Mistakes by those in the construction industry scheme can be costly despite the new penalty regime
- The purpose of the construction industry scheme.
- The penalty regime should encourage compliance.
- The tribunal’s decision in the Bosher case.
- A comparison of the old and new penalty regimes.
- Examples of inequitable penalty charges.
- An improved collection system could help.
Reading Taxation? Welcome. Is it your first time or have you been here before? I only ask because I don’t seem to have received a copy of your completed Value Added forms for the last 18 months.
What do you mean; you didn’t know you had to fill them in? You do read Taxation, don’t you? So you ought to know that a simple form should be completed every week to say which parts of the magazine you’ve read and the value you have received from the different articles. Just turn to page 27 of the print version of this week’s issue; surely you do read right to the back of each magazine?
Well I’m very sorry, but penalties will have to be charged for a failure to submit those forms on time. It’s £100 for each issue that has been read without filling in the form, and if the forms remain outstanding the penalties mount up by another £100 each month.
No, that’s £100 a month for each form, for up to 12 months’ failure per issue, followed by a 13th penalty that can be up to £3,000, depending on how many times the reader “forgot” to do their professional duty. Send us a cheque for £141,500 or we’ll send round the lads.
All right, all right; there’s good news. We changed the rules in November 2011, so penalties will instead be under the new “improved” rules. So now that will just be £100 for each form at the one month stage, another £200 the month after that, and then another £300 after six months. Tell you what, we’ll take £4,118 and call it quits...
That, I hope, should give some idea of how it must feel to be a small construction industry scheme (CIS) contractor caught out by automatic CIS penalties.
CIS in a nutshell
The CIS is means of administering tax that applies uniquely to the construction industry, where short-term engagements, a fluctuating population, and disputes about employment and self-employment status abound.
Essentially, a contractor must acquire the name and UTR (unique taxpayer reference number) of each subcontractor and either their NINO (National Insurance number) for individuals or CRN (the company registration number) for corporates the first time that they are taken on.
The contractor must then find out from HMRC whether they can pay the subcontractor gross or whether deductions must be made from the payments. The deductions are analogous to PAYE and are designed in such a way that a labour-only subcontractor will, more or less, have paid the right amount of tax by deduction at the end of the year.
There are a lot of positive features to the way the CIS operates. Construction industry returns are pre-populated with information that HMRC already holds – a groundbreaking initiative when the new scheme was introduced in 2007 and one that should be rolled out more widely.
The facility to make nil returns by a simple telephone call is also a valuable precedent which, again, it is surprising HMRC have not made available elsewhere.
Indeed, if you believe the original impact assessment for the 2007 schem e, we should by now be in the sunny uplands of saving small construction firms an aggregate of between £63m and £71m a year.
That’s not the tax, of course, but the administrative cost – a comparison of the costs of administering the new scheme with what it might theoretically have been costing subcontractors to carry on administering the previous regime, where they had to carry ID cards issued by HMRC, which contractors had to check before payment.
The unfortunate Mr Bosher
The penalty regime attached to the scheme is supposed, like all HMRC penalties, to encourage compliance and not to be a revenue raiser in its own right. That does not, however, seem to be what is happening in a number of cases. This is illustrated by a tribunal case from last May: Anthony Bosher v CRC  UKFTT 631 (TC).
The case was reported in Taxation, but, briefly, Mr Bosher failed to file 18 monthly CIS returns without a reasonable excuse and HMRC issued him with penalty notices.
The penalty for failing to file a CIS return at the time was £100 for the first month, £100 for the next month and so on up to month 13 when, as well as £1,200 of fixed penalties for the previous 12 months, there was also a geared penalty for the 13th month of up to £3,000. See TMA 1970 Penalty Charges.
From the HMRC’s guidance on changes to penalties for late CIS contractor returns.Penalties applicable before October 2011.
“What penalties currently apply under Section 98A TMA 1970?
“Late submission of the contractor monthly return will currently incur a penalty under TMA 1970, s 98A for each month that the return misses a monthly due date.
“The penalty is charged at £100 for each of up to 12 consecutive months that the return is not submitted by its due date or by the 19th of each consecutive month.
“After 12 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 12-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 s 98A can grow quite rapidly.”
The unfortunate Mr Bosher had clocked up £64,000 in penalties by the time he appealed against them, although HMRC later reduced these to £54,000 and then to £14,600, the amount that they would have been under the post-November 2011 regime. See FA 2009 Penalty Charges.
The current penalty regime, under FA 2009, Sch 55, applied to any return due on or after the month ended 5 November 2011 or, by concession, to earlier returns where that produces a lower result.
From the HMRC’s guidance on changes to penalties for late CIS contractor returns.
“How will the new penalties apply under FA 2009, Sch 55?
