CIS - are penalties on the way?

In April 2007, major changes were introduced to the Construction Industry Scheme (CIS). One of these changes was the requirement for contractors to send a monthly return to HMRC by the 19th of the following month. The failure to do this could, in principle, lead to penalties of £100 per 50 subcontractors (or part thereof) per month.

The monthly return requires contractors to:

• confirm that the employment status of subcontractors has been considered
• confirm that the new verification process has been correctly dealt with
• detail payments made to all subcontractors
• detail any deductions of tax made from those payments.

The monthly return can be sent either manually or electronically and relates to each tax month (ie running from the 6th of one month to the 5th of the next). Even if no subcontractors have been paid during a month, contractors still have to make a nil return unless the contractor does not expect to engage subcontractors for a period of at least six months. Nil returns can be made by telephone.

Problems to watch out for when completing paper returns include ensuring that:

• the forms used are the pre-populated return sent out by HMRC each month or the blank returns included with the contractor pack. Photocopied returns will not be accepted because the returns are scanned electronically which can only be done properly with the original returns
• the return is sent for the right month - do not, for example, send in the return due for August on a form pre-printed for July
• entries are legible
• the declarations on the back page have been completed and the return has been signed
• the return is submitted on time.

To help contractors in the transition to the new system, HMRC stated that they would operate a ‘light touch’ on penalties for the first six months of the new regime but, of course, that honeymoon period is now over.

HMRC have now announced that they will start imposing penalties in respect of any returns outstanding since April unless these were submitted by 19 October 2007. It is clear that HMRC are gearing up to start imposing penalties, so if you have any concerns about the monthly returns or any other aspect of the CIS regime, please do get in touch.