Contractors who fail to comply with the requirements of the construction industry scheme can receive large CIS penalties. The CIS penalties can easily be in the £000’s. Businesses could also lose their gross payment status which potentially could be disastrous for cashflow.
CIS penalties for late filing
If a contractor fails to submit the monthly return on time the following penalties are applied:
- 1 day late – £100
- 2 months late – £200
- 6 months late – £300 or 5% of the CIS deductions (whichever is higher)
- 12 months late – £300 or 5% of the CIS deductions (whichever is higher)
- Over 12 months late – potentially an additional £3,000 or 100% of the CIS deductions (whichever is higher)
The CIS penalties are cumulative and they are for each monthly CIS return not filed in time.
CIS penalties example
As an example if a contractor doesn’t file their 5th January and 5th February monthly returns until 10th May the total penalties would be £600. This is then calculated as follows:
- 5th January return was due to be filed by 19th January, so it has been filed over 3 months late. It therefore incurs the £100 penalty for being over 1 day late plus the £200 penalty for being over 2 months late. Total CIS penalties for this month is £300.
- 5th February return was due to be filed by 19th February, so it has been filed over 2 months late. Again this incurs the £100 penalty for being 1 day late plus the £200 penalty for being over 2 months late. The total CIS penalties for this month is also £300.
CIS penalties for nil returns
Should a contractor fail to submit a nil monthly return a CIS penalty will automatically be issued. When this happens HMRC have confirmed that they will cancel the CIS penalties when the contractor confirms that the monthly return was Nil.
N.b A nil monthly return is simply a tax month in which the contractor has paid no subcontractors.
CIS penalties for incorrect employment status
Contractors must confirm that they have checked the employment status of their subcontractors. This is done when filing the CIS monthly returns.
Contractors have been known to take on workers and treat them as subcontractors for tax purposes. This is to avoid employment taxes which would be paid if taxed as employees. Declaring the wrong employment status can incur penalties of up to £3,000.
To check the status of your workers read our blog employee or subcontractor.
Poor record keeping
Contractors must keep records showing amounts paid to subcontractors and also any CIS tax deducted.
HMRC may at some point request to see the CIS records. Failure to keep these records could incur a penalty of up to £3,000.
The biggest CIS penalty of all
Most businesses are both contractors and subcontractors. Should the business as a contractor file late monthly returns it will have financial penalties to pay. However the much greater punishment if the business is also a subcontractor would be the removable of the gross payment status.
Losing gross payment status would mean the business no longer receives the full sales amount from its customers. Instead as a net subcontractor they would have 20% tax deductions. Potentially this could have a massive impact on cashflow as less money would be received from customers.
At Patterson Hall Chartered Accountants we are experts within all aspects of the Construction Industry Scheme. We have produced an ultimate guide to all things CIS with many user friendly helpsheets and examples. Take a look at our CIS Accountants guide.
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