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HMRC internal manual

Compliance Operational Guidance

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HM Revenue & Customs
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Supporting Guidance: employer compliance: guidance by subject: penalties: CIS from 06-04-07 to 05-10-11 - failure to submit a monthly return - Section 98A penalties - CIS mitigation policy

COG914290 and COG914295 explain the penalties which apply under Section 98A(2)(a) and (b)(ii) TMA 1970 when a contractor fails to submit a monthly return (CIS300), including a nil return, by the due date.

 

Section 102 Mitigation

HMRC has a wide discretionary power to mitigate any penalty. Section 102 TMA 1970 allows us to reduce a penalty once it is determined and final but we must do this reasonably and consistently.

Mitigation is entirely a matter for the Commissioners for HMRC, acting through senior officers. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)  

HMRC’s longstanding policy, which is explained in EM5310 is to only consider mitigation when the penalty has been determined and the taxpayer has exhausted (or abandoned) all appeal rights and the error has been remedied or corrected.

However given that Parliament has enacted the relevant penalty and the taxpayer has incurred it, we will only mitigate in certain narrowly constrained circumstances. This is particularly true of fixed-amount penalties where Parliament has specified the amount and denied the tribunal the ability to alter it.

CIS Mitigation Policy

(This content has been withheld because of exemptions in the Freedom of Information Act 2000) In November 2010 HMRC agreed a new process which in specific circumstances allows officers to mitigate penalties due under Section 98A(2) TMA 1970 for the failure to submit CIS monthly returns by the due date.

The process allows officers to compare the penalties due under Section 98A(2) to the total amount which would have been payable under Schedule 55 Finance Act 2009 and mitigate the Section 98A(2) penalties to the latter amount if this was less. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)  

Note

  • We are not charging penalties under Schedule 55 for periods before the new penalty rules came into effect (6 October 2011).
  • The penalties are correctly due (and charged) under Section 98A(2) TMA 1970.
  • Our statutory authority to mitigate the penalties is Section 102 TMA 1970.
  • The penalty model in Schedule 55 is only used to determine the amount we are prepared to mitigate the Section 98A penalties to.

CIS Mitigation Process

The CIS mitigation process only allows you to mitigate Section 98A(2) penalties if the comparable penalties calculated under Schedule 55 for an individual return are less. Where they are you should offer to mitigate the penalties for each relevant return to the lower amount under Section 102 TMA 1970.

You must consider the penalties for each individual monthly return separately, so in the same case there may be some monthly returns where the CIS mitigation process applies and other monthly returns where it does not.

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Notifying the contractor

When you have calculated the penalties you should provide the contractor with a schedule of the statutory penalties payable under Section 98A(2) TMA 1970 for each monthly return and let them know what amount you are able to mitigate the total Section 98A(2) penalties to under this process. See COG914295 which explains how to calculate the penalty due under Section 98A(2)(b)(ii) for CIS monthly returns over 12 months late.

If the contractor wants to know how you have calculated the reduction you should provide sufficient information to explain the reduction. In some cases (especially where the capping rules do not apply) this may be a separate Schedule showing the reduced penalty for each individual tax month.

Where the capping rules do apply you will not be able to provide a breakdown for individual months because the special rules for new contractors cap the total fixed penalties for all the relevant returns to £3,000. There are also special rules for calculating the tax geared penalty for 6 and 12 months lateness - see CH62580.

You should therefore explain this to the contractor and if necessary provide a schedule of the Schedule 55 penalties but add a line to say ‘the total fixed £100 and £200 penalties payable for the returns due for the period DD/MM/YYYY to DD/MM/YYYY have been capped to £3,000 in accordance with paragraph 13(2)(b) of Schedule 55 to the Finance Act 2009’.

Settlement

If the contractor agrees to pay the lesser amount you should recover the penalties (and any other liabilities, interest and penalties) by contract settlement.

If you are unable to reach agreement with the contractor you will not be able to mitigate the penalties until they have been determined and the taxpayer has exhausted (or abandoned) all appeal rights in accordance with our normal mitigation policy - see EM5310.

You will therefore have to issue formal penalty determinations for the full Section 98A(2) penalties - see COG914297. The determination will provide the contractor with a statutory right of appeal if he thinks the penalties are wrong or not payable. However you must make it clear to the contractor (in a covering letter issued with the penalty determination) that we will mitigate the penalties to the lower amount already offered, when the appeal process has been concluded.

If the appeal is subsequently abandoned or dismissed by a tribunal you should mitigate the Section 98A(2) to the lower Schedule 55 amount.

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Claims for further mitigation

The delegated mitigation process only allows you to mitigate Section 98A(2) penalties if the equivalent penalties calculated under Schedule 55 are less.

However if the contractor does not agree to pay the lesser amount and makes a request for further mitigation, for example, on the grounds of genuine and absolute hardship, you will not be able to mitigate the penalties under this process.

You should issue formal penalty determinations for the full Section 98A(2) penalties see COG914297.

We will only mitigate the penalties to the lower Schedule 55 amount and consider the further grounds for mitigation when the penalties have been determined and the contractor has exhausted (or abandoned) all appeal rights - see EM5310.

The determination will provide the contractor with a statutory right of appeal if he thinks the penalties are wrong or not payable. However you must make it clear to the contractor (in a covering letter issued with the penalty determination) that we will mitigate the Section 98A(2) to the lower Schedule 55 amount when the appeal process has been concluded and will also consider any further request for mitigation in accordance with our published guidance in EM5310.

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Genuine and absolute hardship

If the further grounds include genuine and absolute hardship you should ask the contractor to provide financial evidence to support the claim. This evidence should include, but is not restricted to, the following items from the contractor’s business:

  • a copy of the latest financial accounts
  • any other draft accounts
  • any business plans
  • any cash flow projections
  • copies of bank statements for all bank accounts for the latest 6 months
  • projected income and expenditure
  • details of all business assets and liabilities.

Where the contractor is a sole proprietor you should amend the last 3 bullet points to say the following:

  • details of personal income and expenditure at the current date
  • copies of bank statements for all business and personal bank accounts for the latest 6 months
  • details of all current business and personal assets and liabilities (including mortgage details and the value of any endowments or other investments).

Where the contractor is a partnership, each partner should be asked to provide copies of their personal bank statements and details of personal assets and liabilities

Note: The above list is not exhaustive and it may be appropriate to ask for further and or other information. You may find the following guidance useful when considering what information you should ask the contractor to provide - DMBM802100, DMBM802120, DMBM802130, COG914550 and EM6214.

TAA decision

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