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Construction Industry Scheme Reform Manual

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HM Revenue & Customs
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Late Return Automatic Penalties: Definition of a new contractor and the capping of CIS penalties issued under FA09/SCH55.

CISR65600 Action Guide contents
   

Under FA09/SCH55 there is a facility known as capping of CIS fixed penalties, which applies only from 29th October 2011. Capping applies only to a new contractor, and this provision does not apply to any CIS penalties issued under TMA70/S98A(2)(a). Where capping applies the total of the first and second fixed penalties issued will not exceed £3000.

New contractors

Capping may apply to a new contractor and, in this context, a new contractor is one who has never previously filed a CIS monthly return (CIS300) before. If the contractor had previously been registered for CIS prior to 6th April 2007 and filed annual contractor returns (CIS36) up to 5th April 2007, they will still be treated as a new contractor provided that they have never filed a CIS monthly return (CIS300) before.

There is also a further provision within FA09/SCH55 applicable only to new contractors where the minimum penalty of £300 for the tax geared penalties does not apply for periods up to the date the contractor files their first CIS monthly return. So, if the tax geared element of a penalty of 5% of any CIS deductions shown on the return, is less than the normal minimum of £300 for a tax geared penalty, then it is the lower amount of the penalty that will be charged in these circumstances.

Capping period

The capping period commences from the date that the contractor first had an obligation to file a CIS monthly return or 6th October 2011 (whichever date is the later). The capping period ends at the 5th of the month following the date the contractor filed their first CIS monthly return after 6th October 2011 (irrespective of what month that first CIS monthly return is filed for).

For contractors registered for CIS for the first time, the capping start date is set on the CIS record following registration. The capping end date though is not set on the CIS record until such time as the first CIS return that has been received has been logged or logged and captured, and will be set if the return status is any one of the following;

* Logged
* Effective
* Concluded

How capping for new contractors works

All CIS fixed penalties for CIS monthly returns which have a filing date which fall within that capping period will then be subject to the cap. This means that the total of all the fixed CIS penalties applying during the capping period are subject to a cap, or maximum, of £3000.

Capping applies only to the fixed CIS penalties. The tax geared penalties are not included within the capping provisions and will be issued in addition to the capped fixed penalties (where circumstances apply) at 6 and 12 months.

Example 1

A contractor is due to file their first CIS monthly return on 19/05/2012 but fails to file their CIS returns for the months May 2012 to May 2013 until 07/06/2013. Each return shows CIS deductions made of £10,000. Without capping, the total CIS penalties charged under FA09/SCH55 would be as follows;

First fixed penalties £1300
   
Second fixed penalties £2200
First tax geared penalties £3500
Second tax geared penalties £500
   
Total £7500

However, as the contractor has never filed a CIS monthly return before, the contractor is new and the capping period applies for the period 19/05/2012 until 05/07/2013, being the 5th of the month following filing of the first CIS monthly return. Therefore instead of first and second fixed penalties of £1300 and £2200 being charged, these amounts will be capped to a maximum of £3000 and the total CIS penalties charged will be £7000 instead.

Example 2

This is the same as example 1 above except that each return shows CIS deductions made of £5,000. Without capping the total CIS penalties charged under FA09/SCH55 would be as follows;

First fixed penalties £1300
   
Second fixed penalties £2200
First tax geared penalties £1750
Second tax geared penalties £250
   
Total £5500

Once again the contractor is new and the capping period applies for the period 19/05/2012 until 05/07/2013, so the first and second fixed penalties of £1300 and £2200 are therefore capped to £3000. In addition as this is a new contractor the amount of each tax geared penalty is now less than £300 (CIS deductions, £5000 at 5% = £250) for each return. The tax geared element of the penalty is therefore not subject to a minimum of £300, and the total CIS penalties become £3000 (capped) plus £1750 plus £250 equating to £5000.

Note; Capping will not apply to a contractor for any periods after the date that they have filed their first CIS monthly return (CIS300), similarly, the £300 minimum for the first and second tax geared penalties will apply for any period after the contractor has filed their first CIS monthly return.

