If you’re working in the construction industry, you will be familiar with the Construction Industry Scheme (CIS)… CIS ensures that contractors and subcontractors comply with tax deductions and reporting requirements.
However, it’s easy to fall foul of the regulations, resulting in CIS penalties for non-compliance. If you’ve received a penalty, don’t panic! In this blog, we’ll explain what CIS penalties are, why they occur, how much they can cost, and how you can appeal them.
What are CIS Penalties?
Under the Construction Industry Scheme (CIS), contractors must deduct tax from payments made to subcontractors and pass this on to HMRC.
In addition, both contractors and subcontractors have specific obligations when it comes to registering, submitting returns, and maintaining records.
Penalties can range from small fines to more significant amounts, depending on the severity of the issue. It’s essential to keep on top of your submissions and payments to avoid these fines.
How Much Are CIS Penalties?
The amount you can be fined under the CIS penalty regime depends on the specific violation and how late or incorrect the submission is. Here are the general penalty amounts:
1. Late Submission Penalties:
a. First late submission: £100 for each month the return is late.
b. After 2 months: If your return is late for two months, you will be charged an additional £200, and the penalties will continue to increase the longer the return is late.
c. After 3 months: If your return is still late after three months, HMRC may charge additional penalties and could take further enforcement action.
The penalties are applied per tax year, so they can accumulate if you’re late with more than one return.
2. Late Payment Penalties:
a. First late payment: The penalty is 1% of the amount you owe
b. Second late payment: If you’re late again within 12 months, the penalty increases to 2%.
c. Third or subsequent late payment: Penalties increase to 3% of the outstanding amount.
The percentage increases if you continue to miss payment deadlines, and HMRC may also charge interest on the late payments.
3. Incorrect Returns:
If you submit an incorrect return (e.g. incorrect CIS deductions or missing details) HMRC may impose a penalty of £100. If the incorrect return is not corrected after a certain period, further penalties may apply.
4. Failure to Register for CIS:
If subcontractors aren’t properly registered with the scheme, contractors may have to deduct tax at a higher rate. If subcontractors are not registered, they may face penalties of up to £3,000 or more in some cases.
Follow the link below to the official HMRC website for further information on how the fines and penalties work.
Why Do CIS Penalties Happen?
The main reasons CIS penalties are imposed include:
- Late or missing CIS returns: If your monthly return isn’t filed by the deadline (the 19th of each month), you will face a penalty.
- Incorrect or incomplete returns: Failing to provide accurate information on your returns can result in fines.
- Late payments: Contractors must pay over the deductions to HMRC on time (usually by the 22nd of each month for online payments).
- Failure to register for CIS: Subcontractors must be registered with HMRC under CIS, or else the contractor may have to deduct tax at the higher rate.
Understanding these common pitfalls is the first step in avoiding penalties.
How to Appeal CIS Penalties
If you’ve received a CIS penalty you may be able to appeal the penalty if there are valid reasons for your non-compliance.
Here’s how to do it:
- Check if You Have a Valid Reason
Before appealing, ensure you have a legitimate reason for the mistake or delay. For example, if you experienced technical issues, had a personal emergency, or had difficulty understanding the rules due to changes, HMRC MAY accept this as a valid reason. - Submit Your Appeal Online
You can appeal a CIS penalty directly through your HMRC online account. When submitting your appeal, you’ll need to provide evidence of your reason for the late submission or payment, such as medical records or correspondence with HMRC about technical difficulties. - Provide Supporting Evidence
The more evidence you provide, the stronger your appeal will be. Supporting evidence could include:
a. Emails or letters from HMRC
b. Proof of payment delays (e.g. bank statements)
c. Details of any technical issues or system outages
d. Personal or business-related documentation if a serious event caused delays (e.g. illness, death in the family).
- HMRC’s Response to Your Appeal
After submitting your appeal, HMRC will review the information and decide whether to uphold or cancel the penalty. This process can take several weeks, so make sure to keep track of any correspondence and provide any additional information if requested. - If Your Appeal is Rejected
If your appeal is unsuccessful, you may have the option to escalate the case or take it to the Tax Tribunal for further review. However, it’s best to resolve things with HMRC if possible, as this process can be time-consuming and costly.
Top Tips for Avoiding CIS Penalties in the Future
While appealing a penalty is possible, it’s far better to avoid receiving one in the first place. Here are a few tips to stay compliant with CIS and keep penalties at bay:
- Stay Organised: Keep up-to-date with your CIS submissions and payments. Use digital tools or accounting software that help you track important deadlines and ensure timely submissions.
- Register on Time: Ensure that all subcontractors are registered under CIS and that you have the correct rates applied when making payments.
- Double-Check Your Returns: Always check your returns before submission to avoid mistakes. If you’re unsure about the process, it may be worth seeking advice from a professional.
- Set Up Direct Debits: Set up direct debits or automated payments to ensure you meet the deadlines for paying your CIS deductions to HMRC.
- Seek Professional Help: If you find the process confusing, it’s worth consulting with a professional who specialises in construction industry compliance. They can guide you through the rules and help prevent mistakes.
CIS penalties can be frustrating, but they’re avoidable with the right knowledge and planning. If you do receive a penalty, remember that appealing is always an option, especially if you have a legitimate reason. Keep your records accurate, file your returns on time, and make payments promptly to stay compliant.
Book a call here to chat to one of our experts for bookkeeping advice and more information on CIS.
