

How will the new penalties apply under Schedule 55 FA 2009?

The new penalty system under Schedule 55 Finance Act (FA) 2009 starts in October 2011 and replaces the current Section 98A penalty system. The first return to attract a penalty under Schedule 55 will be the return due for the month ended 5 November 2011.

Under Schedule 55, penalties will be charged as follows.

Initial failure to meet due date

If a return is not received by HMRC by its due date of the 19th of the month, a penalty of £100 will be charged.

Return still outstanding two months after due date

If the return has still not been received by HMRC two months after its due date, a further penalty of £200 will be charged.

Return still outstanding six months after due date

If the return is still outstanding six months after its due date, a 'tax-geared' penalty becomes due. This penalty is the greater of 5% of any deductions shown on the outstanding return or £300.

Return still outstanding twelve months after due date

If the return is still outstanding twelve months after its due date, a second 'tax geared' penalty becomes due as described below.

  • 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.

If you have not sent any previous returns and are filing your first returns late, there will be an upper limit of £3,000 on the total fixed penalties (£100 and £200) that may accrue.

This upper limit does not apply to any 'tax-geared' penalty except that, where it applies, it removes the £300 minimum penalty that would otherwise be charged where the tax-geared penalty is less than £300.

The limit only applies in respect of contractors new to CIS that have not sent in their first returns on time. It does not apply to contractors that have already filed returns previously.

Who should I contact to discuss my penalties?

If you would like HMRC to work out how much the penalty would be under the new rules, you should write to:

HM Revenue and Customs
CIS Centre
Carnbane Way
NEWRY
BT35 6QG

Please mark your correspondence 'Section 102 Claim'.

You do not have to appeal against the penalty to find out if it will be lower under the new rules. However, if you do not agree that the penalty should have been charged at all, you should appeal in writing to this same address within 30 days of receiving the penalty notice.

What if I have filed other returns late?

This arrangement only applies to penalties charged for the late submission of contractor monthly returns for the periods up to and including 5 October 2011. Normal penalty rules and appeals procedures apply for any other penalty.

Examples of who might benefit under Schedule 55

Example 1

Contractor A is new to CIS and therefore benefits from the upper limit that applies under Schedule 55. The contractor should have been submitting returns from 5 February 2010 to 5 August 2010 (seven returns in total). The contractor sends them all in on 22 August 2010. Each return has £200 deductions shown and fewer than 50 subcontractors.

  • Under Section 98A, the penalties for the seven returns will amount to £2,800.
  • Under Schedule 55, the penalties for the seven returns will amount to £1,710.

Example 2

Contractor B is also new to CIS and therefore benefits from the upper limit that applies under Schedule 55. The contractor has been paying subcontractors for sixteen months before sending in his outstanding returns for the period from 5 May 2009 to 5 August 2010. The contractor sends them all in on 22 August 2010. Each return has £200 deductions shown and fewer than 50 subcontractors.

  • Under Section 98A, the penalties for the sixteen returns will amount to £15,600.
  • Under Schedule 55, the penalties for the sixteen returns will amount to £3,140.

Example 3

Contractor C is not new to CIS so the upper limit under Schedule 55 will not apply. The contractor has fallen behind with their returns and is charged penalties for each month the eight outstanding returns are late (5 January to 5 August). The contractor eventually sends them all in on 22 August 2010. Each return has entries for 55 subcontractors and shows deductions of £8,000.

  • Under Section 98A, the penalties for the eight returns will amount to £7,200.
  • Under Schedule 55, the penalties for the eight returns will amount to £2,800.

Examples of who might not benefit under Schedule 55

Example 4

Contractor D is not new to CIS so the upper limit under Schedule 55 will not apply. They did not send in the return due for the month ending 5 August 2010 until 22 October 2010 (three months late). The return has fewer than 50 subcontractors.

  • Under Section 98A, the penalties for the return will amount to £300.
  • Under Schedule 55, the penalties for the return will amount to £300.

Example 5

Contractor E is often late sending in their returns, usually by a couple of days. They only have four subcontractors to include on the return. So far this year:

  • the February return was five days late and incurred a penalty of £100,
  • the April return was six days late and incurred a penalty of £100,
  • the May return was eight days late and incurred a penalty of £100 and,
  • finally, the August return was five days late and incurred a penalty of £100.

In all, four returns were sent in late and each incurred a penalty of £100, amounting to £400 in total. This is exactly the same amount of penalties that would have been charged under Schedule 55, so this contractor will not benefit from the application of Schedule 55 to the penalties they have been charged.

Example 6

Contractor F is not new to CIS so the upper limit under Schedule 55 will not apply. The contractor submits the return for month ended 5 February 2010 on 22 August 2010. The return is received over 6 months after its due date, has deductions totalling £10,000 and fewer than 50 subcontractors.

  • Under Section 98A, the fixed penalties will amount to £700.
  • Under Schedule 55, the penalties will amount to £800, that is £100 and £200 fixed penalties plus a tax-geared penalty of £500 (5% of the £10,000 deductions).

Example 7

Contractor G is not new to CIS so the upper limit under Schedule 55 will not apply. The contractor submits the return for month ended 5 May 2009 on 22 May 2010. This is the first return submitted over 12 months after its due date, has deductions totalling £1,000, fewer than 50 subcontractors and HMRC have determined that the withholding of information on the return was deliberate but not concealed.

  • Under Section 98A, the penalties will amount to £1,500.
  • Under Schedule 55 the penalties will amount to £2,100, that is £100 and £200 fixed penalties plus the minimum penalty of £300 six months after the due date and £1,500 12 months after the due date.