“The new penalty system under FA 2009, Sch 55 starts in October 2011 and replaces the current TMA 1970, s 98A penalty system. The first return to attract a penalty under Sch 55 will be the return due for the month ended 5 November 2011.
“Under Sch 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
“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 12 months after due date
“If the return is still outstanding 12 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.”
The tribunal, however, decided this was so manifestly disproportionate when the aggregate tax on the late returns was less than £6,000 that they reduced the fixed penalties to nil and mitigated the month 13 penalties to the greater of £100 and the tax shown on each return, which worked out to a total of £6,287.25.
Mr Bosher had a poor compliance record as a contractor under the old scheme, and was late with several of his returns in the “soft landing” period when the 2007 scheme was in
force, but penalties were not yet being charged.
Consequently, his argument that the 16 returns he had posted to HMRC over a two-year period had gone missing – and that he had not received any of the penalty notices HMRC sent him over the same period – did not go down well with the tribunal. Indeed, they baldly said “We did not find Mr Bosher’s evidence to be credible.”
So maybe this is a one-off case?
What do we think about Mr G, whose case was taken up by the Federation of Master Builders via their helpline?
Mr G is one of those small scale contractors who occasionally needs to use subcontractors, but more often than not does not. He made subcontractor payments in October 2008, but then did not use subcontractors again until March 2010.
By that time, he had underpaid £37 on his CIS returns, but was asked for penalties of £66,300, mostly from the recurring penalties on the 16 intervening nil returns. No, I haven’t missed out a decimal point. His underpaid CIS deductions were £37 and the calculation of the penalties for failing to make what were largely “nil” returns is shown in Mr G’s Penalties – 1 (below; click image to enlarge).
HMRC kindly proposed to “mitigate” this penalty by recalculating them to what they would be under the 2011 rules: £16,800. See Mr G’s Penalties – 2 (below; click image to enlarge).
In another case, Mr D made a net annual profit of between £12,000 and £16,000 on a gross turnover of between £50,000 and £75,000 a year. He argued that he did not realise he was acting as a contractor and the CIS deductions he failed to make amounted to a few hundreds of pounds in one year and £86 in another. Yet he was told that his penalty bill was £141,500, mitigated to the FA 2009, Sch 55 figure of £4,118.
Of course, these are not intended to be tax-based penalties; they are a flat rate. The amount of £100 a month is designed to ensure compliance, if not in month 1 then at least in month 2.
But penalties of £100 a month only work if they are collected, allowing them to roll up for a year or two is surely both counter productive and oppressive. And by “collecting” them, I do not mean sending an HMRC letter.
At the smaller end of the construction industry scheme are the type of people who throw official envelopes into the same carrier bag where they put their receipts and – if you’re lucky – give them to their accountant at the end of the year.
The builders’ view
Liz Bridge of the Joint Tax Committee for Construction, which represents the Federation of Master Builders, said:
“I am fed up with calls to the helpline from people whose business is so small that they are living hand to mouth. They phone in a dreadful panic with notices to pay swingeing fines. Their real excuse is ignorance and – frequently – poor literacy skills. The first is no excuse in law, and the second is very difficult to ask a person to plead because they are already so ashamed. How can it be just to seek penalties in thousands of pounds from firms that do not make much more than a living wage for their owners? Penalties should make informed people cautious and compliant, not make ordinary men with limited resources bankrupt.”
Looking back at the case of Mr G, it’s easy to see that the problem would not have arisen if someone had knocked on his door in November 2008 and said: “you owe us £200, because you haven’t filled in this form. Have you used any subcontractors this month? OK then, this is what you do...”
This would be entirely in line with HMRC’s supposed “customer-centric strategy”, where those customers who “always need help” are treated differently from the big boys who are “willing and able” to navigate their way through HMRC’s systems.
With hindsight, it’s obvious that a combination of swift collection action with some clear, tailored training would have enabled Mr G either to make nil returns by phone for the 17 consecutive months he engaged no subcontractors or else (if he had some inkling that he wouldn’t be needing subcontractors for a while) to declare himself unlikely to engage subcontractors at all and so temporarily outside of the scheme.
I asked HMRC how they collected the CIS penalties and their answer was as follows.
“Penalty debts will be collected as set out in the published guides – available online. The HMRC website provides more details about collection of debts, and what to do if paying the amount due is a problem.”
They also said that “following recent representations from industry representatives about the penalties charged on some sole traders who only occasionally use subcontractors, HMRC are considering whether it is possible to further streamline the process for issuing penalties for this sector. Any changes to this process will be published at the appropriate time.”
There is, however, no timescale on the consideration of this “further streamlining” of penalties. In the meantime, perhaps HMRC might think about the number of copies of Taxation that are seen in their offices, and the penalties quietly building up for failure to fill in their Value Added forms, and see how they like the feeling.