A CIS penalty will be capped where by virtue of its issue it will take the total CIS fixed penalties within the capping period to an amount in excess of £3000.

Where penalties have been capped (or are to be capped) the CIS system will indicate to you the start date of the capping period and end date (where this has been set) of the capping period. These dates can be viewed within ‘View CIS Customer’ under the title bar ‘Capping Period History’ within the ‘Inhibitions’ Tab (see CISR90080).

Example 3

A contractor already has incurred CIS fixed penalties of £2900 within a period of capping. The contractor has now become liable to a further CIS fixed penalty of £200 which also falls within the capping period. This CIS penalty will not be issued to the contractor and will hold a status of ‘Withheld’ in order that the total for the fixed penalties remains at (or below) £3000 for the capping period.

Capped and non-capped periods

When examining a period of a contractor’s filing of CIS returns, it is entirely possible that you will have capped and non-capped periods for the period you are looking at;

Example 4

A contractor is due to file their first CIS monthly return on 19/05/2012 but fails to file the bulk of their CIS returns for the months June 2012 to May 2013 until 07/06/2013, however the May 2012 return (their first return) was filed by the contractor on 07/12/2012.

Capped period 19/5/2012 to 07/12/2012
   
Non-capped period 08/12/2012 onwards

In this example, the cap of £3000 and the fact that the minimum penalty of £300 will not apply for any tax geared penalties due will only apply for the period up to 07/12/2012. For periods from 08/12/2012 onwards the CIS penalties will not be capped and the minimum tax geared penalty of £300 will apply.

Capping period and use of the ‘Correct Error on Return’ function

The capping period end date can be amended automatically where an ‘effective’ return which was the first monthly return received is removed by the use of ‘Correct Error on Return’ either to another contractor scheme, or to the ‘Unmatched’ pool of returns. The capping period is then extended to the date the next remaining CIS monthly return was received.

A capping period can also be automatically removed from a CIS record. This will occur where, for example, the only ‘effective’ monthly return on the scheme is removed by the use of ‘Correct Error on Return’ either to another contractor scheme, or to the ‘Unmatched’ pool of returns.

Capping end date and the issue of ‘Withheld’ CIS fixed penalties

Where, before the end of a capped period the maximum CIS fixed penalties of £3000 is reached, all future CIS fixed penalties due within the capping period will continue to be created by the CIS system, but will automatically be given a ‘Withheld’ status. This is to ensure that they are not issued to the contractor if they will take the total over £3000. See the subsection below.

Where, subsequently, earlier CIS penalties are then reduced to a lower amount or nil, the CIS system will issue one or more of the ‘Withheld’ CIS fixed penalties until such time as the capping limit of £3000 is once again reached.

Capping and the issue of CIS tax geared penalties

If the contractor is new and capping applies and the contractor returns are outstanding, the CIS system will not issue either a first or second tax geared penalty for the capped period where the total of the CIS penalties issued has already reached £3000. These tax geared penalties will show on the system but will have a status of ‘Withheld’ until such time as the outstanding return is received and captured at which point CIS will calculate the tax geared penalty and then issue this to the contractor.

Note; it is only the CIS fixed penalties that are subject to the £3000 cap. CIS tax geared penalties that are due will be issued over and above this amount, but only when the respective return is received and captured.

If however the contractor is not new and capping does not apply, then the tax geared penalties will be issued at the normal time, as for these contractors the minimum amount of any tax geared penalty will be £300. Where the contractor return is later received, CIS will re-calculate the tax geared penalties by reference to 5% of the CIS deductions on the return and issue a revised penalty where the tax geared penalty now exceeds £300 and the increase in the tax geared penalty is £1 or more.

Capping and Scheme changes

See the guidance at CISR65070 regarding capping where a scheme merger takes place.

If the scheme start date is amended on EBS to an earlier date, and capping applies to the contractor and a capping start date has already been set by CIS, then immediately after the amendment to the EBS record the capping start date set on CIS will also be adjusted to the new start date.